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 income generated from the fibre-optic cable network would jeopardize the not-for-profit status of the Institute.
Position: Likely yes.
Reasons: It does not appear that this income is incidental or arises from activities directly connected to its not-for-profit objectives.
XXXXXXXXXX
2014-053794
Ananthy Mahendran
(905) 721-5204
March 4, 2015
Dear XXXXXXXXXX:
Re: Non-Profit Organization Revenue from the Fibre-Optic Cable Network
This is in response to your email of June 20, 2014, requesting our comments on the application of paragraph 149(1)(l) of the Income Tax Act (the "Act") to XXXXXXXXXX ("the Institute").
As we understand it, the Institute is a not-for-profit organization incorporated under the Societies Act of XXXXXXXXXX and mandated by the XXXXXXXXXX. You advised us that the Institute received a provincial grant and subsequently accessed provincial debentures to finance the construction of a fibre-optic cable network within the XXXXXXXXXX. The network is currently under construction, but once completed, the total capital cost is expected to be in excess of $XXXXXXXXXX with $XXXXXXXXXX of this amount coming via debenture debt. The Institute will charge an access fee to commercial enterprises using the network and cash flow generated from this revenue source could amount to as much as $XXXXXXXXXX per year. Initially, this revenue will primarily be used to service the debt. As the debt balance is reduced, net revenue will be used to support community enhancement projects that meet the Institute's mission and mandate.
Specifically, you have asked for our comments on whether the net revenue generated from the fibre-optic cable network would jeopardize the not-for-profit status of the Institute.
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.
In order to qualify as a non-profit organization (NPO) within the meaning of paragraph 149(1)(l) of the Act, an organization must meet all of the following conditions:
- 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
- its income is not available for the personal benefit of a member or shareholder.
An organization will not be exempt from tax under paragraph 149(1)(l) of the Act if earning profits is a purpose of the organization. If an organization sells goods or performs services to earn income, it may be considered to have a profit purpose, even if the income is used in furtherance of the organization's not-for-profit objectives. Neither the Canada Revenue Agency (CRA) nor the courts accept that using profits to finance not-for-profit objectives is sufficient in and of itself to deny a profit purpose. If an organization wishes to carry on a for-profit business for the purpose of providing funds to an NPO, the business should be carried on through a taxable entity and the funds provided to the NPO on an after-tax basis. In your particular situation, even if all of the revenue generated from the fibre-optic cable network is utilized to support the building of community capacity and the sustainability and growth of its business community, it is our view that the Institute may still have a profit purpose and, as such, may not qualify for the exemption under paragraph 149(1)(l) of the Act.
Jurisprudence has established that engaging in profit-generating activities will not necessarily preclude an organization from satisfying the requirements of paragraph 149(1)(l) of the Act provided that the earning of the profit has not, itself, become an objective of the organization. Therefore, it needs to be first determined whether the particular activities in which the Institute engages are carried out on a for-profit or not-for-profit basis. As we understand it, once the construction of the cable network is completed, the Institute would generate a substantial amount of profit from this new activity. This profit-generating activity would possibly affect the tax exempt status of the Institute, if the earning of the profit is or has become an objective of the Institute.
The CRA has accepted that an organization claiming an exemption under paragraph 149(1)(l) of the Act can earn a profit, as long as the profit is incidental and arises from activities directly connected to its not-for-profit objectives. This means that where the amounts are not material and the profits result from activities that the entity carries out to meet its not-for-profit objectives, the entity will remain tax-exempt. In all cases, the profits must be used to further the not-for-profit objectives of the entity and cannot be available for the personal benefit of members. 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.
Generally, fundraising, by its very nature, is considered a profit activity. However, 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.
Based on the facts provided, it is our view that the revenue generated from the fibre-optic cable network could affect the tax-exempt status of the Institute since it does not appear that this revenue is incidental or arises from activities directly connected to its not-for-profit objectives, which are to support the building of community capacity and the sustainability and growth of its business community. Whether the amount of revenue is considered incidental in relation to the needs of the Institute to carry on its non-profit activities is a question of fact to be determined with regard to the Institute's particular circumstances.
However, we would like to indicate that, subject to subsections 149(1.2) and (1.3) of the Act, paragraph 149(1)(d.5) exempts a corporation from Part I tax on its taxable income for a particular period if not less than 90% of its capital is owned by one or more entities each of which is a municipality in Canada, or a municipal or public body performing a function of government in Canada and the income of the corporation from activities carried on outside the geographical boundaries of the municipalities does not exceed 10% of its income for the period.
We trust that these comments will be of assistance.
Yours truly,
Roger Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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