25 October 2012 External T.I. 2012-0453841E5 - Ex. membship fees refunded in year to memb. of NPO

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 the refund of excess membership fees in the year by a NPO to its members results in the NPO losing its status.

Position: Dependant on facts and scope of fundraising activities.

Reasons: Question of fact.

XXXXXXXXXX 2012-045384

October 25, 2012

Dear XXXXXXXXXX:

Re: Excess funds Refunded to Members of a Non-Profit Organization (“NPO”)

This is in response to your letter received in our office on July 4, 2012, asking whether the return of funds by a NPO to its members will result in a NPO losing its exempt status and a taxable benefit to its members. In your situation, the NPO is established primarily for social purposes and funds are raised through membership fees and fundraising activities. Every year there is a surplus of funds that is refunded to members.

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) of the Income Tax Act (“Act”), 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 addition, no part of the income of the organization can be payable to, or otherwise available, for the personal benefit of, any proprietor, member or shareholder. As such, the articles of incorporation, letters patent, or by-laws of the organization must not indicate that any proprietor, member or shareholder is able to receive income out of it or that its income is otherwise available for their personal benefit. The organization must also operate in a way to avoid making income available for the personal benefit to any proprietor, member, or shareholder.

Generally, a NPO would not be denied exempt status under paragraph 149(1)(l) of the Act, based solely on the fact that it overestimated the membership fees and refunded the excess fees to its members in the year. However, the organization’s financial records, together with the facts surrounding the distribution must support the characterization of the amounts as a refund of fees. Additionally, in order to ensure that the payment is simply a return of fees and not income available for the personal benefit of a member, the payments should be available, proportionately, to all members or groups of members of the organization.

Furthermore, a refund of membership fees that resulted from a mixture of membership fees and fundraising activities may indicate that the scope of the fundraising is beyond the needs of the NPO’s activities, and that the organization has a profit purpose. The CRA accepts that certain fundraising activities can be carried on directly by a 149(1)(l) entity without jeopardizing its tax-exempt status. Limited fundraising activities involving games of chance (e.g., lotteries, draws), or sales of donated or inexpensive goods (e.g., bake sales or plant sales, chocolate bar sales), generally do not indicate that the organization as a whole is operating for a profit purpose. However, the scope of the fundraising activities, especially by comparison with other activities, should not be so significant that fundraising can be considered a purpose of the organization, in which case the organization may not qualify as a 149(1)(l) entity. Factors to consider when making such a determination include the amount of the membership fees refunded in relation to the value of the NPO activities and the scope of the fundraising activities.

Where the fundraising activities of a 149(1)(l) entity are acceptable and the refunded amounts do not exceed membership fees paid in the year, in our view, a refund of fees, on a proportionate basis to all members of the organization would generally not jeopardize the tax-exempt status of the organization.

We trust that our comments will be of assistance.

Yours truly,

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