23 September 1990 Internal T.I. 46467 F - Non-profit Organization

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.

24(1)

This is in reply to your memorandum of January 10, 1990, concerning whether 24(1) (the "Taxpayer") qualifies for exempt status under paragraph 149(1)(1).

24(1)

Our Comments

The conditions in paragraph 149(1)(1) that an association (corporation) must comply with in order to qualify for exemption as a non-profit organization are set out in paragraph 2 of IT-496.

The first condition outlined is that it must not, in the opinion of the Minister, be a charity (see paragraph 4 of IT-496).

The second condition is that it must be organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit.  In order to establish the purpose of an organization, the Department will, as set out in paragraph 5 of IT-496, normally refer to instruments such as letters patent, articles of incorporation, memoranda of agreement and by-laws.

In relation to this requirement  24(1).

A third requirement is that it must be operated exclusively for the same purpose for which it was organized.  As outlined in paragraph 10 of IT-496, the determination of whether this requirement has been satisfied is a question of fact which can only be ascertained on retrospective basis  by reviewing all of its activities for a particular year.  In relation to this requirement and the second one noted above, paragraph 149(1)(1) of the Act contemplates that an organization may carry on income generating activities and earn income and still qualify for exempt status.  However, the income generating activity carried on and the resulting income must be used by the organization to achieve its declared exempt objectives.

In this regard, we would refer you to the Gull Bay Development Corporation case (84 DTC 6040) where the corporation, in order to achieve the social welfare and civic improvement objectives of the Indian Band Council, the logging activities was the most efficient way of achieving the Band Council's social welfare and civic improvement objectives.  Since, in the case at hand,  24(1).  Paragraphs 8 and 9 of IT-496 point out that where an association accumulates amounts in excess of its reasonable needs to carry on its non-profit activities, the Department will consider profit to be one of the purposes for which the association was operated.  We note that if the cash will be used in the Taxpayer's normal business cycle, this would not be considered to be offensive.

The final condition requires that no part of its income may be paid, payable or otherwise made available for the personal benefit of any proprietor, member or shareholder.  In relation to this requirement, 24(1).

As noted in paragraph 11 of IT-496, this is an acceptable method if ensuring that income will not be made available to shareholders indirectly on the wind-up or dissolution of the corporation.  However, these are other considerations.  In this regard, the Department has taken the view that if documentation indicates that anything more that the return of capital or taxable capital gains as provided by subsection 149(2) of the Act may be made available to member by way of dividends or otherwise, the entity will not receive tax exempt status.  In relation to these comments, 24(1).

It is our view that as presently constituted, 24(1).  Should the Taxpayer make an additional submission to you in respect of our comments, we are, of course, willing to be of further assistance to you. 

As the Audit Applications Division of Head Office is concerned with the possible assessments of any and all non-profit organization, we have forwarded to them a copy of this reply for their information.

We understand that they will be in contact with you in the near future concerning this file and thus you may wish to await their comments before entering into any further discussions with the taxpayer or its representatives.

ChiefServices, Public Utilities & Exempt Corporation SectionBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch