22 February 1996 External T.I. 9527685 - WHETHER A CORP. QUALIFIES FOR CHARITABLE REGISTRATION

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 corporation, whose charitable registration was annulled retroactively to January 1, 1967, qualifies for tax exemption under any of paragraphs 149(1)(d), (l) and (j).

Position TAKEN:

Question of fact which should be reviewed by an audit official of the local Tax Services Office. General comments provided on paragraphs 149(1)(d), (l) and (j).

Reasons FOR POSITION TAKEN:

Positions taken in previous files.

		5-952768
XXXXXXXXXX		M. Azzi

Attention: XXXXXXXXXX

February 22, 1996

Dear Madam:

Re: XXXXXXXXXX

This is in reply to your letter of October 19, 1995 requesting our views as to whether XXXXXXXXXX qualifies for tax exemption under any of paragraphs 149(1)(d), (l) and (j) of the Income Tax Act (the "Act"). We apologize for the delay in responding to your request.

Our understanding of the facts is as follows:

XXXXXXXXXX

Our Comments

The particular circumstances outlined in your letter involve an actual taxpayer and specific transactions. As explained in Information Circular 70-6R2, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. As this situation involves completed transactions and the main issues are dependent on a review of all the facts of the specific case, the tax exempt status of XXXXXXXXXX should be discussed with an audit official of your local Tax Services Office

XXXXXXXXXX

We are, therefore, not in a position to give you a definitive answer to your questions. We will, however, provide the following general comments which may be of assistance to you.

Paragraph 149(1)(d) of the Act

A corporation may qualify pursuant to paragraph 149(1)(d) of the Act where, for instance, at least 90% of the capital of the corporation is owned by Her Majesty in right of a province. It is not necessary that the corporation have any share capital, and indeed it is not unusual for crown corporations to have no share capital.

XXXXXXXXXX

are an indication that XXXXXXXXXX is controlled by Her Majesty in right of Ontario, in our view, we have not been provided with sufficient information to determine whether the Crown owns at least 90% of the capital of XXXXXXXXXX That is, the XXXXXXXXXX does not address the issue of ownership of capital, distribution of assets on dissolution or, alternatively, whether XXXXXXXXXX is an agent of Her Majesty in right of Ontario. We would also need to establish that no person other than Her Majesty in right of Ontario has any right to acquire any capital of XXXXXXXXXX

Paragraph 149(1)(l) of the Act

To qualify for tax exempt status as a non-profit organization under paragraph 149(1)(l) of the Act, the organization must not only be organized exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, but must also be operated exclusively for the same purpose or purposes in each year for which it seeks exempt status. Paragraph 7 of IT-496 indicates 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 indicate it is a trade or business are: (a) it is operated in a normal commercial manner, (b) its goods or services are not restricted to members and their guests, (c) it is operated on a profit basis rather than a cost recovery basis, or (d) it is operated in competition with taxable entities carrying on the same trade or business.

In your letter, you indicate that XXXXXXXXXX tries to operate as a normal commercial undertaking, its services are not restricted to members and it may be operating in competition with taxable entities. As indicated above, these are indications that XXXXXXXXXX may be carrying on a business. You also indicate that XXXXXXXXXX provides services with the objective of recovering costs and realizing value for services provided. It is unclear what is meant by "realizing value for services provided".

Nonetheless, as indicated in paragraph 10 of IT-496, a determination of whether an entity was operated exclusively for, and in accordance with, its non-profit purposes in a particular taxation year is based on the facts of each case. This information can be obtained only by reviewing, during the course of an audit, 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 filing of a return reporting the operations and claiming exemption for the year having ended. A review of this nature would be conducted by officials of your local Tax Services Office, who would be in a better position to appreciate all the circumstances of the case.

Paragraph 149(1)(j) of the Act

For purposes of paragraph 149(1)(j) of the Act, the following criteria must be met by a corporation so that it may be considered a non-profit corporation for scientific research and experimental development ("SR&ED") in a particular fiscal period:

1.the corporation's activities must be carried on without the purpose of gain for its members and any profits or other accretions shall be used in promoting its objects. No part of the income may be payable to or otherwise available for the personal benefit of any member thereof;

2.the directors and members, including any director or member who also serves as an officer, shall serve in that capacity without remuneration. No director, member or officer shall directly or indirectly receive any profit from their position as director, member or officer. However, it is permitted that a director or officer may be reimbursed for reasonable expenses incurred in the performance of their duties;

3.the corporation must not acquire control (as defined in subsection 149(8) of the Act) of any other corporation, nor will it carry on any business as that term is used in the Act;

4.the objects of the corporation must be to exclusively carry on and/or promote SR&ED. The SR&ED activity may be directly undertaken by or on behalf of the corporation or by an entity described in clause 37(1)(a)(ii)(A) or (B) of the Act; and

5.the amounts to be expended in Canada on SR&ED must not be less than 90% of the corporation's income for the period (subject to the provisions of subsections 149(2), (8) and (9) of the Act).

It should be noted that if the draft legislation tabled in the House of Commons on December 13, 1995 is enacted as proposed, subparagraph 149(1)(j)(ii) of the Act will be amended (applicable to taxation years that begin after June 1995) to clarify that the amounts to be expended on SR&ED must not be less than 90% of the corporation's gross revenue for the period minus any penalties and interest that is paid by the corporation pursuant to proposed subsection 149(7.1) of the Act.

In your letter, you indicate that XXXXXXXXXX controls a subsidiary corporation, and if this control was acquired, XXXXXXXXXX would not meet the requirements of paragraph 149(1)(j) of the Act. Furthermore, if it is established that XXXXXXXXXX is carrying on business, as explained above (with respect to paragraph 149(1)(l) of Act), XXXXXXXXXX will also not meet the requirements of paragraph 149(1)(j) of the Act in this respect.

Finally, it should also be noted that, as with paragraph 149(1)(l) of the Act, the determination of whether a corporation will qualify under paragraph 149(1)(j) of the Act is a question of fact which can only be determined once the corporation's income tax return for a particular fiscal period is filed, and the activities of the corporation are reviewed by a Tax Services Office.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch