9 April 1997 External T.I. 9621655 - NPO FUNDRAISING

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.

			962165
XXXXXXXXXX			B. Kerr

Attention: XXXXXXXXXX

April 9, 1997

Dear Sirs:

Re: Fund Raising for a Non-Profit Organization

This is in response to your letter of June 11, 1996, wherein you requested our views on several types of fundraising activities that may be initiated by a non-profit organization to raise funds for a capital project. The activities include interest-bearing loans from members, capital investment from members in exchange for various member discounts, lotteries and other types of raffles. You have asked us whether the member discounts would be considered to be interest income to the member and whether such fundraising activities would result in a loss of tax exempt status under paragraph 149(1)(l) of the Income Tax Act (the "Act").

Our Comments

The situation described in your letter involves actual proposed transactions with identifiable taxpayers. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada. However, we can offer the following general comments.

It is a question of fact whether a particular discount would be considered to be "interest" or "in lieu of payment of interest". In order for an amount to be considered "interest", it was stated in the case of Miller v. The Queen, (85 DTC 5354), that three criteria must be met: it must be calculated on a (day-by-day) accrual basis; it must be calculated on a principal sum or a right to a principal sum; and it must be compensation for the use of the principal sum or right to the principal sum. Most case law involves loans issued at a discount and concludes that it is reasonable to regard the discount as being in lieu of interest or of an income nature. The Department states in paragraph 12 of IT-396R, that interest has been described in general terms in the courts as "the return or consideration or compensation for the use or retention by one person of a sum of money, belonging to, in a colloquial sense, or owed to, another". In addition, it may be that these are barter transactions in that the discount in fees is directly tied to the funds invested. Accordingly, in our view, the discounts would likely constitute income to the member.

In the case of an organization that is a corporation, it is also a question of fact whether a member would be in receipt of a benefit under subsection 15(1). Inter alia, as stated in IT-432R, the purpose of subsection 15(1) is to include in a shareholder's income the amount or value of any distribution of corporate property and the value of any benefit conferred on the shareholder which would not otherwise be included therein and which cannot properly be considered as a return of capital.

It is a question of fact whether a particular person qualifies for exemption from Part I tax under the provisions of paragraph 149(1)(l) of the Act. We are unable to offer definitive comments regarding the tax status of an organization without a complete description of the details of its organization and operations. However, the Department's general views are outlined in Interpretation Bulletin IT-496.

Generally, paragraph 149(1)(l) of the Act exempts from Part I income tax a club, society or association (an "organization"), other than a charitable organization or foundation as defined in subsection 149.1(1) of the Act, organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, if no part of its income is payable to, or available for the personal benefit of any proprietor, member or shareholder. A determination of whether an organization was operated exclusively for, and in accordance with, its exempt 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 a Tax Services Office, who would be in a better position to appreciate all the circumstances of the case.

A organization may earn income in excess of its expenditures provided the requirements of the Act are met. The excess may result from the activity for which it was organized or from some other activity. The effect that various types of fundraising would have on the tax-exempt status of an organization would depend on its purpose and the use of the funds. To maintain its tax-exempt status, the income generating activity must be carried on, and the resulting income must be used, by the organization to achieve its declared exempt objectives. However, if a material part of the excess is accumulated each year and the balance of accumulated excess at any time is greater than the organization's reasonable needs to carry on non-profit activities, the Department will consider profit to be one of the purposes for which the club was operated. Refer to paragraphs 7 to 10 of IT-496 for additional comments concerning an organization's purpose and the use of excess funds.

To qualify for exemption pursuant to paragraph 149(1)(l), no part of the income of an organization, whether current or accumulated, may be made available for the personal benefit of any proprietor, member or shareholder ("member") of an organization. An organization may fail to comply with this requirement in a variety of ways, for example, if the organization distributes income during the year, either directly or indirectly, to, or for, the personal benefit of any member. Subsection 149(2) of the Act provides that "income" for the purposes of paragraph 149(1)(l) is deemed to be the amount of income otherwise determined less the amount of any taxable capital gains included therein.

We trust that these comments will be of assistance.

Yours truly,

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