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.
930640
XXXXXXXXXX B. Kerr
(613) 957-2139
August 18, 1993
Dear Sirs:
Re: Golf Club
This is in response to your letter of February 23, 1993, wherein you described a proposed transaction involving a non-profit organization that is
XXXXXXXXXX
XXXXXXXXXX
You have asked us several questions concerning the taxability of these transactions, including whether there would be any taxable benefits to its members, and the effect they would have on the tax exempt status of this non-profit golf club.
Our Comments
The situation described in your letter involves actual proposed transactions with identifiable taxpayers. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70- 6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Taxation. We are unable to offer definitive comments regarding the tax status of an organization without a complete description of the details of its organization and operations. However, we can offer the following general comments.
The Department's views on some of the factors to consider when determining whether a club, society or association would qualify as a non-profit organization ("NPO"), the taxability of the income of an NPO and the winding-up of an NPO are contained in Interpretation Bulletins IT-496 and the special release thereto, IT-83R3 and IT-409 , respectively.
Briefly, paragraph 149(1)(l) of the Act exempts from income tax a club, society or association ("club"), other than a charitable organization or foundation as defined in subsection 149.1(1) of the Act, organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, if no part of its income is payable to, or available for the personal benefit of any proprietor, member or shareholder. However, the provisions of subsection 149(5) override this exemption and tax certain sources of income, as an inter vivos trust, of those clubs that have as their main purpose the provision of dining, recreational or sporting facilities for their members. The sources of income that would be taxed under subsection 149(5) include income from property, and taxable capital gains and allowable capital losses from dispositions of property, other than property used exclusively for, and directly in the course of, providing the dining, recreational or sporting facilities provided by it for its members. In order to exclude the capital gain or loss, club property must actually be used in the manner described above. It is not sufficient that property was intended to be used in that manner. For example, a gain realized on the sale of vacant land acquired in connection with a planned extension of club facilities that has since been abandoned is taxable in the hands of the deemed trust regardless of the reason for the change in plans or the fact that the land was not used for any purpose whatever during the period that it was held. Paragraphs 9 and 10 of IT-83R provide examples to illustrate the application of subsection 149(5) of the Act to a situation involving an incorporated golf club. By virtue of subsection 122(1), an inter-vivos trust is subject to a flat rate of tax which is presently 29%.
To qualify for tax exempt status as an NPO, under paragraph 149(1)(l) of the Act, the organization must not only be organized exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, but must also be operated exclusively for the same purpose or purposes in each year for which it seeks exempt status. A determination of whether the organization was organized exclusively for exempt purposes would require an examination of the organization's enabling documents.
A determination of whether an entity was operated exclusively for, and in accordance with, its non-profit purposes in a particular taxation year is based on the facts of each case. This information can be obtained only by reviewing, during the course of an audit, 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 filing of a return reporting the operations and claiming exemption for the year having ended. A review of this nature would be conducted by officials of a District Taxation Office, who would be in a better position to appreciate all the circumstances of the case.
Generally however, the Department is of the view that a club is not operated exclusively for non-profit purposes when its principal activity is the carrying on of a trade or business. Some characteristics of an activity that might be indicative that it is a trade or business are as follows:
- it is a trade or business in the ordinary meaning, that is, it is operated in a normal commercial manner;
- its goods or services are not restricted to members and their guests;
- it is operated on a profit basis rather than a cost recovery basis; or
- it is operated in competition with taxable entities carrying on the same trade or business.
A club may earn income in excess of its expenditures provided the requirements of the Act are met. The excess 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 club's reasonable needs to carry on non-profit activities, the Department will consider profit to be one of the purposes for which the club was operated. This will be particularly so where assets representing the accumulated excess are used for purposes unrelated to its objects such as the following:
- long-term investments to produce property income;
- enlarging or expanding facilities used for normal commercial operations, or
- loans to members, shareholders or non-exempt persons.
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.
The amount of accumulated excess considered reasonable in relation to the needs of a club 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 expenditures would probably be considered reasonable where a club 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 club 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. Where the present balance of accumulated excess is excessive or an annual excess is regularly accumulated it may indicate that the club'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)(l) would not be met.
In exceptional cases where a special project requires a time period in excess of the current and prior year to accumulate the necessary funds, we would expect such funds to be accounted for in a separate special project fund until sufficient funds are accumulated to carry out the specific special project. The special project fund should consist of at least two separate accounts to be held at a Canadian financial institution. All monies received by the special project fund representing the capital of the fund should be credited to one account (the "capital account") and all amounts earned on those monies should be maintained in a separate account (the "second account"). Funds to complete the project should be taken first from the second account and subsequently from the capital account. The accounting records should be able to track these accounts at all times. Provided that the funds accumulated in its special project fund are used for that project, or to further the objects and purposes of the NPO, there should not be any other tax consequences, except those described above in regard to the application of subsection 149(5) of the Act.
To qualify for exemption pursuant to paragraph 149(1)(l), no part of the income of a club, whether current or accumulated, may be made available for the personal benefit of any proprietor, member or shareholder ("member") of a club. A club may fail to comply with this requirement in a variety of ways. Some of these are as follows:
- the club distributed income during the year, either directly of indirectly, to or for the personal benefit of any member;
- the club has the power at any time in the current or future years to declare and pay dividends out of income; or
- the club in the case of a winding-up, dissolution or amalgamation has the power to distribute income to a member.
Subsection 149(2) of the Act provides that "income" for the purposes of paragraph 149(1)(l) is deemed to be the amount of income otherwise determined less the amount of any taxable capital gains included therein.
As set out in paragraph 1 of IT-496 , the Department considers the expression "club, society or association", to include an incorporated company and although it is our understanding that most NPOs wishing to incorporate, do so under the provisions of Part II of the Canada Corporations Act as non-share corporations, there is no authority we are aware of for limiting that position to non-share corporations nor are we aware of any authority that prevents the sale of its shares on the open market. However, corporations must comply with the applicable corporate law. For example, a requirement for corporations incorporated under the Canada Business Corporations Act (the "CBCA") is that at least one class of shares have dividend rights. These dividend rights which must be attached to these shares would preclude such a corporation from being a NPO. It is also our understanding that one of the purposes of the CBCA is to revise and reform the law applicable to business corporations incorporated to carry on business throughout Canada. In light of this and our earlier comments concerning carying on a business it would seem that a club incorporated under the CBCA would not qualify as a NPO.
It would seem that based on the meaning of the word "equity", as defined in the Concise Oxford Dictionary, which includes "stocks and shares not bearing fixed interest" and the "value of shares issued by a company", that the existence of equity shares would suggest that the income of the club may be available for the benefit of the members. An equity share could very well meet the definition of a common share which is defined in subsection 248(1) of the Act to mean a share the holder of which is not precluded upon the reduction or redemption of the capital stock from participating in the assets of the corporation beyond the amount paid up thereon plus a fixed premium and a defined rate of dividend. In determining the value of such shares the income of the club would generally be included and accordingly, the club would not qualify as a NPO.
Although a club may be exempt from income tax pursuant to paragraph 149(1)(l), excluding the provisions of subsection 149(5), this does not excuse it from complying with the other provisions of the Act, including the filing of annual tax returns, the requirement to maintain books and records and to determine its income and taxable income. Consequently, such things as the adjusted cost base or undepreciated capital cost of its property would have the meanings assigned by paragraph 54(a) and paragraph 13(21)(f) of the Act, respectively. If a non-profit organization loses its tax exempt status it would become taxable "at that time" and the provisions of subsection 149(10) would apply. If "that time" does not coincide with its normal fiscal period, subsection 149(6) of the Act, would also apply. Finally, it is a question of fact whether a member would be in receipt of a taxable benefit. Such a determination can only be made after a complete review of all the facts in a particular situation. For example in the case of a corporation, a member that is a shareholder would be subject to the provisions of sections 15 or 84 of the Act if in fact that shareholder was in receipt of an amount described in those sections.
We trust that these comments will be of assistance.
Yours truly,
R. Albert for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1993
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1993