20 August 1992 Income Tax Severed Letter 9218667 - 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.

August 20 1992

     VANCOUVER DISTRICT OFFICE               Business and
                                              General
     Business Audit Section                   Division
     144-24                                  A. Humenuk
                                             (613) 957-2134
     Attention:  R. Ford

                                             921866

24(1)

We are replying to your letter of June 10, 1992 wherein you ask for our comments on whether the above noted trust can be considered a non-profit organization within the meaning of paragraph 149(1)(l) of the Income Tax Act (the Act).

You advise that the above noted trust was set up by the employer for the purpose of providing training to its employees and was funded in part with funds from the Canadian Jobs Strategy Program administered by Employment and Immigration Canada. From your review you are satisfied that the trust was set up and organized exclusively for non- profit purposes. However, you question whether the trust can be considered a non-profit organization within the meaning of paragraph 149(1)(l) of the Act since the trust document provides for a return of contributions to the employer, the settlor of the trust, upon windup of the trust.

An additional question was raised concerning the nature of payments made to the employees while on training. You ask whether the amounts are properly taxable as employment income or whether the amounts can be considered as a living allowance received from an entity with which the employee does not have an employee-employer relationship.

From our review of the documents it would appear that the training trust fund fails to qualify as a non-profit organization for two reasons.

As stated in paragraphs 7 - 9 of Interpretation Bulletin IT-496 "Non-Profit Organizations", an organization that is organized exclusively for non-profit purposes will not qualify as a non-profit organization if it is operated in any manner for profit. As you have stated, the question of whether the organization was operated in part for profit is a question of fact to be decided at the end of the year with reference to the actual activities of the trust. Nevertheless, we note that the trust intends to fund the cost of training out of its investment income. This suggests that the trust must be operated at least in part for profit in order that the investment income be sufficient in order to fund the training.

On the question of whether or not the return of contributions to the employer upon windup of the trust would be considered as a payment of income to a proprietor, member or shareholder of the organization, we note that the wording of paragraph 149(1)(l) of the Act was not drafted specifically with trusts in mind. Nevertheless, the Department has considered certain trusts to be non-profit organizations where the trust was organized and operated in the manner of a non-profit organization and where no amount of income was made available to the settlor(s) or trustees either currently or upon windup. As presently worded, the trust document permits the distribution of income of the trust to the employer in the event of windup. We agree that if the trust agreement is not amended, the possibility that the funds could be returned to the employer (settlor of the trust) would disqualify the trust as a non-profit organization.

The potential return of contributions to the employer has the additional tax consequence of rendering the employer's contributions contingent in nature. If the contributions are not required before the wind up of the trust, the unused portion will be returned to the employer. In our view, the employer would thus not be entitled to a deduction for the contributions to the trust by reason of paragraph 18(1)(e) of the Act.

With respect to your final question concerning the nature of the payments to the employees while on training, it seems apparent that the employees are receiving the payments by virtue of their employment. Consequently it is irrelevant as to whether the amount received is salary or a living allowance or who pays the amount since the employee will be subject to taxation in the usual manner, with the usual withholding requirements.

In summary, it is our view that the trust is properly taxed as an inter vivos trust and not as a non-profit organization within the meaning of paragraph 149(1)(l) of the Act. Accordingly, the contribution made by Employment and Immigration Canada to the trust would be included in the trust's income under paragraph 12(1)(x) of the Act as an inducement from a government.

P.D. Fuoco for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

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