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: Whether a particular entity qualifies for the exemption in 149(1)(l) if it earns investment income.
Position: Question of fact.
Reasons: The investment income must be incidental and must arise from activities undertaken to support the entity's non-profit objectives. Setting up a reserve for the purpose of investing generally indicates a profit purpose.
March 30, 2012
Compliance Programs Branch Headquarters
Specialty Audits Section Directorate Income Tax Rulings
Directorate
Attention: Rubin Dressler P. Burnley
(613) 957-2100
2011-040885
XXXXXXXXXX (the “XXXXXXXXXX ”)
We are writing in response to a request for our views as to whether the XXXXXXXXXX qualified for the tax exemption provided by paragraph 149(1)(l) of the Income Tax Act (the “Act”) for the years under review.
The XXXXXXXXXX was incorporated in XXXXXXXXXX under Part II of the Canada Corporations Act. You have indicated that the XXXXXXXXXX is a XXXXXXXXXX recognized by the XXXXXXXXXX as a XXXXXXXXXX within the meaning of the XXXXXXXXXX . It was formed by XXXXXXXXXX (the “Members”), to protect and serve their interests. XXXXXXXXXX. The XXXXXXXXXX collected, net of a commission of approximately XXXXXXXXXX %, are distributed to Members at specified times throughout the year. You have indicated that there is a time difference between the receipt of the XXXXXXXXXX from users and the payment of the net amount to Members for various reasons, one of them being that the XXXXXXXXXX waits for XXXXXXXXXX year-ends to calculate the XXXXXXXXXX , which are based on a detailed schedule of rates.
Because of the time delay between the collection of the XXXXXXXXXX and the payment of the net amounts to Members, the monies collected are invested until needed for distribution. The investment income earned is used to defray expenses of the XXXXXXXXXX with an effort made to keep commissions charged to Members as low as possible. You have questioned whether the expectation of this income jeopardizes the XXXXXXXXXX ability to claim the exemption in paragraph 149(1)(l) of the Act, especially in conjunction with the XXXXXXXXXX desire to minimize commissions charged to Members.
In order to qualify for the tax exemption provided by paragraph 149(1)(l) of the Act, an organization must meet all of the conditions of that provision, that is, the XXXXXXXXXX must be organized and operated exclusively for any purpose other than profit, and none of its income can be available for the personal benefit of its members. The courts have recognized that an organization claiming a paragraph 149(1)(l) exemption can earn a profit, as long as the profit is incidental and arises from activities directly connected to its not-for-profit objectives. For example, maintaining reasonable operating reserves or bank accounts required for ordinary operations will generally be considered to be an activity undertaken to meet the not-for-profit objectives of an organization. Consequently, incidental profits arising from these accounts will not affect the tax-exempt status of an organization.
The XXXXXXXXXX appears to have non-profit reasons for distributing the amounts collected from users to Members on a periodic basis rather than immediately when received, and it is reasonable to expect that the funds will be invested during that time. The fact that these funds are invested and the XXXXXXXXXX is earning investment income generally should not cause it to lose the exemption provided by paragraph 149(1)(l) of the Act, particularly if the incidental investment income is used to help meet the operating expenses of the XXXXXXXXXX . However, accumulating undistributed XXXXXXXXXX for the purpose of increasing the XXXXXXXXXX ability to generate investment income would be a concern. Similarly, if the XXXXXXXXXX is delaying distributions to Members in order to increase funds available for investing, it could be considered to be operating for a profit purpose.
You have not provided any information on whether the XXXXXXXXXX has a reserve. A 149(1)(l) organization may maintain a reasonable reserve, but the reserve must be for identifiable operating purposes or for a specific future capital project. If the XXXXXXXXXX has a reserve, or is building up a reserve, for investing purposes, either by delaying payments XXXXXXXXXX (amounts not paid as soon as reasonably possible) or by charging more than necessary in commissions, this could indicate that the XXXXXXXXXX is operating for a profit purpose. A reserve maintained for the purpose of earning investment income will likely result in an organization not qualifying for the paragraph 149(1)(l) tax exemption.
The preceding comments assume that the investment income in issue is the income of the XXXXXXXXXX . However, if the investment income is the income of the Members and not the XXXXXXXXXX (i.e., the XXXXXXXXXX is merely an agent of the Members with respect to this income), then the investment income would be taxed in the hands of the Members and would not affect the tax status of the XXXXXXXXXX .
We trust that these comments will be of assistance.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.
Eliza Erskine
Manager
Non-Profit Organizations and Aboriginal Issues Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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