23 February 1990 Administrative Letter 59246 F - Non-profit Organizations ("NPOs")

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.

February 23, 1990

Dear Sirs:

Re:  Non Profit Organizations ("NPO's")

This is in reply to your letter of December 7, 1989 requesting our interpretation of a number of issues which have come to your attention in connection with NPO's.

In accordance with paragraph 23 of Information Circular 70-6A the Department does not issue written opinions concerning proposed transactions.  Should you in fact wish an advance income tax ruling relative to the fact situation set out in your letter, it will necessary for you to conform to the guidelines under which such advance income tax ruling are issued as set out in IC 70-6A.

We do however, offer the following general comments with respect to some of the issues raised in your letter.

Our Comments

1.     The ruling set out in 29 continues to represent the Department's views on amalgamation of NPO's.

2.     An interest free loan made between corporations could give rise to a section 15 benefit in the hands of the share-holders of the recipient corporation.

3.     As indicated in paragraph 8 of Interpretation Bulletin IT-496, if the balance of accumulated excess at any time is greater than the NPO's reasonable needs to carry on non-profit activities, the Department will consider profit to be one of the purposes for which the NPO was operated.  This will be so particularly where assets representing the accumulated excess are used for purposes unrelated to its objects such as loans to members, shareholders or non-exempt persons.

4.     The ability of an NPO to issue dividends would mean that part of its income could be paid, payable or otherwise be made available for the personal benefit of a proprietor, member or shareholder.  Thus it would lose it status as an NPO and in fact it may never have qualified as an NPO.  In this respect, the Department has taken the view that if the letters patent, trust documentation or by-laws of an entity indicate that anything more than the return of capital or taxable capital gains as provided by section 149(2) of the Act may be made available to members by way of dividend or otherwise, whether on winding-up or otherwise, such an entity will not receive tax-exempt treatment.

      It is a canon of statutory interpretation that in constructing statutes the grammatical and ordinary sense of the words therein must be adhered to unless that would lead to absurdity.  The ordinary meaning of the word "available" is defined by the Oxford English Dictionary as "capable of being turned to account, hence, at one's disposal".  Based on this, it is the Department's view that paragraph 149(1)(1) of the Act precludes the tax-exempt treatment of any entity which has the power at any time in the current or future years to declare and pay dividends out of current or retained income.

5.     Dividends received by an NPO, the main purpose of which is to provide, dining, recreational or sporting facilities for its members, would be considered property income includable in income under subsection 149(5) of the act. Where, however, the dividends are paid by a related or associated NPO the comments in 4 above apply.

6.     Gross up and tax credit rules apply in respect of dividends received by an NPO that meets the description set out in 5 above, however, as in 5 above the comments in 4 above may apply.

7.     Interest earned on deposits, irrespective of source, would be investment income for purposes of the subsection 149(5) of the Act.

8.     All NPO's that are corporations are required to file T2 Returns.  (See paragraph 3 of Special Release to IT-496 dated June 16, 1989.) Where the non-profit status of an NPO changes to that of a taxable entity it should indicate that change by reporting as a taxable corporation.

It should be noted that a tax-exempt NPO must not only be organized exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, but must also be operated exclusively for the same purpose or purposes in each year for which it seeks exemption as an NPO.  A determination of whether an association was operated exclusively for, and in accordance with, its non-profit purposes in a particular taxation year is based on the facts of each case. This information can be obtained only by reviewing, during the course of an audit, all of its activities for that year.  Such a determination cannot be made in advance of or during a particular year but only after the end of the year.

We trust our comments will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch