9 July 1993 External T.I. 9307285 F - Whether Main Purpose of Association to Provide Dining Etc.

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.

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Attention:  XXXXXXXXXX

Dear Sir:

RE:  XXXXXXXXXX

This is in reply to your letter of February 19, 1993 to the XXXXXXXXXX District Office and your follow-up facsimile dated June 17, 1993 to Mr. Humphrey of this office.

You seek an opinion regarding whether the XXXXXXXXXX will be subject to subsection 149(5) of the Income Tax Act in respect of interest income earned on funds on deposit pending the construction of an Arena.

Our Comments:

The two principal issues raised in your letter are:

(1)     Whether the Society is one, the main purpose of which is to provide dining, recreational or sporting facilities for its members, with the result that it is subject to subsection 149(5); and

(2)     Assuming the Society is subject to the provision, whether income earned from the deposits you describe is income from property within the meaning of subparagraph 149(5)(e)(ii) of the Act?

With regards to the first issue, you have offered the view that since the Society makes its sporting facilities available to both its members and XXXXXXXXXX residents at large, it should not be considered one having as its main purpose the provision of those facilities to its members, but rather that the provision of those facilities to its members is only a purpose of the Society.

As the situation outlined in your letter relates to an actual proposed transaction involving a specific taxpayer, confirmation of the transaction's income tax consequences can only be given in the context of an advance income tax ruling. We do, however, offer the following general comments relating to your queries.

(1)     While the actual use of the arenas may be a factor to be considered in determining the purpose(s) or main purpose of the Society, arguably of greater importance in such a determination is the content of the By- Laws enacted by the Society to regulate its affairs.

Paragraph 8 of the Society's By-Laws reads, in part:

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This provision would seem to support the position that the Society's main purpose is to provide sporting facilities for its members, notwithstanding their practice of allowing access to the facilities to non-members.

The second issue raised in your letter is discussed in paragraph 4 of IT-83R3, which reads as follows:

"...any property income of the club is included as income of the inter vivos trust. Dividend and interest income is clearly income from property."

In addition, normally having surplus funds in excess of an NPO's current needs could endanger its NPO status. However in exceptional circumstances 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 seperate special project fund until sufficient funds are accumulated to carry out the specific project. The special project fund should consist of at least two seperate accounts to be held at a Canadian financial institution. All monies received by the special project fund represening the capital of the fund should be credited to one account and all amounts earned on those monies should be maintained in a seperate account. Funds to complete the project should be taken first from the second (interest or other revenue) 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 capital fund are used for that project, or to further the objects and purposes of the NPO, the existance of the excess funds should not put the NPO's tax status at risk.

We trust that this information will be of assistance.

Yours sincerely,

for DirectorBusiness and General Division Rulings and Intergovernmental Affairs branch