17 November 1993 Income Tax Severed Letter 9330166 - Membership Fees

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.

Ms Joanne Houlahan
A/Manager
MUSH/Charities and NPOs                    B. Kerr
Policy and Legislation                     957-2139
Excise/GST                                 933016
Revenue Canada
Customs and Excise
Place Vanier—Tower C
25 McArthur Road
Ottawa, Ontario
K1A 0L5

November 17, 1993

Dear Ms Houlahan:

Re: Membership fees subparagraph 18(1)(l)(ii) of the Income Tax Act (the "Act")

This is in response to the request you made at the meeting held at your offices on October 13, 1993, and attended by officials from your office, Taxation, Legal Services-GST, and the Department of Finance concerning the interpretation of the words "membership fees...in any club the main purpose of which is to provide dining, recreational or sporting facilities for its members".

It is our understanding that these words also appear in subsection 170(1)(a) and section 17 of Part IV of Schedule V of the Excise Tax Act. This issue has arisen in the context of dealings that your office is currently having with the XXXXXXXXXX Specifically, if a XXXXXXXXXX membership falls within these words the membership fees would be subject to GST.

You have asked us to provide you with written comments on our interpretation of these words and on the effect the interpretation may have on other areas of the Act. You also commented that you thought it was our position that the facilities provided must be owned by the club.

Our comments

Briefly, subparagraph 18(1)(l)(ii) provides, inter alia, that in computing the income of a taxpayer from a business or property no deduction shall be made in respect of an outlay or expense made by the taxpayer after 1971, as membership fees or dues in any club the main purpose of which is to provide dining, recreational or sporting facilities for its members.

In our Memorandum of March 15, 1991, to Mr. Paul Fuoco then Manager, ITA/GST Policy Co-ordinator, Excise Branch, we stated:

"There is no definition of main purpose in the Income Tax Act. It is a question of fact in each case. The dictionary meaning seems to be synonymous with "chief in size or extent" or perhaps of "preeminent importance" or "primarily". The Department, generally, considers that the "used primarily" test will be met where more than 50% of the assets in question are used in whatever process is involved. This suggests that the main purpose test for a club would be met where more than 50% of the assets of the club are utilized to provide dining, recreational or sporting facilities for its members."

We would add that although the use of the assets of a club may be a factor to be considered in determining the purpose(s) or main purpose of the club, arguably of greater importance in such a determination is the content of the By- Laws enacted by the club to regulate its affairs. This is consistent with the comments in paragraph 2 of Interpretation Bulletin IT-496 , entitled "Non-Profit Organizations", that states "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."

Not only do the words "main purpose of which is to provide dining, recreational or sporting facilities for its members" appear in subparagraph 18(1)(l)(ii) of the Act, they also appear in subsection 149(5) of the Act. Generally, a non- profit organization as defined in paragraph 149(1)(l) of the Act is exempt from Part I Tax. However, subsection 149(5) of the Act overrides subsection 149(1) and provides, inter alia, that where a non-profit organization that is a club was for any period, a club, the main purpose of which was to provide dining, recreational or sporting facilities to its members, the club will be subject to tax as an inter-vivos trust on its:

        (i) income and losses from property, and 

       (ii) its taxable capital gains and allowable capital losses
            from the dispositions of property, other than property
            used exclusively for and directly in the course of
            providing the dining, recreational or sporting
            facilities provided by its members.

In our view if the provision of dining, recreational or sporting facilities for its members was the main purpose of the club, the club would fall within the words of subsection 149(5) of the Act regardless of whether these facilities are owned, rented or donated by its members. In regards to the application of subsection 149(5) of the Act the one often cited case that you may wish to refer is the case of Manitoba Curling Association Inc. v M.N.R, T.C.C. 84 DTC 1462. We also refer you to IT-83R3 , entitled "Non- Profit Organizations—Taxation of Income from Property", which outlines the Department's position concerning subsection 149(5).

                    XXXXXXXXXX

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