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 the XXXXXXXXXX would qualify as a non-profit organization
within the meaning of paragraph 149(1)(l) of the Act?
Position:
Likely it would qualify.
Reasons:
As regards its Canadian operations, its expenses exceed its
revenues and it receives income from XXXXXXXXXX In addition, it
does not operate in competition with taxable entities.
5-963542
XXXXXXXXXX C. Chouinard
Attention: XXXXXXXXXX
December 23, 1996
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
We are writing in response to your letter of October 23, 1996, wherein you requested our comments regarding the tax status under paragraph 149(1)(l) of the Income Tax Act (the "Act") of the XXXXXXXXXX. You also inquire about the reporting requirements for non-profit organizations.
XXXXXXXXXX
To qualify for exempt status under paragraph 149(1)(l) of the Act, an organization 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 organization 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. Such a determination cannot be made in advance of or during a particular year but only after the end of the year. An organization that qualifies for exemption in a particular year may cease to qualify in a subsequent year by failing to meet the requirements of paragraph 149(1)(l) of the Act. A review of this nature is usually conducted by officials of the local Tax Services Office who are in a better position to appreciate all the circumstances of the case.
Generally, the Department is of the view 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 be indicative of a trade or business are as follows:
- it is a trade or business in the ordinary meaning, that is, it is operated in a normal commercial manner;
- its goods or services are not restricted to members;
- it is operated on a profit basis rather than a cost recovery basis; or
- it is operated in competition with taxable entities carrying on the same trade or business.
Moreover, to qualify for the exemption pursuant to paragraph 149(1)(l), no part of the income of an organization can be paid
or payable or otherwise made available for the personal benefit of any member. An organization may fail to comply with this requirement in a variety of ways, such as where:
- the organization distributes income during the year, either directly or indirectly, to or for the personal benefit of any member; or
- the organization, in the case of a winding-up, dissolution or amalgamation, has the power to distribute income to a member.
However, it is the Department's view that certain types of payments made directly to members do not, in and by themselves,
disqualify an organization from being exempted from tax pursuant to paragraph 149(1)(l) of the Act. Thus, payments such as
salaries, wages, fees or honorariums for services rendered by directors or officers to the organization, provided the amounts
paid are reasonable and in line with those paid in arm's length situations for similar services, will not disqualify the
organization.
Given that XXXXXXXXXX does not operate in competition with taxable entities in Canada, receives part of its revenue from
XXXXXXXXXX and, as regards the Canadian operations, appears not to earn sufficient income to cover its expenditures, it is likely that we would consider XXXXXXXXXX to be organized as a non-profit organization. However, as there is no indication in XXXXXXXXXX enabling legislation that XXXXXXXXXX is organized as a non-profit organization, we cannot conclusively state that it is so organized. Nor can we comment upon the question of whether XXXXXXXXXX would meet the "operated exclusively for non-profit purposes" test, as a determination of whether an entity was operated exclusively for non-profit purposes cannot be made in advance of or during a particular year. Nevertheless, you should note that, generally, organizations 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 organizational documents, do not have difficulty with the retrospective operational test.
As regards the reporting requirements, where a non-profit organization is a corporation, it must file a return of income in
prescribed form (form T2) for each taxation year. Where the corporation is exempt from tax under paragraph 149(1)(l) of the
Act and meets the conditions set out in subsection 149(12) of the Act, it must file, in addition to form T2, an information return in prescribed form (form T1044). This return must be filed with the Department within six months of the end of the fiscal period of the organization, but only if the organization has received dividends, interest, rents or royalties in excess of $10,000 in that period or if the total assets of the organization exceed $200,000 at the end of the immediately preceding fiscal period.
In addition, once an organization has been required to file an information return in respect of a fiscal period, it is required
to file returns for all subsequent periods.
We trust these comments will be of assistance.
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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