27 June 1994 External T.I. 9408145 - TRAINING TRUST FUNDS

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 training trust fund is a non-profit organization within the meaning of paragraph 149(1)(l) of the Act?

Position TAKEN:

Question of fact.

Reasons FOR POSITION TAKEN:

General comments regarding non-profit organizations: 921866 and 932020.

5-940814
XXXXXXXXXX C. Chouinard

Attention: XXXXXXXXXX

June 27, 1994

Dear Madam:

Re: XXXXXXXXXX

We are writing in reply to your letter of March 24, 1994 addressed to the Assessment of Returns Directorate that was referred to us for reply.

You have requested comments on the tax status, under paragraph 149(1)(l) of the Income Tax Act (the "Act"), of the XXXXXXXXXX which you have described as follows:

XXXXXXXXXX

XXXXXXXXXX

Our Comments

Your request for a technical interpretation relates 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.

Although it could be argued that a trust qualifies as a non-profit organization ("NPO") pursuant to the conditions set out in paragraphs 5 and 6 of IT-496, that is that a trust could presumably be set up or be organized for social welfare, civic improvement, pleasure, or recreation or for any other purpose except profit, it is our view that by the very nature of a trust, most would have difficulty meeting the NPO requirement of being operated as a NPO on an annual basis. Most trusts would have difficulty meeting the condition that "no part of its income, whether current or accumulated, may be made available for the personal benefit of any proprietor of member". This is so because a trust is generally constituted to hold or manage property for the benefit of one or more beneficiaries. However, having stated that, it is our further view that employee training trust funds are similar to purpose trusts and provided, among other factors, they spend their funds on furthering the non-profit purposes for which they were formed, it is likely they could qualify as non-profit organizations.

As you have not provided a copy of any documents such as a training trust fund agreement, we are unable to comment on whether the XXXXXXXXXX meets the condition set out in paragraph 2(a) of IT-496 that it be organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit. We are also unable to confirm that the XXXXXXXXXX is operated for non-profit purposes. To qualify for exemption, an association 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. An association that qualifies for exemption in a particular year may cease to qualify in a subsequent year by failing to operate in accordance with one of the purposes specified in paragraph 149(1)(l) of the Act, by revising its objectives so that it is no longer organized in accordance with that provision or by otherwise failing to meet the requirements of that paragraph.

We note, however, that, generally, organizations or entities which meet the Department's criteria for having been organized for a purpose other than profit, and which subsequently are operated in strict conformity with their own organizational documents, do not have difficulty with the retrospective operational test.

Notwithstanding the decision in the L.I.U.N.A. case, it is still the Department's position, as stated in paragraph 8 of Interpretation Bulletin IT-496, that if a material part of the income earned in excess of an NPO's expenditures is accumulated each year and the balance of accumulated excess at any time is greater than the association's reasonable needs to carry on its non-profit activities, the Department will consider profit to be one of the purposes for which the association was operated. However, providing a training trust fund spends its funds (including the accumulating interest income) on furthering the non-profit purposes for which it was formed, it is likely to retain its non-profit status.

With respect to the question of whether or not the return of "unexpended sums of money and other assets in the possession of the Trustees" to the contributors to the fund upon wind-up of the trust would be considered 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 with trusts in mind. Nevertheless, certain training trust funds may be considered to be non-profit organizations where they are organized and operated in the manner of a non-profit organization and where no amount of income is made available to the settlor(s) or trustees, either currently or upon wind-up. In this respect, we note that the XXXXXXXXXX trust document provides that the surplus money and assets of the trust must be distributed to the employer and other contributors, if any, in the event of the wind-up of the trust. Although the Trustees have complete discretion as to the manner in which the surplus and assets are distributed, they have no discretion as to the determination of the beneficiaries and their respective shares. This clause is somewhat different from that considered in the L.I.U.N.A. case where the Trustees could distribute and apply any remaining surplus in the manner they saw fit. In the situation described, the Trustees must distribute the surplus and assets in accordance with the provisions of the trust document. As these "unexpended sums of money and other assets" of the trust may include income of the trust, the training trust fund may be disqualified as a non-profit organization.

In summary, based on our above analysis of the information provided, it is unlikely that we would consider the XXXXXXXXXX to be a non-profit organization within the meaning of paragraph 149(1)(l) of the Act.

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