6 May 2025 External T.I. 2024-1031071E5 - Subparagraph 149(5)(e)(ii) and vacant land

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: Would a parcel of land that was only used by a golf club as a golf range for a limited period of time during its ownership be considered “property used exclusively for and directly in the course of providing the dining, recreational or sporting facilities provided” by the golf club for the purposes of subparagraph 149(5)(e)(ii) of the Income Tax Act?

Position: No, the land was not “property used exclusively for and directly in the course of providing the dining, recreational or sporting facilities provided” by the golf club for its members.

Reasons: See response.

XXXXXXXXXX									2024-103107
M. Gauthier

May 6, 2025

Dear XXXXXXXXXX:

Re: Vacant land and the application of subparagraph 149(5)(e)(ii) of the Income Tax Act

This is in reply to your letter dated August 6, 2024, requesting comments on the application of subparagraph 149(5)(e)(ii) of the Income Tax Act (Act) to the sale of land by a golf club that is claiming the exemption from tax under paragraph 149(1)(l) of the Act. You stated that the golf club sold a subdivided parcel of land in 2024 that was owned for 35 years (1990 to 2024) and was used as a golf range for 5 of those years (1998-2002). For all other years, the land was vacant and was not used for any other purpose by the golf club. You asked whether the parcel of land is considered “property used exclusively for and directly in the course of providing the dining, recreational or sporting facilities provided” by the golf club for its members as described under subparagraph 149(5)(e)(ii) of the Act.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). 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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Requirements of paragraph 149(1)(l) of the Act

Paragraph 149(1)(l) of the Act provides that the taxable income of an organization is exempt from tax under Part I for a period throughout which the organization meets 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 proprietor, member, or shareholder, unless the proprietor, member, or shareholder was a club, society, or association which has as its primary purpose and function the promotion of amateur athletics in Canada.

An organization that meets the above conditions is hereafter referred to as a tax-exempt NPO. You stated that the golf club was incorporated as a non-profit public company under the laws of XXXXXXXXXX. It is a question of fact whether the golf club is a tax-exempt NPO.

Indicators of Profit Purpose

According to the golf club’s webpage, in addition to membership options, the golf club offers green fees, power cart rentals, driving range access, golf lessons, and operates a restaurant, all of which are available to the public (that is, to non-members). These activities may indicate a profit purpose, which would jeopardize its status as a tax-exempt NPO.

If the golf club ceases to be a tax-exempt NPO, it will be subject to the rules in subsection 149(10) of the Act. According to that subsection, the taxation year of a corporation is deemed to have ended immediately before that point in time when it ceases to be tax-exempt and a new taxation year is deemed to begin at the time it ceased to be exempt. In addition, the corporation is deemed to have disposed of all of its properties immediately before it ceased to be tax-exempt and to have reacquired them at fair market value. In effect, any capital gain that accrues after the time the entity ceased to be a tax-exempt NPO will be taxable.

Application of subsection 149(5) and subparagraph 149(5)(e)(ii) of the Act

Assuming the golf club is a tax-exempt NPO and its main purpose is to provide dining, recreational or sporting facilities for its members, it will be subject to the rules in subsection 149(5) of the Act. Subsection 149(5) of the Act deems the existence of a trust and the property of the tax-exempt NPO to be the property of the trust, and provides that income tax is payable by the trust on its taxable income which is generally limited to property income and taxable capital gains. However, subparagraph 149(5)(e)(ii) of the Act excludes from the taxable income of the deemed trust, the taxable capital gains from the disposition of property used exclusively for and directly in the course of providing the dining, recreational or sporting facilities provided by the tax-exempt NPO for its members.

The phrase used exclusively for and directly in the course of is not found elsewhere in the Act and the terms used, exclusively, and directly are not defined terms in the Act. As a result, we rely on jurisprudence and dictionary definitions for those terms.

The meaning of the term exclusively was considered in Tourbec (1979) Inc v MNR (footnote 1) , in the context of paragraph 149(1)(l) of the Act, and stated:

“There is one thing which is clear both on the wording of the statute and on the cases. The word “exclusively” must be given its full effect. It is not sufficient that the society should be instituted “mainly” or “primarily” or “chiefly” for the purposes of science, literature, or the fine arts, it must be instituted “exclusively” for those purposes.”[Our emphasis]

The term directly was considered in McDonnell Douglas Canada Ltd. v. Her Majesty The Queen (footnote 2) in the context of an exemption under the Excise Tax Act and the court stated the following:

“35. In order to understand the meaning of “directly” one starts with a reliable dictionary. “Directly” is the adverb derived from the adjective “direct” which bears the principle meaning. (It may be noted that “directly” and directement, the term expressed in the French language version of the statute are no faux amis, but bear the very same meaning.) The Oxford Dictionary of Current English records the following meanings:

direct ... 1 a. extending or moving in a straight line or by shortest route, not crooked or oblique; straightforward, going straight to the point, frank, not ambiguous; without intermediaries, personal; (of descent) linear not collateral; complete, greatest possible (direct opposite, contrast). 2 adv. in a direct way or manner (deal with him direct); by direct route (train goes to London direct).

directly 1 adv. in a direct line or manner; at once, without delay.”

The term used was interpreted in Glaxo Wellcome Inc. v. Her Majesty the Queen (footnote 3) in the context of the definition of former business property and states:

“Let us then start with the word “used”. About as garden-variety a word as one is likely to find anywhere. A company uses a piece of land on which it locates its factory, and carries on its business. A farmer uses land on which he plants crops. Indeed, I would extend the word “use” to cover land that a farmer summer-fallows for a season. Unless some principle of interpretation compels me to ascribe a broader meaning to the word, “use” connotes actual utilization for some purpose, not holding for future use. “Used primarily for the purpose of gaining or producing income from a business” would, prima facie, imply that the land be put to some productive use in the business.”

As noted in paragraph 7 of archived Interpretation Bulletin (IT-83R3), Non-profit organizations - Taxation of income from property, for a deemed trust to be exempted from income tax on the taxable capital gain realized on the sale of a property, the property must actually be used exclusively for and directly in the course of providing the dining, recreational or sporting facilities provided by the tax-exempt NPO for its members. It is not sufficient that vacant land was intended to be used in the manner described in subparagraph 149(5)(e)(ii) of the Act. Paragraph 7 of IT83R3 states that “a gain realized on the sale of vacant land acquired in connection with a planned extension of club facilities that has since been abandoned is taxable in the hands of the deemed trust regardless of the reason for the change in plans or the fact that the land was not used for any purpose whatever during the period that it was held.” Therefore, the actual usage of the facilities is what must be considered when determining whether subparagraph 149(5)(e)(ii) of the Act applies.

Furthermore, casual or indirect uses of a property are not sufficient for the exception in subparagraph 149(5)(e)(ii) of the Act to apply. It is our understanding that subparagraph 149(5)(e)(ii) of the Act is intended to only exclude taxable capital gains from property that is required and used exclusively to meet the objectives of the tax-exempt NPO.

The information provided stated that the parcel of land was used as a golf range for a brief five-year period (1998–2002) of its 35-year ownership (1990 to 2024). The land has remained unused (vacant) for the past 22 years. In our view, such limited or historical use is insufficient to meet the threshold of being property used exclusively for and directly in the course of providing facilities to members. Therefore, based on the information provided, it is our view that the parcel of land does not meet the conditions for the exception under subparagraph 149(5)(e)(ii) of the Act, and the taxable capital gain realized on its sale should be included in the taxable income of the deemed trust and is subject to tax under Part I of the Act.

Nothing in this letter should be construed as implying that we are confirming that the income of the golf club is, or has been at any particular time, exempt from income tax under paragraph 149(1)(l) of the Act. Whether the golf club qualifies for the tax exemption under paragraph 149(1)(l) of the Act for a taxation year is a question of fact to be determined at the end of the taxation year after considering all of the club’s activities during that year.

We trust that these comments will be of assistance.

Yours truly,

Ms. Nerill Thomas-Wilkinson, CPA, CA

Manager
Non-Profit Organizations and Indigenous Issues
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Tourbec (1979) Inc v MNR, 88 DTC 1442; [1988] 2 CTC 2071

2 McDonnell Douglas Canada Ltd. v. Her Majesty The Queen, Federal Court-Trial Division, Customs and Excise,1996 CarswellNat 2096, [1997] 1 C.T.C. 37

3 Glaxo Wellcome Inc. v. R., [1996] 1 C.T.C. 2904 96 D.T.C. 1159