27 September 2012 External T.I. 2011-0412961E5 - NPO and Taxable Subsidiary

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: 1. Will an organization exempt from tax under paragraph 149(1)(l) of the Act jeopardize its exemption if it incorporates and holds shares in a for-profit taxable subsidiary?
2. Is the answer the same if the non-profit organization uses a trust instead of a corporation?

Position: 1. An organization may continue to be exempt from tax - it is a question of fact.
2. Cannot answer in the context of a general interpretation.

Reasons: 1. Whether an organization is organized and operated for non-profit purposes is a question of fact in each situation.
2. This question is better handled in an advance income tax ruling request.

XXXXXXXXXX 2011-041296
P. Burnley
(613) 957-2100

September 27, 2012

Dear XXXXXXXXXX:

Re: Paragraph 149(1)(l) of the Income Tax Act (the “Act”) and a Taxable Subsidiary

This is in response to your correspondence dated July 4, 2011, in which you asked whether an organization claiming the exemption from tax provided by paragraph 149(1)(l) of the Act will jeopardize its exemption from tax if it incorporates a taxable subsidiary to carry on for-profit activities.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, “Advance Income Tax Rulings”. This Information Circular and other Canada Revenue Agency (“CRA”) publications can be accessed on our website at http://www.cra-arc.gc.ca. We are, however, prepared to provide the following general comments.

The determination of whether an organization is exempt from tax under paragraph 149(1)(l) of the Act is a question of fact in each situation. Among other criteria, to be tax-exempt under paragraph 149(1)(l), an organization must be organized and operated exclusively for any purpose other than profit, and no income of the organization may be available for the personal benefit of a member, shareholder or proprietor. A determination of whether an organization was operated exclusively for, and in accordance with its not-for-profit purpose in a particular year must be based on the facts of each case, which can be obtained only by reviewing all of its activities for that year.

The fact that an organization incorporates and holds the shares of a taxable subsidiary will not, in itself, cause the organization not to be exempt from tax under paragraph 149(1)(l) of the Act. As stated above, an organization claiming an exemption under paragraph 149(1)(l) must operate exclusively for any purpose other than profit.

Generally, an organization claiming the exemption can earn a profit, as long as the profit is incidental and arises from activities directly connected to its not-for-profit objectives. Therefore, if an organization holds shares to earn income from property, it may be considered to have a profit purpose, even if the income from those shares is used in furtherance of the organization’s not-for-profit objectives. However, the CRA has accepted that where an organization that otherwise qualifies for the exemption under paragraph 149(1)(l) engages in an income-generating activity that is carried out in a taxable, wholly-owned corporation, and this corporation pays dividends out of its after-tax profits to the organization to enable the organization to carry out its not-for-profit activities, the organization may still qualify for the exemption as set out in paragraph 149(1)(l).

Where an organization receives management fees, rents, interest income, or other types of income from a taxable subsidiary, the receipt of that income may indicate a profit purpose that can only be determined by reviewing the facts. Further, an organization that has excess funds available to loan to a taxable subsidiary may not qualify as a 149(1)(l) entity, as the use of funds in this manner is generally not supporting the organization’s not-for-profit objectives. As stated in Interpretation Bulletin IT-496R, “Non-Profit Organizations”, where assets representing accumulated excess income are used for purposes unrelated to the organization’s not-for-profit objectives, such as long-term investments to produce property income, or loans to members, shareholders or non-exempt persons, profit may be considered to be one of the purposes for which the association was operated.

You have also asked if our response would change if, instead of a taxable subsidiary corporation, a trust fund was established to carry out the for-profit activities. This question, in our view, would best be dealt with in the context of an advance income tax ruling request or, if the transaction is completed, by the appropriate Tax Services Office, such that we would have the opportunity to fully review all of the facts and relevant agreements.

We trust that these comments will be of assistance.

Yours truly,

R. Albert, CA
Manager
Non-Profit Organizations and Aboriginal Issues Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch