25 September 2012 Roundtable, 2012-0457611C6 - BC Tax Conference 2012 Question #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: CRA's position of various payment plans in respect of membership fees for a NPO that offers dining, recreational or sporting facilities for its members.

Position: General comments provided

Reasons: CRA's position is that interest income, regardless or source, is considered to be income from property for the purpose of subsection 149(5). The determination of whether a payment plan includes income from property is a question of fact.

Conference Date: September 25, 2012

BC TAX CONFERENCE 2012
CRA Roundtable

Question 5

Distinction between income from property and income earned in a business by a non-profit organization (NPO) for purposes of ss 149(5).

Where the main purpose of a club that is described in paragraph 149(1)(l) is to provide dining, recreational or sporting facilities for its members, ss 149(5) deems an inter vivos trust to have been created and all of the property of the club is deemed to be property of the trust for purposes of computing the trust's tax liability under Part I. The taxable income of the deemed trust is calculated pursuant to the rules set out in paragraph 149(5)(e) which exclude income earned in the course of the club's business, but include "income and losses from property".

In Technical Interpretation 2011-0409901E5, CRA expressed the opinion that interest income earned by a club on overdue accounts is characterized as income from property, and that interest income is income from property whether the source giving rise to the interest was capital or income in nature. This opinion was confirmed by two Federal Court of Appeal ("FCA") cases: Elm Ridge Country Club Inc. v. The Queen, 99 DTC 5127, and Point Grey Golf and Country Club v. The Queen, 2000 DTC 6217.

In Interpretation Bulletin 83R3, Non-profit organizations – Taxation of income from property, CRA has also take the position that rental income can be income from property or income from business, depending upon whether the rents were derived from one of the main activities of the club or ancillary to the activities of the club. From this view, it can be discerned that the character of the income can be discerned from the nature of the activities that were undertaken to earn the income.

In a more recent FCA case, The Queen v. Irving Oil Ltd., 2001 FCA 364, the judge concluded that interest earned on an income tax refund can be business income of a taxpayer. In the decision, the comment was made that the taxpayer earned the interest income on its tax liability as a result of exercising "its business judgement that it would be preferable to pay the tax than to provide security". Accordingly, it appears there are situations where interest income is not characterized as income from property for tax purposes.

The purpose of our question is to seek further guidance as to CRA's assessing position in respect of the characterization of income earned from various types of payment plans offered by clubs in respect of membership entrance fees, monthly dues, and fees for the use of club resources (collectively referred to hereinafter as the "Fees").

In the following examples, a club described in ss 149(5) is considering various ways to structure payment plans to its members in respect of its Fees. Please provide your comments on each scenario as to whether or not the income would be characterized as income from property of a deemed trust and subject to Part I tax in paragraph 149(5)(e):

(a) Members have the opportunity to pay the Fees over a series of payments at regular instalments throughout the period, but are subject to a surcharge if they do so. The surcharge is a pre-determined flat or fixed fee based on the member's level of usage of the club's facilities. The aggregate amount of instalments paid by a member over the period, together with the flat or fixed fee surcharge, would be greater than the club's stated fee schedule which assumes the Fees are paid in a single lump-sum at the beginning of the period.

Would the flat or fixed fee surcharge be characterized as income from property for purposes of paragraph 149(5)(e)?

(b) Assume the same scenario as in (a), but instead of a flat or fixed fee, the surcharge is based on the Bank of Canada prime rate applied to the balance of the member's Fees outstanding at the instalment due dates throughout the period. The aggregate amount of instalments paid by a member over the period, together with the prime rate surcharge, would be greater than the club's stated fee schedule which assumes the Fees are paid in a single lump-sum at the beginning of the period.

Would the prime rate surcharge be characterized as income from property for purposes of paragraph 149(5)(e)?

(c) The Fees are billed monthly to the members throughout the period. The invoices given to the members have payment terms, such that the invoiced Fees must be paid in full within 1 month of the invoice date. If a member's payment is received past the 1 month period, a penalty is charged to the member's account.

(i) If the penalty was a flat or fixed amount which was independent of the amount of the member's unpaid invoice and the time that the member's account was unpaid, would the penalty be characterized as income from property for purposes of paragraph 149(5)(e)?

(ii) If the penalty was calculated using the Bank of Canada prime rate and based on the amount of the member's unpaid invoice and the time that the member's account was unpaid, would the penalty be characterized as income from property for purposes of paragraph 149(5)(e)?

(d) The club provides its members with a discount on its Fees if a member pays the total Fees invoiced within 10 days of the invoice date. The discount is calculated as a fixed percentage of the amount of the Fees on the invoice.

Would a portion of Fees collected where members have not taken the discount be characterized as income from property for purposes of paragraph 149(5)(e)?

(e) The club's Fees are billed only twice a year and are payable within 30 days of the invoice date. In determining the amount of the Fees, the club includes a notional premium to compensate it for its additional cost of financing its cash flow, due to the infrequent cash receipts. No discount is allowed for members that pay early.

Would the premium portion of the Fees billed be characterized as income from property for purposes of paragraph 149(5)(e)?

(f) The club has various facilities that are rented to its members on a first-come first-serve basis. The rental of such facilities is one of the main activities of the club. The rental charges are a component of the Fees. The club provides its members with the option of paying the Fees in a lump-sum payment within 1 month of the invoice date or paying over a series of instalments which also include a flat fee surcharge. The aggregate amount of instalments paid by a member, together with the flat fee surcharge, would be greater than the club's stated fee schedule which assumes the Fees are paid in a single lump-sum within 1 month of the invoice date.

Would the flat fee surcharge be characterized as income from property for purposes of paragraph 149(5)(e)?

(g) Assume the same scenario as in (f), but instead of a flat fee, the surcharge is based on the Bank of Canada prime rate applied to the balance of the member's Fees outstanding at the instalment due dates. The aggregate amount of instalments paid by a member, together with the prime rate surcharge, would be greater than the club's stated fee schedule which assumes the Fees are paid in a single lump-sum within 1 month of the invoice date.

Would the prime rate surcharge be characterized as income from property for purposes of paragraph 149(5)(e)?

CRA Response

In this question, a club described in subsection 149(5) is considering various ways in which to structure payment plans to members in respect of its fees. The question seeks CRA's guidance in respect of the characterization of income earned from various types of possible payment plans in respect of membership fees, monthly dues and fees for the use of club resources. The plans described include discounts for early payments options and surcharges for deferred payment plans options. The basic question is whether any income from these plans will be characterized as income from property and subject to tax under paragraph 149(5)(e).

It should be noted that based on the detail and options in the question, it is not clear to CRA that this type of question, which is basically a request for assistance with possible tax planning opportunities, should be the subject of a CTF question. Nevertheless, we will provide some general comments.

Subsection 149(5) of the Income Tax Act (Act) is an exception to the general rule that a non-profit organization is not taxable on its taxable income. This exception only applies to a "club" whose main purpose is to provide dining, recreational or sporting facilities for its members. The taxable income in this case is limited by paragraph 149(5)(e) of the Act, to include all of its income from property and certain taxable capital gains.

There may be situations where interest income is not always characterized as income from property for tax purposes. However, in our view, these situations do not apply to a non-profit organization that does not earn business income. This issue was discussed in the case of Elm Ridge Country Club Inc v. The Queen, 99 DTC 5127. The taxpayer was a non-profit organization providing dining, recreational or sporting facilities for its members. In Elm Ridge, interest income on short term deposits was found to be income from property, pursuant to paragraph 149(5)(e) of the Act. In reaching this conclusion, the court felt that generally accepted approaches used to determine whether income was from business or from property, are designed for profit-making organizations and are unsuited to non-profit organizations. The Federal Court of Appeal in paragraph 15 of its decision, felt that: "Parliament has taken care to ensure that clubs such as the appellant, unlike other non-profit organizations, are taxed on all their income from property and therefore, it is plain, on all their interest income…".

As noted in the question, CRA's position regarding the application of paragraph 149(5)(e) of the Act is expressed in document 2011-040990. Interest income, regardless of its source, earned by a club is considered income from property for the purpose of subsection 149(5) of the Act. The CRA does not make a distinction between interest income that is earned from the deposit of surplus funds received as a result of prepaid membership dues and interest income earned from overdue membership dues.

The determination of whether any particular payment plan offered to members includes income from property is a question of fact that can only be determined on a case by case basis.

File #2012-045761
Officer: Ann Townsend