10 March 1992 Income Tax Severed Letter 9202905 - Non-profit Organization - 24(1)

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 ORGANIZATION - XXX Section(s): 149(1)(1)]

XXX 920290 Glen Thornley (613) 957-2101

Attention: XXX

March 10, 1992

Dear Sirs:

Re: XXX

This is in reply to your letter of January 24, 1992 requesting confirmation that XXX is, in the opinion of the Minister, a nonprofit organization as defined in paragraph 149(1)(1) of the Income Tax Act.

Questions relating to tax considerations of a particular taxpayer should be addressed to your local District Taxation Office. Situations involving proposed transactions on the other hand are more appropriately the subject of an advance income tax ruling in accordance with instructions in Information Circular 70-6R2. Notwithstanding the foregoing the following are general comments on the subject of non-profit organizations (“NPO's”).

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 4 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. purposes would appear to qualify it for this category.
• 4) 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.
5) To qualify for exemption pursuant to paragraph 149(1)(1), no part of the income of an association, whether current or accumulated, may be made available for the personal benefit of any proprietor, member or shareholder of an association (hereinafter referred to as a member). An association may fail to comply with this requirement in a variety of ways. Some of these are as follows:
• (a) the association distributed income during the year, either directly or indirectly, to or for the personal benefit of any member;
• (b) the association has the power at any time in the current or future years to declare and pay dividends out of income;, or
• (c) the association in the case of a winding-up, dissolution or amalgamation has the power to distribute income to a proprietor, member or shareholder.

The presence of any of the circumstances described in (a), (b) and (c) could be conclusive evidence that income was payable or available for the personal benefit of a member. To avoid possible difficulties regarding (c), an association may in its enabling documents provide that upon a winding-up, amalgamation or dissolution all of its assets and accumulated income are to be transferred to an organization with similar objects that qualifies for exemption pursuant to paragraph 149(1)(f) or (1) of the Act.

XXX Memorandum of Association does not appear to contain the prohibition that no part of the income of XXX may be made available for the personal benefit of any member of XXX nor have they provided for a winding-up in the manner outlined above and in paragraph 11 of IT-496. Thus, in our view XXX does not in the present circumstances qualify as an NPO, If it is proposed to amend XXX Memorandum of Association in the future to conform to the requirements of IT-496 you may wish to apply for an advance income tax ruling with respect to non-profit status prior to implementing the proposed amendments. We caution, however, that a ruling can only be given to the effect that at the time of the ruling request the documents submitted support the fact that a particular organization or entity is organized exclusively for any other purpose except profit. We cannot, as indicated earlier, confirm that such an NPO is operated for any other purpose except profit.

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