21 January 2026 External T.I. 2025-1062851E5 - Disposition of Property by XXXXXXXXXX Club

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. Is the land disposed by a tax-exempt NPO considered property used exclusively for and directly in the course of providing dining, recreational or sporting facilities for its members for the purposes of subparagraph 149(5)(e)(ii)? 2. Would the investment income earned on the proceeds from the sale of land affect the organization's eligibility for the tax exemption under paragraph 149(1)(l) of the Act? 3. Would reducing member fees using funds from the disposition of property or from investment income earned on those funds be considered making income available for the personal benefit of a member?

Position: 1. Question of fact, but likely. 2. Question of fact. 3. Question of fact, but likely not.

Reasons: 1. Provided the property was the main parking lot or the facility, then it likely qualifies for the exception in subparagraph 149(5)(e)(ii) of the Act 2. It is the CRA's long-standing view that a tax-exempt NPO may earn passive investment income without affecting its NPO status. A NPO that aggressively earns investment income to fund non-profit activities likely will not be considered to be operating for any purpose other than profit. 3. If the capital gain is used to reduce membership fees, then it would not be considered making income available to members because subsection 149(2) excludes the taxable capital gain realized by Club in determining whether income is available for the personal benefit of a member. If the earnings from investing the proceeds of disposition are used to reduce membership fees, it will likely not be considered making income available to members as long as the earnings are considered, incidental profits. Incidental profits are generally not taken into account in determining whether income is available for the personal benefit of a member. It is a question of fact whether the earnings would be considered incidental profits.

XXXXXXXXXX								2025-106285
M. Gauthier

January 21, 2026

Dear XXXXXXXXXX:

Re: Disposition of land

This is in reply to your letter dated March 14, 2025, requesting comments on the application of subsection 149(5) of the Income Tax Act (Act) to the disposition of a parcel of land held by the XXXXXXXXXX (Club). You also asked for comments on whether investing the proceeds of disposition would negatively affect the Club’s eligibility for the tax exemption under paragraph 149(1)(l) of the Act.

In your submission, you stated that the Club owns XXXXXXXXXX (Lot). The Club intends to use the proceeds from this disposition towards future capital improvements and equipment purchases.

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.

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.

Hereafter referred to as a tax-exempt NPO.

You stated that the Club earned income from renting the Lot to non-members (rental income) and you asked whether this activity jeopardized the Club’s status as a tax-exempt NPO.

As noted above, to be a tax-exempt NPO, 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 tax-exempt NPO even if it expects to use or uses that profit to support its not-for-profit objectives.

However, the courts have recognized that a tax-exempt NPO 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.

You indicated that the rental income was sporadic, minor, and not actively pursued. Whether the rental income is considered incidental profits is a question that can only be determined after a review of all the facts, typically as part of an audit. Based on our understanding of the information provided, the occasional rental of the Lot would likely be considered incidental profits.

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

Assuming the Club qualifies as a tax-exempt NPO, it is subject to the rules in subsection 149(5) of the Act since its main purpose is to provide dining, recreational, or sporting facilities for its members. 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 term used requires the property to be actively employed in providing the dining, recreational or sporting facilities for its members. 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. Casual or indirect uses of a property are not sufficient for the exception in subparagraph 149(5)(e)(ii) of the Act to apply. In addition, limited or historical use is also insufficient to meet the threshold of the subparagraph.
• The term exclusively indicates that the use of the property must be restricted to the specified purpose of the organization (i.e., providing the dining, recreational or sporting facilities for its members) and not some other type of purpose or use. It implies that secondary, incidental, or unrelated uses of the property may not qualify if those other uses are not providing dining, recreational, or sporting facilities. In addition, the property must be used exclusively for providing services for members, not the general public.
• The term directly suggests that the property’s use must have a straightforward connection to the dining, recreational, or sporting facilities. This suggests a clear link or relationship between the property and providing the dining, recreational, or sporting facilities to its members.

You stated that the Lot was used as the main XXXXXXXXXX lot for the Club’s members, but it was also rented to non-members for limited periods. Paragraph 7 of Interpretation Bulletin IT83R3 ARCHIVED - Non-profit organizations - Taxation of income from property, states, in part, that “a club is not deprived of the exemption from the capital gain and loss provisions by reason only of occasional rental of its property to non-members”. As stated above, you indicated that renting the property was sporadic, minor, and not actively pursued. It is our view that, in this case, the rental to non-members appears to be have been occasional.

Therefore, provided the Lot was used as the main XXXXXXXXXX lot for the Club, then it likely qualifies for the exception in subparagraph 149(5)(e)(ii) of the Act as a property used exclusively for and directly in the course of providing the dining, recreational or sporting facilities by the Club for its members.

Investment activities by a tax-exempt NPO

You asked whether investing the proceeds from the disposition of the Lot would be considered a profit making activity that would negatively affect the Club’s status as a tax-exempt NPO.

Generally speaking, earning passive investment income likely will not jeopardize the Club’s status as a tax-exempt NPO. However, if the investment 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 tax-exempt NPO.

You stated that the some of the proceeds from the disposition of the Lot may be held in a reserve fund for future use, including to cover future capital improvements, to repair or replace equipment, or to reduce membership fees, and you would like to know whether this reserve fund would negatively affect the Club’s status as a tax-exempt NPO.

Having a reserve fund may not, in and of itself, negatively affect an organization’s status as a tax-exempt NPO. It is our view that a tax-exempt NPO can establish and maintain a reasonable reserve fund provided the fund is used solely in the operations of the organization. There is no specific quantum that is considered reasonable. Each reserve fund 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.

You also asked whether the Club may use the reserve fund or investment income from passively investing the reserve fund, to reduce membership fees without negatively affecting its status as a tax-exempt NPO. As noted above, one of the conditions to be a tax-exempt NPO is that the organization’s 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), hereafter referred to as the No Personal Benefit Test.

Income for this purpose is determined in accordance with section 3, however subsection 149(2) excludes any taxable capital gains or allowable capital losses. Therefore, the taxable and non-taxable portion of the capital gain from the disposition of the Lot can be distributed to members, including reducing membership fees, without jeopardizing the Club’s status as a tax-exempt NPO, as both of these amounts are not considered income for the purposes of the No Personal Benefit Test.

As for reducing membership fees using investment income, it is our view that incidental profits can be used to reduce membership fees without violating the No Personal Benefit Test. However, it should be noted that payments of incidental profits directly to members would violate 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 tax-exempt NPO. Whether the Club qualifies as a tax-exempt NPO 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 (TCC), 88 DTC 1442; [1988] 2 CTC 2071