30 October 2012 Internal T.I. 2011-0419931I7 - Subparagraph 149(5)(e)(ii)

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. Was the capital gain realized by the Corporation on the sale of XXXXXXXXXX taxable? 2. Was the interest income earned by the Corporation taxable pursuant to 149(5)?

Position: 1. Yes. 2. Yes

Reasons: 1. XXXXXXXXXX was not used exclusively for and directly in the provision of XXXXXXXXXX facilities to members. 2. Previous position.

October 30, 2012

Compliance Programs Branch HEADQUARTERS
Specialty Audits Section Income Tax Rulings
Attention: Rubin Dressler Directorate
P. Burnley
(613) 957-2100

2011-041993

XXXXXXXXXX (the "Corporation")

We are writing in response to your request for our views as to whether the Corporation was taxable on the capital gain arising from the disposition of XXXXXXXXXX during the XXXXXXXXXX taxation year XXXXXXXXXX. The Corporation has suggested that this capital gain was exempt from tax pursuant to subparagraph 149(5)(e)(ii) of the Income Tax Act (the "Act").

FACTS

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

• The Corporation was incorporated by letters patent on XXXXXXXXXX.
• The Corporation, XXXXXXXXXX would be governed by Part XXXXXXXXXX of the Companies Act.
• According to the special by-law, the purposes of the Corporation are:
  • XXXXXXXXXX
• The Corporation's regulations set out XXXXXXXXXX membership categories.
• The regulations limit the number of XXXXXXXXXX members to XXXXXXXXXX at any one time. In addition, the total number of visiting members cannot exceed XXXXXXXXXX.
• The fee payable by the members depends on the category of member.
• If a member fails to pay his or her fees on time the Corporation may impose a penalty or charge interest on the overdue amount.
• The main purpose of the Corporation is to provide XXXXXXXXXX facilities for its members.
• In XXXXXXXXXX, the Corporation sold XXXXXXXXXX. As a result of this sale, the Corporation realized a capital gain in the amount of $XXXXXXXXXX.
• The Corporation also earned interest income in XXXXXXXXXX from members' overdue accounts.
• The Corporation did not remit tax in XXXXXXXXXX on the capital gain nor on the interest income earned from overdue accounts, on the basis that these amounts were exempt from tax.

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.

You have determined that the Corporation qualified for a tax exemption pursuant to paragraph 149(1)(l) of the Act for the XXXXXXXXXX taxation year. Since the Corporation's main purpose in XXXXXXXXXX was the provision of XXXXXXXXXX facilities to its members, we agree with your view that subsection 149(5) of the Act applied to the Corporation for that year.

Subparagraph 149(5)(e)(ii) of the Act contains an exception with respect to capital gains arising from the disposition of property that was used exclusively for and directly in the course of providing dining, recreation and sporting facilities to the members of the organization. It is our understanding that subsection 149(5) of the Act is intended to tax income from property (including capital gains) earned from investments and other assets that are not directly used in providing the services of the organization. Thus, while an organization may own several assets, in our view, it is only the capital gain arising on the disposition of those which are required and used to ensure that the organization's objects are met that are not to be taxed. As, in our view, XXXXXXXXXX is not required by an organization to provide XXXXXXXXXX facilities, we agree with the auditor that the capital gain realized on XXXXXXXXXX was taxable in the year XXXXXXXXXX sold.

Additionally, if XXXXXXXXXX was purchased with the intention to earn a profit, the Corporation may be considered to have profit as a purpose. As stated in paragraph 8 of Interpretation Bulletin, IT-496R "Non-Profit Organizations", an organization may be considered to have a profit purpose, particularly so, where assets representing the accumulated excess are used for purposes unrelated to its objects, such as long-term investments to produce property income.

We also understand that the Corporation claimed that the interest income earned from charging interest on members' overdue accounts was not property income subject to subsection 149(5) of the Act. We agree with the auditor that this interest income is "income from property" as that term is used in subsection 149(5) of the Act and is taxable in the year received. As discussed in our document 2011-0409901E5, in our view, consistent with the scheme of the Act and the related jurisprudence, interest income earned by a club, irrespective of source, is considered income from property for the purpose of subsection 149(5). The courts have rejected the argument that interest income may be classified as business income when it appears to relate to business activities of the 149(1)(l) organization.

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) 952-1361. In such cases, a copy will be sent to you for delivery to the taxpayer.

R. Albert, CA
Manager
Non-Profit Organizations and Aboriginal Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch