5 January 1998 External T.I. 9717525 - NON-PROFIT ORGANIZATION

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 organization formed to undertake advertising, promotional and research activities for franchisees, who are required to pay a specified percentage of their monthly sales as a membership fee, qualify for NPO status under paragraph 149(1)(l) of the Act.

Position: Doubtful

Reasons:

Possible conflict with the comments contained in paragraphs 6 and 7 of IT-496.

971752
XXXXXXXXXX A.M. Brake

Attention: XXXXXXXXXX

January 5, 1998

Dear Sirs:

Re: Non-Profit Organization

This is in reply to your letter of June 24, 1997, wherein you asked for our comments on whether an entity was eligible for exemption as a non-profit organization under paragraph 149(1)(l) of the Income Tax Act in the scenario described below.

You state that there are a number of franchisees all across Canada operating in a retail industry. A requirement is that the franchisees join a common association. The purpose of the association is to:

1. Foster, promote and engage in activities and programs as will serve and be in common interests of the members of the association.

2. Co-operate for general improvement and stabilization of their industry.

3. Study and collectively solve the problems of their industry.

4. Distribute reliable and accurate information regarding competitors in their industry.

5. Distribute information among its members and improve the overall operation of each member.

6. Promote a closer and friendlier relationship among members.

7. Engage in and commission advertising and marketing research for the benefit of the members through conducting marketing and promotional activities for the benefit of its members.

8. To develop common promotional materials and store display boards of the products and their retail prices ("the menu boards"). The promotional materials and menu boards are sold to the members at the cost to the association.

9. There is no distribution of surplus to the members. It is operated on a cost recovery basis. All excess of receipts over disbursements is held for use next year. On average, the association is maintaining a surplus equal to about six months of expenditures. This is required because advertising programs can be expensive and the association must commit "up front" to the entire program (i.e., a TV commercial).

10. Each member of the association is required to pay a specified percentage of their monthly sales as a membership fee. The fee is calculated and paid on a monthly basis.

11. The revenue collected by each franchisee is accumulated by XXXXXXXXXX regions across Canada. The costs to do each specific marketing and promotional activity (i.e., TV advertising) is charged to the specific region to which the potential benefit relates. The board of directors (made up of representatives of franchisees) monitor costs by region to ensure the members who paid dues are receiving their similar share of the advertising and promotional activities.

OUR COMMENTS

Paragraph 6 of Interpretation Bulletin IT-496, Non-Profit Organizations, states, "Any other purpose except profit" may be used to describe the aims of an association whose activities are directed toward the general improvement of conditions within one or more areas of business. An example of this would be where an association was organized to advance the educational standards within a particular industry or profession, to publicize, improve and promote its objectives in a general way and to encourage the exchange of relevant technical information. If the activities of such an organization were consistent with these aims, then it may qualify for exemption, provided all other conditions of paragraph 149(1)(l) were complied with in the year.

Paragraph 6 goes on to say, "However, the association will probably not so qualify if it is primarily involved, for example, in activity that is directly connected with the sales of members' goods or services and for such services receives a fee or commission computed in relation to sales promoted." In this regard, the aspect raised in 10 above would need to be considered in connection with a review of the organization's activities.

While the foregoing comments are general in nature, they reflect the considerations that should be included in determining whether the organization you have in mind qualifies for the exemption. As well, the comments in paragraphs 7 to 10 of IT-496 should also be considered in determining whether or not it is in fact operated annually for non-profit purposes.

We trust our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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