4 July 1990 Ministerial Correspondence 900954 F - Charity not Qualifying as 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.

July 4, 1990

Dear 19(1)

This is a reply to your letter of May 28, 1990 concerning your  24(1)  In addition to our comments that follow please refer to our previous letter dated May 24, 1990.  Our comments are referenced to your paragraph numbers.

132.     We do not agree with your first sentence and the first of your three tests.  To qualify as a non-profit organization under paragraph 149(1)(l) of the Income Tax Act (the "Act") an entity must not be a charity.  An entity that is, in the opinion of the Minister of  National Revenue, a charity (whether registered or  not) can not qualify under paragraph 149(1)(l) of the Act.

134.      We suggest the following wording: "A key element to qualifying as a non-profit organization is that the organization must not have profit as an objective.  However, the law does not prohibit the realization of profit. The Department of National Revenue, Taxation takes the view that an organization has profit as an objective when its principal activity is the carrying on of a trade or business. Four of the more common characteristics of an activity that might be indicative that it is a trade or business are: (a) it is operated in a normal commercial manner; (b) its goods and services are not restricted to members and their guests: (c) it is operated on a profit basis rather than a cost recovery basis; or (d) it is operated in competition with taxable entities carrying on the same trade or business."

135.     We agree that a golf club or recreational association whose principal activities are described by the four facts set out in your item 136 would not qualify for tax exempt status under paragraph 149(1)(l).  However we are not in a position to comment on your general statement that this is not uncommon. 

136.     We do not agree with your views.  In our view there is no conflict between the Department's interpretation of "any other purpose except profit" in paragraph 149(1)(l) and the existence of subsection 149(5) of the Act.  Paragraph    149(1)(l) of the Act provides exemption from tax to entities organized and operated exclusively for pleasure or recreation.  However subsection 149(5) of the Act overrides that exemption, to subject to tax property income of those entities whose main purpose is to provide dining, recreational or sporting facilities. Subsection 149(5) has no application to those organizations which do not qualify for exemption under  paragraph 149(1)(l). It is difficult to see how a provision such as subsection 149(5) which has the effect of further restricting the activities of organizations which qualify under paragraph 149(1)(l) can be read as loosening the restrictions inherent in the terms of paragraph 149(1)(l).  We would suggest changing the 2nd sentence of 136 to read "Also, the Income Tax Act imposes a tax on the property income of  certain dining recreational and sporting organizations which are otherwise exempt under paragraph 149(1)(l)." 

137.     The Department accepts the decision in the case of The Gull Bay Development Corporation v. Her Majesty 84 DTC 6040.  In that case the court found that:

(1)     Although it was engaged in a commercial activity, the corporation was not set up to carry on commercial activities.

(2)     The corporation was set up to achieve the social  welfare and civic improvement objectives of the Indian Band Council.

(3)     Having the corporation carry on these activities was the most efficient way of achieving the Band Council's social welfare and civic improvement objectives.

(4)     The social welfare and civic improvement objectives included providing employment and training to otherwise unemployed Indians on the Reserve and using the income to, inter alia, clean up the community, cut wood for elderly residents, remove  unsightly abandoned cars, move a garbage dump, make hockey rinks, help older residents who could not do washing for themselves and set up an alcoholic control program.

138.     We do not understand the point of your comments.  Please refer to our comments in item 10 on page 3 of our May 24, 1990 letter, regarding the earning of a profit by a fraternal organization. 24(1) certain housing corporations, labour organizations or societies, and benevolent or fraternal benefit societies or orders are specifically exempt under paragraphs (h.1), (i) and (k) of  subsection 149(1) of the Act.  These paragraphs, unlike paragraph 149(1)(l), do not contain any references respecting "profit".  Any entity that meets the requirements of any of paragraphs 149(1)(h.1), (i) or (k) does not need to met the requirements of paragraph 149(1)(l). 

140.     We do not understand your comments.  Interpretation Bulletin IT-409 discusses the tax consequences respecting the distribution of assets on a loss of exempt status and  winding-up of a non-profit corporation, which you appear to acknowledge in you second sentence.  Generally a distribution by a share capital corporation would be deemed to be a dividend to the shareholders and a distribution by a non-share capital corporation would be proceeds of disposition of the members' interests in the corporation. In our view, a distribution to a member of an unincorporated  association on the winding up of the association would be  proceeds of disposition of the member's interest in the association.  Consequently we would suggest deleting the words "tax free" in the first sentence in 140 and in the first sentence of the second paragraph of the Non-Profit Organizations section of the Main Points summary.  As regards the last sentence in 140, whether a member has benefitted from an organization's tax exempt status could only be determined after a review of all the facts of a particular case.  In our view, the most that could be said is that: "In some cases, some members may benefit." However, as it is not possible to make a generalization, we would suggest the deletion of the last sentence in 140.

141.     The second sentence of this paragraph may be read by some as indicating a recent or perhaps even an on-going problem.  As noted in our letter to you of May 2 1990, the particular abuse of which this Department was aware was ended by statutory amendment in 1968, i.e. 22 years ago. Accordingly, we suggest deleting the second sentence of 141 and replacing it with a more general statement such as: "It is open to the Federal Government, to the Provincial Governments and to  Canadian Municipalities to use the exempt status of corporations owned by them to pass on a tax concession to a private concern."

Appendix

We are unable to comment on your observations in the appendix. As we pointed out above the Income Tax Act does not preclude non-profit organizations from carrying on income generating activities for the purpose of earning income or profit to be used to achieve their exempt objectives, otherwise there would be no need for exempting provisions.  Your concerns regarding business activities carried on by non-profit organizations relate to tax policy considerations.  While our Department is responsible for the administration of the Act, the Department of Finance is the appropriate authority to which to refer matters relating to tax policy considerations.

We trust this will be of assistance to you.

Yours truly,

B.W. DathDirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch