14 February 1992 Income Tax Severed Letter 9200435 - Non-profit Organizations - Non-resident

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: NON-PROFIT ORGANIZATIONS-NON-RESIDENT Section(s): 149(1)(1), 149(5), 212(14)]

920043
Glen Thornley
(613) 957-2101

XXX

February 14, 1992

Dear Sirs:

Re: Non-profit Organization ("NPO") Status

This is in reply to your letters of December 20, 1991 and January 14, 1992 concerning the tax status of interest income, initiation fees and annual dues to be received by a United Kingdom NPO operating in Canada.

XXX

You ask for a written opinion, under the provisions of paragraph 21 of Information Circular 70-6R ("IC 70-6R"), of the tax consequences of receiving the types of income referred to above.

Paragraph 21 of IC 70-6R2 [Information Circular 70-6R2] states that the Rulings Directorate will provide written opinions on the interpretation of specific provisions of the law, however, that paragraph goes on to say, "... when a requested interpretation relates to a contemplated transaction, a taxpayer should request an advance ruling rather than a opinion."

As your letter clearly sets out a contemplated, proposed transaction we are precluded from providing written answers to your questions. If you wish to obtain any binding commitment with respect to your proposal, an advance income tax ruling application should be submitted. Although we are unable to provide any binding assurance here with respect to the queries you have raised, we do provide the following general comments for your information.

Our Comments

Whether or not a particular organization, club or society is in any particular year, an NPO, is a question of fact. This determination can only be made at the end of a particular year and after an examination of all relevant information and financial statements. See paragraph 6 below. The conditions set out in paragraph 149(1)(1) of the Income Tax Act (the "Act") that an association must comply with to qualify for exemption are explored at length in Interpretation Bulletin IT-496. In general terms they are as follows:

• (a) it must not, in the opinion of the Minister, be a charity;
• (b) it must be organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit;
• (c) it must in fact be operated exclusively for the same purpose in (b) for which it was organized or for any of the other purposes mentioned in (b); and
• (d) no part of its income may be paid, payable or otherwise made available for the personal benefit of any proprietor, member or shareholder, except in connection with the promotion of amateur athletics in Canada.

Some concerns relevant to your present situation are as follows:

• 1) To be tax-exempt an association must be both organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit. An association may also be organized and operated exclusively for any combination of these purposes. To establish the purpose for which an association was organized, the Department will normally look to the instruments by which it was created. These instruments may include letters patent, articles of incorporation, memoranda of agreement, by-laws, articles and so on.
• 2) The category of "any other purpose except profit" is interpreted as a catch-all for associations that are organized and operated for other than commercial or financial reasons.
• 3) "Any other purpose except profit" may be used to describe the aims of an association whose activities are directed toward the general improvement of conditions within one or more areas of business. An example of this would be where an association was organized to advance the educational standards within a particular industry or profession, to publicize, improve and promote its objectives in a general way and to encourage the exchange of relevant technical information. If the activities of such an organization were consistent with these aims, then it would qualify for exemption provided all other conditions of paragraph 149(1)(1) of the Act were complied with in the year. The brief discussion in your letter of the XXX objects would appear to qualify it for this category, however, a definitive answer could not be given without an examination of the instruments referred to in paragraph 1 above and in paragraph 15 of Information Circular 70-6R2.
• 4) An NPO may earn exempt income in excess of its expenditures provided the requirements of the Act are met. However, certain NPO's are, pursuant to subsection 149(5) of the Act, subject to tax on their property income and on certain taxable capital gains. In this respect, even though you have indicated that you are familiar with it, we refer you to IT-83R3. The excess referred to in the first sentence of this paragraph may result from the activity for which it was organized or from some other activity. However, if a material part of the excess is accumulated each year and the balance of accumulated excess at any time is greater than the NPO's reasonable needs to carry on its non-profit activities, the Department will consider profit to be one of the purposes for which the association was operated. This will be particularly so where assets representing the accumulated excess are used for purposes unrelated to its objects. This may also be the case where the accumulated excess is invested in a term deposit or guaranteed investment certificate that is regularly renewed within a year and from year to year, whether or not the principal is adjusted from time to time.
• 5) The amount of accumulated excess considered reasonable in relation to the needs of an association to carry on its non-profit activities is dependent on such things as the amount and pattern of receipts from various sources such as membership fees, training course fees, exam fees and so on.

It is conceivable that there would be situations where an accumulation equal to one year's reasonably anticipated expenditures on its non-profit activities may not be considered excessive while in another situation an accumulation equal to two months' reasonably anticipated expenditures would be considered more than adequate. For example, a year-end accumulation equal to the following year's anticipated expenditures would probably be considered reasonable where an association carries out its "annual fund drive" in the last month of its fiscal period in anticipation of its non-profit activities planned for the following year. However, where another association raises its funds on a regular basis throughout the year, it may be difficult to justify a year-end accumulation in excess of an amount equal to its expenditures for one or two months. It is noted that where the present balance of accumulated excess is excessive or an annual excess is regularly accumulated it may indicate that the association's aims are two-fold, to earn profits and to carry out its non-profit purposes. In such a case, the "operated exclusively" test in paragraph 149(1)(1) of the Act would not be met.

• 6) To qualify for exemption, an association must not only be organized exclusively for non-profit purposes but it must in fact be operated in accordance with these purposes in each year for which it seeks exemption under paragraph 149(1)(1) of the Act. A determination of whether an association was operated exclusively for and in accordance with its non-profit purposes in a particular taxation year must be based on the facts of each case which can be obtained only by reviewing 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. An association that qualifies for exemption in a particular year may cease to qualify in a subsequent year by failing to operate in accordance with one of the purposes specified in paragraph 149(1)(1) of the Act, by revising its objectives so that it is no longer organized in accordance with that provision or by otherwise failing to meet the requirements of that paragraph.

Subject to the comments above and providing all conditions of paragraph 149(1)(1) of the Act are met an NPO would not normally be taxable on its initiation fees, annual dues and receipts of interest (other than interest earned by an NPO whose main purpose is to provide dining, recreational or sporting facilities for its members).

An NPO which is a non-resident can obtain exemption from liability for Part XIII tax. Attached is a copy of form NR6A, Application for Certificate of Exemption.

A copy of this form should be submitted by organizations meeting the requirements of subsection 212(14) of the Act that receive interest from bonds, debentures or similar obligations issued after June 13 1963. See paragraphs 32, 33 and 77 to 80 of Information Circular 77-16R3 (copy enclosed) for further comments

We trust our comments will be of assistance to you.

Yours truly,

E. Wheeler
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch