30 March 1989 Income Tax Severed Letter 5-7604 - [890330]

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.

Revenue Canada Taxation

Head Office

XXXX

R.B. Day (613) 957-2136

MAR 30 1989

Dear XXXX

We are writing in reply to your letter of February 22, 1989, wherein you requested our views regarding the following issues:

I. Factors which must be present (or absent) in order for an organization to qualify for non-profit status under paragraph 149(1)(1) of the Income Tax Act.

II. The impact of the 1988 tax changes regarding meal and entertainment expenses incurred by non-profit organizations.

Our Comments

We will reply to the questions set out in your letter in the order in which they appear.

1. (a) Where an organization, attempting to qualify as a non-profit organization, uses the corporate vehicle, there is no requirement that the corporation be without share capital. However, if it does have a share capital, the enabling documents must very clearly provide that no distribution may be made to, or on behalf of, a member at anytime including on the wind-up or dissolution of the corporation. For further comment in this regard see paragraphs 11 to 13 of IT-496 .

(b) It is not possible for a corporation, qualifying for exemption under paragraph 149(1)(1) to have a wholly-owned subsidiary. The Act calls for the organization to be organized and operated exclusively for the designated purpose. In our view, this provision excludes the possibility of a non-profit organization owning a subsidiary which is in itself a taxable entity.

2. To qualify for exempt status under paragraph 149(1)(1) an organization must be both organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or any other purpose except profit or any combination of these activities. The use of the word exclusively from a technical view point means 100%.

A further requirement to qualify under paragraph 149(1)(1), is that no part of the organization's income may be paid, payable or otherwise available for the personal benefit of any proprietor, member, or shareholder unless that person was a member, proprietor or shareholder of a club, society or association the primary purpose and function of which was the promotion of amateur athletics in Canada.

Where a corporation provides services to taxable Canadian corporations on a membership fee basis it would not, in our view, qualify as a non-profit corporation as it is considered to operate merely as an extension of the members business activities. While such a corporation may not be liable to tax because it does not have any taxable income it does not qualify as a non-profit organization.

3. Paragraph 7 of Interpretation Bulletin IT-496 sets out the view, as you point out, that an association is not operated "exclusively" for non-profit purposes where its principal activity is the carrying on of a trade or business for profit. This principle applies whether the entity makes its service available only to members or to both members and the public. Since the primary objective of the corporation described in your letter is the carrying on of a business enterprise, it could not be said to be operated ".. exclusively ... for any other purposes except profit". The entity would not, therefore, qualify as a non-profit organization under paragraph 149(1)(1).

4. (a) Whether or not a particular corporation qualifies for exempt status under paragraph 149(1)(1) may only be confirmed on an after-the-fact basis as a result of a departmental audit of the years concerned.

(b) When corporate returns are screened for audit by our audit division, non-profit organizations are not given special consideration relative to other corporations. There are no special reporting requirements for corporations seeking non-profit status under paragraph 149(1)(1). It is a question of fact in each year and in each case, whether a corporation qualifies as a non-profit organization.

II. Disallowance for Meals and Entertainment

Since subsection 67.1(1) states that it applies "For all purposes of this Act" and no exception is made for section 149, any amounts expended for meals and entertainment, by a non-profit organization, would be subject to the 80% limitation imposed by this section.

In situations where the organization seeking non-profit status under paragraph 149(1)(1) have their expenses reimbursed by taxable entities, that portion of the reimbursement that relates to meals and entertainment expenses would, in our view, be subject to the 80% limitation in the hands of the reimbursing taxpayers.

Yours truly,

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental. Affairs Branch