25 July 1994 External T.I. 9413795 - NPO - PURPOSE TRUSTS

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 testamentary trust established for the purpose of providing funds for the "care and treatment of domestic animals in the XXXXXXXXXX area" qualifies as a non-profit entity under paragraph 149(1)(l) of the Act?

Position TAKEN:

The trust may qualify as a non-profit entity under paragraph 149(1)(l) of the Act.

Reasons FOR POSITION TAKEN:

The trust qualifies as a purpose trust. Purpose trusts that are organized and operated as non-profit organizations qualify under paragraph 149(1)(l).

		5-941379
XXXXXXXXXXC. Chouinard

Attention: XXXXXXXXXX

July 25, 1994

Dear Sir/Madam:

Re: XXXXXXXXXX - Paragraph 149(1)(l) of the Income Tax Act

We are writing in reply to your letter of May 8, 1994 wherein you inquired whether a trust established under the will of XXXXXXXXXX all the income of which is to be used "
XXXXXXXXXX
",

would qualify as a non-profit organization within the meaning of paragraph 149(1)(l) of the Income Tax Act (the Act").

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. Where the particular transactions are completed the enquiry should be addressed to the relevant District Office. The following comments are, therefore, of a general nature only.

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 trusts that are set up, not to benefit specified persons, but to ensure that particular purposes are carried out, i.e., purpose trusts, could qualify as non-profit organizations provided, among other factors, they spend their funds on furthering the non-profit purposes for which they were formed.

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 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.

In addition, as stated in paragraph 8 of Interpretation Bulletin IT-496, if a material part of the income earned in excess of a 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, provided a purpose trust 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.

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,

A.M. Brake
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch