14 August 2009 External T.I. 2009-0332161E5 - Distributions from an NPO on Winding-Up

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: Are the comments in archived IT-409 that state that a member's interest in a non-share corporation is likely capital property to the member, such that a distribution received by the member on the winding-up of the corporation would be proceeds of disposition of the membership, still correct?

Position: Yes.

Reasons: It is a question of fact as to whether a member meets the definition of "shareholder" in subsection 248(1) of the Act. If a member is found to be a shareholder, then a distribution to a member upon dissolution of a non-share corporation may be subject to subsection 84(2) of the Act. If a member is found not to be a shareholder, then it is likely that the membership is a capital property and any amounts received upon dissolution of the non-share corporation will be proceeds of disposition of that interest. Depending on the membership interest's adjusted cost base, the member may incur a capital gain. The adjusted cost base of the membership interest only includes amounts paid to obtain the membership; it does not include annual fees.

									2009-033216
XXXXXXXXXX 								L. Zannese
(613) 957-2747
August 14, 2009

Dear XXXXXXXXXX :

Re: Winding-Up of a Non-Profit Organization

We are writing in response to your letter of July 2, 2009, requesting confirmation that the comments in paragraphs 9 to 11 of Archived Interpretation Bulletin IT-409, "Winding-up of a Non-Profit Organization" ("IT-409"), continue to be the position of the Canada Revenue Agency (the "CRA"). Specifically, you ask if the comments in these paragraphs would apply to a distribution of cash to the members of a society incorporated under the Society Act of British Columbia upon its dissolution. We infer from your letter that the society is a corporation without share capital (a "non-share corporation").

The situation outlined in your letter appears to be a factual one, involving specific taxpayers. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at 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.

Paragraphs 9 to 11 of IT-409 discuss the tax consequences to a member of a non-share corporation when the member receives a distribution of assets upon the winding-up of the corporation. Paragraph 9 explains that a distribution of assets to a member is viewed as a payment on account of capital, and represents the member's proceeds of disposition of the interest in the corporation. Paragraph 9 goes on to state that subsection 84(2) of the Act does not apply to deem any part of the payment to be a dividend.

While we can confirm that the comments in paragraph 9 of IT-409 generally continue to represent the views of the CRA, we note that it is always a question of fact whether any particular member of a non-share corporation is a "shareholder" as that term is defined in subsection 248(1) of the Act. Whether a member of a non-share corporation is a shareholder will generally depend on the rights given to the member by the by-laws or other constituting documents of the corporation. If a member is found to be a shareholder, subsection 84(2) of the Act may in fact apply upon the disposition of the membership. In most cases, a member of a non-share corporation will not be a shareholder and, therefore, any cash received by the member upon wind-up would be viewed as proceeds of disposition of the member's interest.

It follows from the comments in paragraph 9 of IT-409 that a member may incur a capital gain or loss on the disposition of a membership if the related proceeds of disposition are different from the membership's adjusted cost base. Paragraph 11 explains that when calculating a membership's adjusted cost base, only the amount initially paid for the membership is taken into account. Annual membership fees are considered to be paid for services a member receives during the year and are not included when calculating the membership's adjusted cost base. We can confirm that the comments in paragraph 11 remain the views of the CRA.

We trust that these comments will be of assistance.

Yours truly,

Eliza Erskine
A/Manager
Non-Profit Organizations and Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch