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 149(1)(l) entity can make loans to a taxable subsidiary and maintain its tax exempt status.
Position: No.
Reasons: Suggests a for-profit purpose unrelated to its not-for-profit objectives.
XXXXXXXXXX
2011-042914
Lori Merrigan
(613) 957-9229
September 28, 2012
Dear XXXXXXXXXX:
Re: 149(1)(l) Entity - Loans to Taxable Subsidiary
This is in response to your email of November 24, 2011, inquiring whether an organization would compromise its tax exempt status under paragraph 149(1)(l) of the Income Tax Act (the “Act”) by making loans to a taxable subsidiary. In this letter, unless otherwise expressly stated, all statutory references are to the provisions of the Act.
Our Comments
The situation outlined in your email appears to relate to a factual one, involving a specific taxpayer. 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. However, we are prepared to provide the following general comments.
The CRA's general views regarding 149(1)(l) entities are contained in Interpretation Bulletins IT-496R, “Non-profit Organizations”, and IT-83R3, “Non-profit organizations – Taxation of income from property”, which may be viewed at http://www.cra-arc.gc.ca. To qualify as a tax exempt entity described in paragraph 149(1)(l), an organization must be both organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit.
In general terms, paragraph 149(1)(l) provides that the taxable income, including taxable capital gains, of a corporation is exempt from tax under Part I for a period throughout which a corporation meets all of the following requirements:
- it is a club, society or association;
- it is not a charity;
- it is organized and operated exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit; and
- it does not distribute or otherwise make available for the personal benefit of a member or shareholder any of its income, unless the organization is an association which has as its primary purpose and function the promotion of amateur athletics in Canada.
An organization claiming a paragraph 149(1)(l) tax 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 reserves or accounts will not affect the tax-exempt status of an organization.
However, paragraph 8 of Interpretation Bulletin IT 496R, “Non-profit Organizations”, states that:
“An association may earn income in excess of its expenditures provided the requirements of the Act are met. The excess may result from the activity for which it was organized or from some other activity. However, if a material part of the excess is accumulated each year and the balance of accumulated excess at any time is greater than the association's reasonable needs to carry on its non-profit activities (see ¶ 9), profit will be considered to be one of the purposes for which the association was operated. This will be particularly so where assets representing the accumulated excess are used for purposes unrelated to its objects such as the following:
(a) long-term investments to produce property income;
(b) enlarging or expanding facilities used for normal commercial operations; or
(c) loans to members, shareholders or non-exempt persons.”
In our view, the fact that a 149(1)(l) organization has funds available to provide loans to its taxable subsidiaries generally suggests that the organization has retained earnings larger than is necessary to meet the organization’s not-for-profit objectives and is therefore not operating exclusively for a purpose other than profit. As a result of large reserves, a 149(1)(l) organization may also be earning large amounts of tax-free investment income on funds that are not necessary to meet its not-for-profit objectives. The earning of investment income used to meet for-profit objectives such as financing the activities of a taxable subsidiary may also indicate that an organization is not operating for a purpose other than profit.
As previously stated, an organization claiming a paragraph 149(1)(l) tax exemption can, with certain restrictions, earn a profit; but those profits earned by the organization must be wholly expended in accordance with the organization’s non-profit purposes. In our view, using income, whether incidental or not, to finance profitable activities in a taxable subsidiary suggests that an organization is likely not using its income to support its non-profit objectives. Accordingly, based on the comments above, in our view, an organization that provides loans to a taxable subsidiary would likely not qualify for the tax exemption available under paragraph 149(1)(l).
We trust that these comments will be of assistance.
Yours truly,
R.A. Albert, CA
Manager
Non-Profit Organizations and Aboriginal Issues Section
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2012
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2012
Email this Content