22 March 2012 Internal T.I. 2011-0412051I7 - Application of Subsection 149(5)

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: Was the main purpose of the Corporation to provide dining, recreational or sporting facilities to its members such that subsection 149(5) applied to the Corporation?

Position: Likely, yes.

Reasons: Facts.

								March 22, 2012

	Compliance Programs Branch			HEADQUARTERS
	Speciality Audits Section 			Income Tax Rulings
	Attention:  Rubin Dressler			Directorate
								L. Zannese
							      (613) 957-2747

								2011-041205

	XXXXXXXXXX  (the "Corporation")

We are writing in response to your request for our views as to whether subsection 149(5) of the Income Tax Act (the "Act") applied to the Corporation for the taxation years under review. In particular, you asked whether the fact that the Corporation rented space in the XXXXXXXXXX , as opposed to owning its own facility, affects the application of subsection 149(5) to the Corporation.

FACTS

Based on the information you provided us, our understanding of the facts is as follows:

• The Corporation was incorporated without share capital on XXXXXXXXXX , under the XXXXXXXXXX .
• The original objects of the Corporation were to "XXXXXXXXXX and to provide facilities therefore."
• The Corporation changed its objects on XXXXXXXXXX , when it filed an application for supplementary letters patent. The current objects of the Corporation are:
  • XXXXXXXXXX
• The supplementary letters patent also contain a special provision stipulating that:
  • the Corporation shall be carried on without the purpose of gain for its members and any profits or other accretions to the corporation shall be used in promoting its objects.
• The Corporation has passed a constitution. Specifically:
  • It describes the purposes of the Corporation as "to encourage the instruction, practice, enjoyment and advancement of its members in all aspects of XXXXXXXXXX in accordance with the XXXXXXXXXX ".
  • To further the Corporation's objects the Corporation may:
• Raise, use, invest and reinvest money to support its operations provided that no property, funds or income of the Corporation will benefit any member.
• Acquire, accept, solicit or receive any real or personal property either as an annual or other contribution or as an addition to the funds of the XXXXXXXXXX .
• The Corporation rents XXXXXXXXXX space and XXXXXXXXXX from the XXXXXXXXXX . It has entered into a lease which stipulates that the Corporation must rent XXXXXXXXXX per year at a cost of approximately $XXXXXXXXXX per year.
• The Corporation charges its members for use of this facility and also offers memberships to the public.
• The Corporation offers XXXXXXXXXX , and XXXXXXXXXX for members. It also operates XXXXXXXXXX on behalf of the XXXXXXXXXX . Participants in the XXXXXXXXXX offered on behalf of the XXXXXXXXXX are considered active members of the Corporation.
• The XXXXXXXXXX provides the Corporation with XXXXXXXXXX to operate XXXXXXXXXX on its behalf.
• The auditor has confirmed that the Corporation qualified for an exemption from tax pursuant to paragraph 149(1)(l) of the Act for the years under review.
• The Corporation's financial statements report the following: Year Total XXXXX Fee Total Assets XXXXX to assets XXXXX to total Revenue revenue XXXXX $XXXXX $XXXXX $XXXXX $XXXXX $XXXXX

OUR COMMENTS

Although an organization described in paragraph 149(1)(l) of the Act is generally not taxable under Part I of the Act on its taxable income, there is a special rule in subsection 149(5) of the Act that applies to such an organization if its main purpose is to provide dining, recreational or sporting facilities. Under subsection 149(5), an inter vivos trust is deemed to exist throughout the period during which the main purpose of the organization is to provide dining, recreational, or sporting facilities. Very generally, the following rules apply:

• the property of the 149(1)(l) organization is deemed to be the property of the trust;
• tax is payable by the trust on its taxable income for each taxation year;
• the taxable income of the trust is calculated on the assumption that there is no income or loss other than
  • income and losses from property; and
  • taxable capital gains, and taxable capital losses from the dispositions of property, other than property used exclusively for and directly in the course of providing the dining, recreational or sporting facilities provided by it to its members;
• $2,000 may be deducted in computing the taxable income of the trust, in addition to any other permitted deductions.

In order for subsection 149(5) of the Act to apply to the Corporation, the Corporation must have had as its main purpose for the taxation years under review "to provide dining, recreational or sporting facilities for its members." Whether any organization had as its main purpose the provision of dining, recreational or sporting facilities is a question of fact. As stated in document 2002-011989, there is no definition of "main purpose" in the Act:

"The dictionary meaning seems to be synomous with "chief in size or extent" or perhaps of "preeminent importance" or "primarily". The Agency considers that the "used primarily" test will be met where more than 50% of the assets in question are used in whatever process is involved. This suggests that the main purpose test for a club would be met where more than 50% of the assets of the club are utilized to provide dining, recreational or sporting facilities for its members."

When determining the purpose or main purpose of an organization reference should be made to the instruments creating the organization which will normally include any documents of incorporation, by-laws and a constitution. According to the original letters patent, the purpose of the Corporation was to "...XXXXXXXXXX and to provide facilities therefore." The Corporation filed supplementary letters patent in XXXXXXXXXX and replaced the original purpose of the Corporation with the wording noted above under "Facts".

The original objects of the Corporation clearly stated that one of the purposes of the Corporation was the provision of facilities in order to XXXXXXXXXX . The current objects, although not as explicit, also indicate a purpose of providing facilities to members. As the Corporation XXXXXXXXXX to members, XXXXXXXXXX , and owns no real property of its own, the natural conclusion is that it will rent or lease the required facilities in order to provide the programs its offers.

There is nothing in the wording of subsection 149(5) of the Act that suggests that the provision will only apply to a 149(1)(l) organization that owns facilities. The Tax Court of Canada, in Manitoba Curling Club v. MNR, 84 DTC 1462, determined that the Manitoba Curling Club was not subject to subsection 149(5) because it was an oversight body for the sport rather than a recreational club. The court noted that the taxpayer was not similar to country clubs, health clubs, recreation clubs and so on: "These clubs all have in common the fact that they either lease or own, their facilities." Thus, the fact that the Corporation leased rather than owned the ice rinks its members used is not relevant when determining whether subsection 149(5) of the Act applies to the Corporation.

Moreover, in our document E 9114615, a taxpayer asked for our views as to whether a hockey association that rented its sporting facilities would be subject to subsection 149(5). We responded:

"If an association devotes the majority of its time, resources and efforts in the organization and operation of various competitions for its members, and facilities are either owned, rented or donated by its members for such events, the Department's view is that in these situations the main purpose of the association or club is the provision of sporting facilities for its members."

In summary, based on the past and present by-laws and on the use of the Corporation's assets and revenue, we agree with the auditor's view that subsection 149(5) of the Act applied to the Corporation for the years under review. This is consistent with our past interpretation of this provision in similar circumstances.

We trust that these comments will be of assistance to you.

Yours truly,

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