2 April 2026 External T.I. 2025-1066701E5 - Member Loans to Housing Co-operative

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: Will loans from members of a housing co-operative (before or after construction) to the housing co-operative cause the housing co-operative to fail or cease to qualify for the tax exemption provided in paragraph 149(1)(l) of the Income Tax Act?

Position: Question of fact.

Reasons: The housing co-operative may cease to be exempt from tax under paragraph 149(1)(l) if it generates profits (other than incidental profits) that allow it to repay the principal and/or interest on the member loans. Additionally, the housing co-operative cannot make its income payable to or otherwise available for the personal benefit of the member. Therefore, where members are repaid the value of upgrades/renovations in excess of the cost of those upgrades/renovations, the income of housing co-operative will likely be considered to have been made available for the personal benefit of members, leading to the loss of its status as a tax-exempt NPO.

XXXXXXXXXX 2025-106670
M. Gauthier

April 2, 2026

Dear XXXXXXXXXX:

Re: Member loan to housing co-operative

This is in reply to your request dated May 9, 2025, requesting comments on the tax exemption under paragraph 149(1)(l) of the Income Tax Act (Act) as it relates to the XXXXXXXXXX (Housing Co-op) and the loans it receives from its members (i.e., individuals who have purchased a share in the co-op at a price of $1,000). We apologize for the delay in responding.

In your request, you described the Debt Obligation Agreement (DOA) that members must sign when committing to entering into a lease agreement with the Housing Co-op. Under the DOA, members are required to provide loans (up to a certain amount) to the Housing Co-op. The loans are comprised of an initial downpayment and ongoing additional payments until the member’s total loan obligation under the DOA is met.

In addition, where a member increases the value of their home by paying out of pocket to upgrade and/or renovate it with the permission of the Housing Co-op, the value of the work (which may or may not be equal to the cost of the upgrades/renovations) is added to the members total loan obligation and to the member’s contributed loan amount.

Interest accrues on the loan at a rate equal to the XXXXXXXXXX and cannot be less than 1%, or more than 5%. Upon the termination of a member’s lease, the Housing Co-op will repay the total amount of the loan provided by that member during their lease, along with all accrued interest due to the member, less any amounts the member owes to the Housing Co-op.

You asked whether the member loans would cause the Housing Co-op to not qualify for the tax exemption under paragraph 149(1)(l) of the Act.

Our Comments:

This technical interpretation provides general comments about the provisions of the Income Tax 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 payable to or otherwise 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.

Operating for any other purpose except profit

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 also 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.

In determining whether the profit is not significant and arises from activities directly connected to the organization’s not-for-profit objectives, factors such as the nature of the activity, the frequency and scale of the activity, the degree of commerciality, and whether the activity is actively pursued could be considered. No single factor is determinative, and the determination is inherently fact-specific.

Generating income for the purpose of repaying the principal portion of member loans may indicate that the Housing Co-op has a profit purpose, as such profits would not likely be considered incidental. In contrast, earning income to cover reasonable interest expenses on member loans that constitute a bona fide debt and are incurred in furtherance of the Housing Co-op’s non-profit objectives may not, in and of itself, indicate a profit purpose. In addition, the realization of profits arising from the revaluation or sale of real property may, depending on all the relevant facts and circumstances, be indicative of a profit purpose.

You stated that Housing Co-op will hold three percent (3%) of the principal amount of all loans received from members in a reserve fund to ensure that upon the departure of any member there are sufficient funds available to pay the accrued interest on the loan. Therefore, this reserve fund would most likely need to be invested by Housing Co-op in order to meet its future interest obligations on the loan.

Generally speaking, earning passive investment income from investing the reserve likely will not jeopardize Housing Co-op’s status as a tax-exempt NPO. However, if the investment income accumulates and creates a surplus well beyond what is reasonably required for Housing Co-op’s operations, it may indicate that Housing Co-op is operated for a profit purpose. Similarly, where Housing Co-op aggressively pursues investment income to fund its activities (including its loan payment obligations), this may also indicate that it is operated for a profit purpose, leading to the loss of its status as a tax-exempt NPO.

Income payable to or otherwise available for the personal benefit of a member

As stated above, a tax-exempt NPO’s income cannot be payable to or otherwise 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.

In our view, the Housing Co-op may repay a member loan (principal and interest) without it being considered to be income that is payable to or otherwise available for the personal benefit of the member, provided that:

• the loan is a genuine, bona fide debt that creates a debtor-creditor relationship on reasonable terms and conditions;
• the interest rate is reasonable;
• the arrangement is not effectively a mechanism to distribute surpluses of the Housing Co-op;
• it furthers the Housing Co-op’s non-profit objectives; and
• in general, the principal portion of member loans are repaid from member contributions, gifts or grants, or incidental profits.

It is a question of fact whether the member receives the payment in his or her capacity as a lender or in his or her capacity as a member of the Housing Co-op.

Furthermore, where the amount repaid in respect of upgrades or renovations exceeds the member’s actual out-of-pocket cost, the excess may indicate that income has been made available for the personal benefit of the member, leading to the loss of its status as a tax-exempt NPO. Conversely, a repayment that merely reimburses the member for actual renovation costs, without conferring an economic gain, would generally be less likely to be viewed as income made available for the member’s personal benefit.

Nothing in this letter should be construed as confirming that the Housing Co-op is, or has been at any particular time, a tax-exempt NPO. Whether the Housing Co-op 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 Housing Co-op’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