2 August 2013 External T.I. 2013-0475041E5 - NPO - rental income

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. Whether the NPO can rent vacation properties to non-members and still be exempt from tax. 2. Whether the NPO would pay tax on rental income pursuant to 149(5).

Position: 1. Depends. 2. Yes, would likely be considered income from property.

Reasons: 1. Could indicate a profit purpose. 2. If business income, would likely indicate a profit purpose organization and would not be considered an NPO.

XXXXXXXXXX
2013-047504
Lori Merrigan
(613) 957-9229

August 2, 2013

Dear XXXXXXXXXX:

Re: 149(1)(l) Entity – Rental Income

This is in response to your letter of January 10, 2013, requesting our views as to whether the rental of vacation properties to non-members would jeopardize the tax exempt status of an entity described in paragraph 149(1)(l) of the Income Tax Act (the "Act"). In this letter, unless otherwise expressly stated, all statutory references are to the provisions of the Act.

Written confirmations of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002.  This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html.  Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required.  Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer had prepared and filed its income tax return for the year.  Notwithstanding the foregoing, we are prepared to provide the following comments that may be of assistance.

Paragraph 149(1)(l) provides an exemption from Part I tax for a club, society, or association that is not a charity and that is 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 club, society or association can be payable or be available for the personal benefit of any of its members. However, when the main purpose of an organization is to provide dining, recreational or sporting facilities to its members, subsection 149(5) applies to deem the existence of an inter vivos trust. The property of the organization is deemed to be the property of the trust and income tax is payable by the trust on its property income and certain capital gains. The CRA's general views regarding subsection 149(5) can be found in Interpretation Bulletin IT-83R3, "Non-profit organizations - Taxation of income from property." This reply is premised upon the existence of a properly constituted and operated 149(1)(l) entity, although it is important to note that we are not in a position to make this determination with respect to your inquiry.

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 exclusively and directly used in providing the services of the organization, to its members. With respect to rental income of a 149(1)(l) entity, paragraph 4 of IT-83R3 states that:

"…Revenue derived from the rental of club facilities may be categorized, depending upon the facts of a particular situation, either as income from property or income from business. For example, the rental of building space that is in excess of a club's normal requirements would be property income, while the rental of dining facilities for a wedding reception or a golf course for a tournament would be business income. In distinguishing property income from business income, the courts have generally regarded the degree of the lessor's activity associated with the rental as determinant. It should be noted that active pursuit of rental income from non-members that is categorized as business income could result in a club being disqualified as an organization exempt from tax under paragraph 149(1)(l)."

Paragraph 5 of IT-83R3 continues on to say:

"Where a club owns its premises and rents space in a club building that is in excess of its current requirements for carrying out club activities, a reasonable apportionment of common expenses (including capital cost allowance) is deductible in determining the income from the rental of the excess space. When the building is disposed of, any recapture of capital cost allowance claimed (or terminal loss) or taxable capital gain or allowable capital loss on that portion of the building rented, is to be included in the income of the trust."

However, it should be noted that the active pursuit of rental income from non-members could indicate a profit purpose resulting in an entity being disqualified as an organization exempt from tax under paragraph 149(1)(l). One of the key considerations in determining whether an organization is validly constituted and operated as a 149(1)(l) entity is whether profit is one of its purposes. Relevant issues to be considered as to whether the rental of property is actively sought from non-members would be:

• the circumstances and purposes for which the property was acquired and previously used,
• the duration of the profitable rental situation,
• the amount of profit, and
• whether the income earned from the rentals to non-members is used for the organization's not-for-profit objectives.

It is our view that the rental of vacant property to non-members would likely not affect the tax exempt status of a 149(1)(l) entity where the rental income was incidental, the rental of the property to non-members was infrequent or for a short period of time during a transition period (e.g. for a period during which the property was being prepared for sale), any incidental income earned from the rental of the property was used for the organization's not-for-profit objectives, and the incidental income earned was not made available for the personal benefit of the organization's members.

Where an organization meets the conditions described above, and maintains its tax exempt status as a 149(1)(l) entity, the rental income would likely be considered income from property and taxed in the deemed trust pursuant to subsection 149(5). Where an organization does not meet these conditions, the organization would no longer qualify for the tax exemption provided for in paragraph 149(1)(l) and would therefore be considered a taxable organization.

We trust that these comments will be of assistance.

Yours truly,

Roger Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch