6 August 1997 External T.I. 9613565 - INDIAN NON PROFIT CORPORATION CARRYING ON BUSINESS

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:

Would a non-profit organization proposing to carry on a business no longer qualify as an NPO if it under took the activities directly or in an incorporated subsidiary?

Position:

Question of fact as to a causal relationship between the business and the exempt purpose of the organization if undertaken directly. Also possible to receive dividends from a subsidiary incorporated to carry out the activities if dividends are appropriately used by the NPO.

Reasons:

Paragraph 149(1)(l) contemplates that NPOs may carry out income earning activities.

961356
XXXXXXXXXX J.D. Brooks

Attention: XXXXXXXXXX

August 6, 1997

Dear Sirs:

This letter is in reply to your letter of April 4, 1996 in which you requested our opinion concerning the application of the Indian Act to a hypothetical situation. You are concerned with the tax consequences to a corporation that is presently exempt from Part I tax under the Income Tax Act by virtue of subsection 149(1), if the corporation were to undertake a business for profit. Alternatively, the corporation might incorporate a subsidiary which would carry on the business for profit. The corporation is owned by an Indian band. We acknowledge our conversation of October 22, 1996.

Our Comments

The fact situation which you set out is quite specific and it appears that it may relate to definite contemplated transactions. Assurance as to the tax consequences of contemplated transactions can only be given in response to a request for an advance income tax ruling. If you wish to obtain any binding commitment with respect to an actual case with facts similar to your hypothetical situation, an advance income tax ruling request should be submitted. We do, however, provide the following comments for your information.

The fact that a corporation is owned by an Indian band does not ensure that the corporation will be exempt from tax. Since a corporation is not an Indian, paragraph 87(b) of the Indian Act does not provide exemption. Instead, the corporation would have to rely on provisions such as paragraph 149(1)(d) or (l) of the Income Tax Act.

A corporation the shares or capital of which were owned 90% or more by an Indian band could qualify for exemption under paragraph 149(1)(d), only if the band were considered to be a municipality in Canada which is itself exempt by virtue of paragraph 149(1)(c). Although the Tax Court of Canada in the case of Otineka Development Corporation Limited and 72902 Manitoba Limited v. Her Majesty the Queen (94 DTC 1234; (1994) 1 CTC 2424) determined that in certain circumstances an Indian band could qualify as a Canadian municipality, in our view, an Indian band which is exempt is more likely exempt from tax under paragraph 149(1)(c) by virtue of being a public body performing a function of government. It is a question of fact as to whether an Indian band may be considered to be a public body performing a function of government in Canada or a Canadian municipality.

In order for a corporation to be exempt under paragraph 149(1)(l), inter alia, it must be organized as well as operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit and no part of its income may be payable to or otherwise available for the personal benefit of any of its members or shareholders. To establish the purpose for which a corporation was organized, the Department will normally look to the instruments by which it was created such as letters patent and articles of incorporation. Whether or not a corporation was operated for such purposes, is a question of fact that can only be determined retrospectively based on a review of its operations in the period concerned.

Paragraph 149(1)(l) contemplates that an organization may carry on income generating activities and earn income and still qualify for exempt status provided that there is a causal relationship between the profit making activity and the exempt purpose of the organization. That is, the income generating activity cannot be the principal activity of the corporation and must be carried on, and the resulting income must be used, by the corporation to achieve its declared exempt objectives. It is a question of fact whether such a relationship exists. In this regard, we refer you to the case of Gull Bay Development Corporation v. Her Majesty the Queen (84 DTC 6040).

Where an organization that otherwise qualifies as a non-profit organization proposes to engage in an unrelated profit making enterprise, it is our view that, if the organization were to carry out this unrelated activity in a taxable, wholly-owned corporation and this corporation were to pay dividends out of its after-tax profits to the organization to enable the organization to carry out its non-profit activities, the organization may qualify as a non-profit organization as set-out in paragraph 149(1)(l) of the Act.

We trust that these comments will be of assistance to you.

Yours truly,

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