17 July 1991 Internal T.I. 911399 F - Taxable Subsidiary of a 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 17, 1991

Dear Sirs:

Re: Taxable Subsidiary of a Non-Profit Organization

This is in reply to your letter of May 15, 1991 in which you ask a series of questions relating to a hypothetical non-profit organization, (the "NPO") involved in the 24(1) but not one to which subsection 149(5) of the Income Tax Act applies.

The example that you set out is quite specific and it appears that it may relate to a particular contemplated transaction or transactions. Assurance as to the tax consequences of contemplated transactions can only be given in response to a request for an advance income tax ruling. The procedure for requesting an advance income tax ruling is outlined in Information Circular 70-6R2. If you wish to obtain any binding commitment with respect to actual cases with facts similar to your example, an advance income tax ruling application should be submitted. Although we are unable to provide any binding assurance with respect to the queries you have raised, we do provide the following general comments for your information.

Our Comments

1.     Providing land is a capital property to an NPO the difference, where a disposition takes place, between the adjusted cost base of the land and the transfer price at fair market value would be a capital gain.

2.     For the purposes of section 3 of the Act, capital gains are income. Thus, where a capital gain arises on the disposition of a capital property in the context of your enquiry such gain is included in income. However, the preamble to subsection 149(1) states that "No tax is payable under this part upon the taxable income of a person for a period when that person was ... a nonprofit organization."

3.     Generally, an NPO which holds long-term investments does so to produce income from property or a business, and therefore it could not be considered to be operated exclusively for a purpose other than profit. However, if a review of letters patent, articles of incorporation, memorandums of agreement, by-laws, etc determines that the NPO intends to use profits from a particular activity or investment for the purpose of achieving its declared exempt objectives, such passive investment or activity will not likely jeopardize the non-profit status of the organization. The determinant factor is whether the earning of profits is an end in itself or a means by which the organization achieve its declared exempt objectives. It is clear that the earning of profits is an end in itself where profits are accumulated and not used to achieve an NPO's declared exempt objectives.

4.     The substitution of shares for undeveloped land of an NPO in the context of the foregoing will generally not in and by itself jeopardize the non-profit status of such an NPO.

Providing interest and other investment income is used to further the non-profit organization's non-profit activities, the receipt of interest or dividends on debt owed to an NPO will not in and by itself jeopardize its non-profit status.

We trust our comments will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionRulings Directorate Legislative and Intergovernmental     Affairs Branch