Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Can an entity that qualifies for an exemption from tax under paragraph 149(1)(l) invest in property and later sell the property to its members? Would the property be inventory or capital property?
Position: Unable to answer these questions as it depends on the facts surrounding the transaction. General information about paragraph 149(1)(l) is provided.
Reasons: Whether the transactions described would, in and of themselves, prevent the corporation from qualifying as a paragraph 149(1)(l) entity could only be determined having regard to all the facts. Similarly, the question whether particular properties are held as inventory or capital property depends on the facts.
2008-026894
XXXXXXXXXX L. Zannese
(613) 957-2747
May 12, 2008
Dear XXXXXXXXXX :
Re: Non-Profit Organization
This is in response to your letter of February 14, 2008 inquiring about activities that can be undertaken by an entity that qualifies for an exemption from Part I tax pursuant to paragraph 149(1)(l) of the Income Tax Act (the "Act"). Specifically, you have inquired if such a corporation that proposes to invest in property, with the intention that the property would be sold to the members of the corporation at some future time, could continue to rely on paragraph 149(1)(l) to claim an exemption from tax. The sale price of each property would be either the cost of the property to the corporation or the property's fair market value at the time of the sale to the member. In addition, you ask if the property would be considered capital property or inventory and how the related gains would be characterized.
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
The CRA's general views regarding paragraph 149(1)(l) entities are contained in Interpretation Bulletin IT-496R "Non-Profit Organizations" which may be viewed at http://www.cra-arc.gc.ca/E/pub/tp/it496r/it496r-e.html.
In general terms, paragraph 149(1)(l) provides that the taxable income of a corporation is exempt from tax under Part I of the Act for a period throughout which the corporation complies with all of the following:
(a) it is not a charity;
(b) it is organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit with no income available for the personal benefit of its members or shareholders;
(c) it is in fact operated exclusively for the same purpose for which it was organized or for any of the purposes mentioned in (b); and
(d) it does not distribute or otherwise make available for the personal benefit of a member or shareholder any of its income, unless the organization is an association which has as its primary purpose and function the promotion of amateur athletics in Canada.
Whether a particular corporation meets all of the above conditions and qualifies under paragraph 149(1)(l) as a tax-exempt corporation is a question of fact that can only be determined after a review of the purposes and activities of the corporation. This review normally takes place at the end of each taxation year to determine whether the corporation satisfies the requirements of paragraph 149(1)(l) and is, as a result, exempt from tax for that year.
When determining whether a corporation is organized and operated exclusively for social welfare, civic improvement, pleasure, and recreation or for any other purpose except profit, the instruments creating the corporation are reviewed. In addition, the activities that the corporation undertook are also examined as it is not enough that the corporation has the intent to qualify as a paragraph 149(1)(l) entity, it must also carry on activities exclusively for this purpose.
One of the key considerations in determining whether a corporation is validly constituted and operated as a paragraph 149(1)(l) entity is whether profit is one of its objectives. A concern in this regard might arise in a situation in which a corporation commences business activities or begins earning income from property. Although business activities or the investment of capital can suggest a profit motive, this determination is a question of fact. Relevant considerations in such a situation would be the circumstances and purposes for which the property was acquired, the duration of the profitable situation and whether the income earned during the period is used for the corporation's not-for-profit objectives.
For example, your letter describes this corporation's objectives as being social and cultural in nature. It would be a question of fact whether the corporation is actually meeting the requirements of paragraph 149(1)(l) with this determination occurring at the end of the corporation's taxation year. Similarly, the very few facts you have provided suggest that the property to be acquired might be held as inventory; however, complete details are not available, and it is a question of fact as to whether any property held would be inventory or capital property to the corporation.
We trust that these comments will be of assistance.
Yours truly,
Robin Maley
Manager
Non-Profit Organizations and
Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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