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.
Principal Issues:
Whether a cooperative corporation that operates cafeterias owned by a municipality is exempt from tax under either paragraph 149(1)(d), (k) or (l) of the Act.
Position TAKEN:
It is not exempt under any of the above-mentioned paragraphs.
Reasons FOR POSITION TAKEN:
Paragraph 149(1)(d): The shares of the corporation are not owned by a Canadian municipality.
Paragraph 149(1)(k): The activities carried on by the corporation are unrelated to labour (labour organization) and are not intended to promote a worthy common cause to which all members subscribe (benevolent or fraternal benefit society). Ref.: 5-902292.
Paragraph 149(1)(l): The income of the corporation could, by virtue of its enabling legislation, be available to its members. The corporation might also be considered to be carrying on a business as the cafeterias are open not only to members of the corporation but also to the general public and the corporation has, in certain years, made profits. General Ref.: 930640.
5-940515
XXXXXXXXXX C. Chouinard
Attention: XXXXXXXXXX
June 17, 1994
Dear Sir:
Re: Paragraphs 149(1)(d), (k) and (l) of the Income Tax Act
We are writing in reply to your letter of February 16, 1994 wherein you requested our comments on the tax status, under the above-mentioned provisions of the Income Tax Act (the "Act"), of a corporation described as follows:
1. XXXXXXXXXX
provides for the payment of interest or dividends on capital stock and the crediting of patronage dividends to the members. No such payments have been made by the corporation nor is it intended that any such payments will ever be made.
2.The members of the co-operative corporation are representatives of various departments of a municipality. The By-laws of the corporation provide that each member holds his shares in trust for personnel or members of his or her department.
3.The corporation operates cafeterias owned by the municipality. The cafeterias are operated on a non-profit basis although, in some years, profits have arisen. While the cafeterias are intended primarily for the use of municipal employees, other persons are allowed to use the facilities under the same conditions as the employees.
4.The municipality does not collect rent from the corporation with respect to the premises in which the cafeterias are operated.
Your request for a technical interpretation appears to relate to a situation which arose in respect of a specific taxpayer. As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, a request for a written opinion on a completed transaction is generally considered by the taxpayer's local district office. Therefore, while we are unable to provide an opinion in respect of the situation outlined in your letter, we are prepared to offer the following comments.
Paragraph 149(1)(d)
Whether a particular corporation is exempt under paragraph 149(1)(d) of the Act as a corporation whose shares are 90% owned by a Canadian municipality or as a wholly-owned corporation subsidiary to a Canadian municipality is a question of fact, the determination of which can only be made from an examination of all the facts and pertinent documentation. However, the corporation described in your letter would not be exempt from taxation under paragraph 149(1)(d) of the Act, since its shares are held, not by the municipality, but by employees of the municipality.
Paragraph 149(1)(k)
To qualify as a "fraternal benefit society" within the meaning of paragraph 149(1)(k) of the Act, the organization in question must be an organization whose members have banded together in unison to accomplish or promote a worthy cause to aid and assist one another and to promote the common cause. The activities which the cooperative corporation carries on do not, in our opinion, meet this description, nor are they related to labour. In our view, it is unlikely that the corporation would qualify as either a labour organization or a fraternal benefit society and therefore, the corporation would not be exempt from taxation under paragraph 149(1)(k) of the Act.
Paragraph 149(1)(l)
To qualify for exempt status under paragraph 149(1)(l) of the Act, an organization 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)(l) 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 organization that qualifies for exemption in a particular year may cease to qualify in a subsequent year by failing to meet the requirements of paragraph 149(1)(l) of the Act. A review of this nature is conducted by officials of the local District Taxation Office who are in a better position to appreciate all the circumstances of the case.
Generally, the Department is of the view that an organization 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 of 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;
- 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.
Moreover, to qualify for the exemption pursuant to paragraph 149(1)(l), no part of the income of an organization can be paid or payable or otherwise made available for the personal benefit of any member. An organization may fail to comply with this requirement in a variety of ways, such as where:
- the organization distributes income during the year, either directly or indirectly, to or for the personal benefit of any member;
- the organization has the power at any time in the current or future years to declare and pay dividends out of income; or
- the organization, in the case of a winding-up, dissolution or amalgamation, has the power to distribute income to a member.
We would need to consider the by-laws relating to winding-up, dissolution, and amalgamation to determine if these by-laws provide for the distribution of income to a member. In any event, although the corporation has never paid interest or distributed dividends to its members, since it has the power to do so by virtue of XXXXXXXXXX the Co-operative Association Act, the income of the corporation may be considered to be available for the benefit of the members.
In our view, it is unlikely that the co-operative corporation would qualify for exempt status under paragraph 149(1)(l) since its income could, by virtue of its enabling legislation, be available to its members. Moreover, the corporation could be considered to be carrying on a business of operating the cafeterias as the cafeterias are open not only to members of the corporation but also to the general public and it has, in certain years, made profits.
Unless as otherwise stated, all references to statute are to the Income Tax Act, S.C. 1970-71-72, c.63, as amended and consolidated to June 10, 1993.
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, 1994
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, 1994
Email this Content