5 August 2025 External T.I. 2024-1045401E5 - NPO - Accumulated Surplus

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 earning interest income from investing lifetime membership fees would disqualify an organization from the income tax exemption under paragraph 149(1)(l) of the Act. (2) Under what circumstances would an accumulated surplus be considered reasonable for the organization for the purposes of paragraph 149(1)(l) of the Act. (3) Whether covering the cost of food during an annual general meeting, which is open to all members, is considered making income available for personal benefit of the members for purposes of paragraph 149(1)(l) of the Act.( 4) Whether using a surplus accumulated from past events to cover members’ expenses at future events is considered making income available for personal benefit of the members for purposes of paragraph 149(1)(l) of the Act. (5) Whether the organization covering the member expenses at future events for only select members is considered making income available for personal benefit of the members for purposes of paragraph 149(1)(l) of the Act.

Position: 1) Question of fact, but likely no. 2) Question of fact, general comments. 3) and 4) Question of fact, but likely no. 5) Maybe, but question of fact.

Reasons: Consistent with prior positions and case law.

XXXXXXXXXX									2024-104540
										Phyllis Chiu

August 5, 2025

Dear XXXXXXXXXX:

RE: XXXXXXXXXX club and paragraph 149(1)(l) of the Income Tax Act

This is in response to your email dated December 2, 2024, asking whether a XXXXXXXXXX club (Club) qualifies for the income tax exemption under paragraph 149(1)(l) of the Income Tax Act (Act) where it earns investment income and has an accumulated surplus from Club XXXXXXXXXX.

Our understanding of the information you provided is as follows:

• The Club is organized to develop and promote the history, restoration, preservation, and enjoyment of XXXXXXXXXX.
• Membership in the Club is open both to individuals who own a XXXXXXXXXX as well as to those simply interested in XXXXXXXXXX. Membership fees are collected as follows: $10 for one year, $20 for three years, or $200 for a lifetime membership. The Club has approximately 100 members.
• The Club’s main activities are periodic board and membership meetings, the annual general meeting, and about XXXXXXXXXX during the year. The XXXXXXXXXX provide an opportunity for members to socialize and enjoy the XXXXXXXXXX and a fee is required to attend.
• The Club also produces a periodic newsletter (2-4 times per year), primarily distributed by email, which provides updates on past and upcoming XXXXXXXXXX and meetings, as well as classified ads regarding member XXXXXXXXXX.

Specifically, you would like to know whether earning interest income on lifetime membership fees would affect the Club’s qualification for the income tax exemption under paragraph 149(1)(l) of the Act (Tax Exemption). You also would like to know under what circumstances an accumulated surplus arising from Club XXXXXXXXXX would be considered reasonable and not disqualify the Club for the Tax Exemption. Lastly, you asked whether the Club is permitted to deplete that surplus by covering certain member expenses, such as XXXXXXXXXX, without negatively affecting the Club’s Tax Exemption.

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.

In general terms, paragraph 149(1)(l) of the Act provides that the taxable income of a club, society, or association is exempt from tax under Part I of the Act for a period throughout which it meets all the following conditions:

a) it is not a charity;

b) it is organized and operated exclusively for social welfare, civic improvement, pleasure or recreation, or for any other purpose except profit; and

c) it does not distribute or otherwise make available for the personal benefit of a member or shareholder any of its income (No Personal Benefit Test) unless the member or shareholder is an organization that has as its primary purpose and function the promotion of amateur athletics in Canada.

Hereafter referred to as a 149(1)(l) Organization.

As noted above, to be a 149(1)(l) Organization, an organization must be organized and operated exclusively for social welfare, civic improvement, pleasure or recreation, or for any other purpose except profit. According to the decision rendered by the Tax Court of Canada in Tourbec (footnote 1) , the word exclusively must be given its full effect and it is not sufficient that an organization be organized and operated mainly or primarily or chiefly for those purposes. The use of the word exclusively therefore indicates that while an organization may have many purposes, none of those purposes can be to earn a profit. Thus, where an organization intends, at any time, to earn a profit, it will not be a 149(1)(l) Organization even if it expects to use or uses that profit to support its not-for-profit objectives.

However, the courts have recognized that a 149(1)(l) Organization can earn a profit, as long as the profit is incidental. That is, the profit is not significant and arises from activities directly connected to the organization’s not-for-profit objectives. In addition, the incidental profit must be used to meet the not-for-profit objectives of the Organization.

It is our understanding that the Club invests the lifetime membership fees it receives and that the annual interest income earned is used to cover the Club’s annual operating expenses related to serving those lifetime members. Earning interest income from passively investing the lifetime membership fees is not likely to jeopardize the Club’s status as a 149(1)(l) Organization. This is because the interest income appears to be incidental (as described above) and is used to help cover the Club’s operating expenses. However, if the interest income accumulates and creates a surplus well beyond what is reasonably required for the Club’s operations, it may indicate that the Club is operated for a profit purpose. Similarly, where the Club aggressively pursues investment income to fund its activities, this may also indicate that it is operated for a profit purpose, leading to the loss of its status as a 149(1)(l) Organization.

You stated that the Club has accumulated a surplus from past Club XXXXXXXXXX and you would like to know whether this surplus would negatively affect the Club’s status as a 149(1)(l) Organization. Having an accumulated surplus may not, in and of itself, negatively affect an organization’s status under paragraph 149(1)(l) of the Act. It is our position that a 149(1)(l) Organization may accumulate a reasonable surplus from incidental profits (Incidental Surplus) provided the Incidental Surplus is used solely in the operations of the organization. There is no specific quantum of surplus that is considered reasonable. Each surplus must be examined taking into consideration the organization’s particular circumstances, including such things as future anticipated expenditures and the amount and pattern of receipts from various sources.

Further, a surplus arising from profits realized due to the mis-budgeting of events such as the XXXXXXXXXX, will generally be considered an Incidental Surplus where the original budget was reasonable. However, if the organization consistently budgets for and generates a profit, it may be considered to be operating with a profit purpose and therefore lose its status as a 149(1)(l) Organization.

You also asked whether the Club is permitted to deplete the accumulated surplus from XXXXXXXXXX by covering the cost of food for its members during the annual general meeting or the members’ XXXXXXXXXX fees, without negatively affecting its status as a 149(1)(l) Organization. Generally, an organization is permitted to deplete an Incidental Surplus arising from member-paid events such as XXXXXXXXXX by covering reasonable costs associated with future member-only events, including food served at annual general meetings, without violating the No Personal Benefit Test. This is only permitted if such use of funds reasonably supports or furthers the Club’s not-for-profit objectives. However, using the Incidental Surplus to only cover the reasonable costs of select members will likely violate the No Personal Benefit Test unless the use of funds in this restricted manner can be regarded as supporting or furthering the Club’s not-for-profit objectives. It is a question of fact whether depleting an Incidental Surplus in a particular manner violates the No Personal Benefit Test.

Nothing in this letter should be construed as implying that we are confirming that the Club is, or has been at any particular time, a 149(1)(l) Organization. Whether the Club qualifies as a 149(1)(l) Organization 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 these comments will be of assistance.

Yours truly,

Ms. Nerill Thomas-Wilkinson, CPA, CA

Manager
Non-Profit Organizations and Indigenous Issues Section
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 (TCC), 88 DTC 1442; [1988] 2 CTC 2071