2 September 1997 External T.I. 9710205 - NON-PROFIT STATUS

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:

Is XXXXXXXXXX exempt under 149(1)(l)?

Position:

no, because of membership distributions but changes made by the Board of Directors may reinstate non-profit status.

Reasons:

reading of 149(1)(l)

	                              	971020
XXXXXXXXXX	                               	C. Tremblay

Attention: XXXXXXXXXX

September 2, 1997

Dear Sirs:

Re: Non-Profit Status

This is in reply to your letter of February 14, 1997, wherein you requested whether XXXXXXXXXX qualifies for an income tax exemption as a non-profit organization pursuant to paragraph 149(1)(l) of the Income Tax Act (the "Act").

In general terms, the conditions set out in paragraph 149(1)(l) of the Act that an association must comply with to qualify for exemption are as follows:

(a) it must not, in the opinion of the Minister, be a charity;

(b) it must be organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit;

(c) it must in fact be operated exclusively for the same purpose in (b) for which it was organized or for any of the other purposes mentioned in (b); and

(d) no part of its income may be paid, payable or otherwise made available for the personal benefit of any proprietor, member or shareholder, except in connection with the promotion of amateur athletics in Canada.

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. Such a determination cannot be made in advance of or during a particular year but only after the end of the 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, by revising its objectives so that it is no longer organized in accordance with that provision or by otherwise failing to meet the requirements of that paragraph. A review of this nature would be conducted by officials of the XXXXXXXXXX Taxation Services Office, who would be in a better position to appreciate all the circumstances of the case.

To establish the purpose for which a corporation was organized, the Department will normally look to the instruments by which it was created, e.g., articles of incorporation or by-laws. Accordingly, in our view, the by-laws should specifically prevent the distribution of income during the year, either directly or indirectly, to or for the personal benefit of any director or shareholder. The corporation should be specifically prevented from having the power at any time in future years to declare and pay dividends out of income and the possibility of dissolution, winding-up or amalgamation should also be dealt with. This restriction will apply even though the shareholder or member may itself be exempt under paragraph 149(1)(l) or any other provision of the Act. The only exception to this restriction is where the member or shareholder is a club, society or association whose primary purpose and function is the promotion of amateur athletics in Canada.

In our opinion, the stated purposes for which the XXXXXXXXXX was formed could fall within the ambit of paragraph 149(1)(l) of the Act and, other than the distributions to the members which you claim the Board of Directors is in the process of alleviating, there is nothing in the information submitted which would be inconsistent with exemption under paragraph 149(1)(l) of the Act.

The XXXXXXXXXX Taxation Services Office will contact you with regards to your request for a waiver of potential income tax liabilities.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch