22 December 1994 External T.I. 9419975 - PURPOSE TRUST

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 ISSUE:

1.Whether subsection 75(2) applies where the trust agreement provides that the settlor's successor can be appointed as trustee, should the appointed trustee be unable to continue as trustee?

2.Whether a trust established for the purpose of providing funds for programs or services of a Hospital and health care programs and services, qualifies as a non-profit entity under paragraph 149(1)(l) of the Act?

Position TAKEN:

1.Question of fact but probably not applicable if purpose trust.

2.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).

			5-941997

XXXXXXXXXX L. Roy

Attention: XXXXXXXXXX

December 22, 1994

Dear Sir\Madam:

Re: XXXXXXXXXX
Subsection 75(2) and paragraph 149(1)(l) of the Income Tax Act (the "Act")

This is in reply to your letter of July 29, 1994 in which you requested our opinion as to whether we would consider the application of subsection 75(2) and paragraph 149(1)(l) of the Act to a particular trust.

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, dated September 28, 1990. Where the particular transactions are completed, the enquiry should be addressed to the relevant district taxation office. The following comments are, therefore, of a general nature only, and are not binding on the Department.

Subparagraph 75(2)(a)(ii) and paragraph 75(2)(b) of the Act apply if a person has retained the possibility to determine to whom the property will pass after the creation of the trust or if the property cannot be disposed of without the consent of the person from whom the property was acquired by the trust. Such a determination is a question of fact which can only be determined after an examination of all the relevant facts in a particular situation.

It is our opinion that paragraph 75(2) of the Act could apply where a trust agreement provides that the settlor's successor will be appointed as trustee if the first named trustee is unable to act or to continue to act as such. However it would be a question of fact whether the settlor's successor is the person from whom the property was acquired by the trust.

Concerning the qualification of a trust as a non-profit organization ("NPO"), it could be argued that a trust qualifies as a 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. However, 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.

Also, it is our view that where a purpose trust is set up, subparagraph 75(2)(a)(ii) of the Act would not apply.

We trust the above comments will be of assistance to you. If you have any questions do not hesitate to contact us.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate