5 March 1991 Internal T.I. 9028877 F - Miscellaneous Exemptions - 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.

7-902887/3-901761

Subject:  24(1) Advance Income Tax Rulings Request

This is in reply to your memorandum of October 15, 1990 and subsequent conversations (Mundell/Duff) requesting our comments with respect to whether  24(1) could qualify for tax exempt status pursuant to paragraph 149(1)(1) of the Income Tax Act (the Act).

24(1)

asks for confirmation that 24(1)  incorporating as a share capital corporation pursuant to the Canada Business Corporations Act will not, in and by itself, disqualify 24(1) from being a tax exempt non-profit entity pursuant to paragraph 149(1)(1) of the Act.  As set out in paragraph 1 of IT-496, the Department considers the expression "club, society or association", used in paragraph 149(1)(1) of the Act, to be wide enough to include an incorporated company and there is no authority we are aware of for limiting that position to non-share corporations.

To be tax exempt an association must be both organized and operated exclusively for one or a combination of social welfare, civic improvement, pleasure or recreation or for any other purpose except profit.  To establish the purpose for which an association was organized, the Department will normally look to the instruments by which it was created.  To determine whether an organization was operated in accordance with its non-profit purposes in a particular taxation year the activities of the organization must be reviewed after the fact.  As we understand it, one of your concerns is that

24(1) You feel that this indicates that an operating profit is contemplated with which the debt will be retired.  Subsection 149(1)(1) of the Act contemplates that an organization may carry on income generating activities and earn a profit and still qualify for exempt status.  However, the income generating activity must be carried on and the resulting income must be used, by the organization, to achieve its declared exempt objectives.  In this regard we refer you to the case of Gull Bay Development, 84 DTC 6040 where the corporation, in order to achieve the social welfare and civic improvement objectives of an Indian Band Council, operated a logging business.  The court held that having the corporation carry on the logging activities was the most efficient way of achieving the Band Council's objectives.  On the specific point of the power to borrow money, there has been at least one occasion where we have suggested that the failure by an alleged NPO to borrow money in order to acquire a building in which to carry on its ostensible purposes was itself an indication that the alleged NPO was not being operated to achieve any of its ostensible non-profit purposes.

The Act also requires that no part of the income may be paid, payable or otherwise made available for the personal benefit of any proprietor, member or shareholder

24(1)

21(1)(b)

Nevertheless, we agree that, in the circumstances of this case

24(1)

IT-496 paragraph 12 indicates that remuneration for services rendered by a member will not disqualify a non-profit organization, provided it is reasonable and in line with amounts paid in arm's length situations for similar services.  As the concept of non-dues-paying Founding or Charter members is not a novel one, in our view 24(1) The value of the remuneration would be a question of fact.

We would want to see the provisions in the original documentation which prohibit distributions to members during the existence of the organization as well as upon winding-up, amalgamation or dissolution.  In the latter case provision should be made to transfer all assets and accumulated income to an organization with similar objects that also qualifies for exemption.  Otherwise, we would not take the view that the Club was organized on non-profit principles.

The existence of Social memberships might be considered to be running a business, however, as discussed above, the Act contemplates that an organization may carry on income generating activities and earn income and still qualify for exempt status.  Also, if the facts were such that the   24(1)  members were paying as much for the use of dining and other social facilities as the 24(1) members were paying, it could be argued that these activities simply fell within the club's non-profit purposes.

24(1) would have no bearing on its exempt status as long as it meets the requirements of a non-profit organization as set out in paragraph 149(1)(1) of the Act.

You feel that it would be inconsistent for the corporation to have tax exempt status if the shares of the club qualify as RRSP investments.  Whether the corporation's shares qualify for RRSP purposes is irrelevant in determining whether it is or is not a non-profit organization.  You are in a better position to determine whether such shares are qualified investments for RRSP purposes.

E. WheelerChiefServices, Public Utilities & Exempt Corporations SectionBusiness and General DivisionRulings Directorate