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 is exempt from tax.
Position: Perhaps.
Reasons: May qualify under 149(1)(c) or 149(1)(l). To qualify for tax exempt status under paragraph 149(1)(c) of the Act, the XXXXXXXXXX would have to be considered a public body performing a function of government. It is a question of fact whether or not the XXXXXXXXXX is a public body performing a function of government.
To qualify for tax exempt status under paragraph 149(1)(l) of the Act, an association must be both "organized and operated" exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit. 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.
5-981076
XXXXXXXXXX Karen Power, CA
(613) 957-8953
Attention: XXXXXXXXXX
September 1, 1998
Dear Sirs:
Re: XXXXXXXXXX
We are writing in reply to your letter of February 11, 1998, concerning the taxation of net revenues earned by the XXXXXXXXXX In addition, we have reviewed the XXXXXXXXXX Agreement which sets out the establishment, structure, purpose, powers and administration of the XXXXXXXXXX.
XXXXXXXXXX
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.
It is our understanding that the XXXXXXXXXX is not a settlement corporation as defined in XXXXXXXXXX, as such the XXXXXXXXXX will not be exempt from tax by virtue of the Settlement Act. It is necessary to look to the Income Tax Act (the “Act”) for tax exemption.
No tax is payable under Part 1 on the taxable income of a person for a period when that person falls within one of the paragraphs under subsection 149(1) of the Act. Since there is no specific provision in respect of the XXXXXXXXXX, it would have to qualify under one of the existing paragraphs such as paragraph 149(1)(c) or (l).
Paragraph 149(1)(c):
To qualify for tax exempt status under paragraph 149(1)(c) of the Act, the XXXXXXXXXX would have to be considered a public body performing a function of government. It is a question of fact whether or not the XXXXXXXXXX is a public body performing a function of government. The following excerpts from the XXXXXXXXXX Agreement would indicate that the XXXXXXXXXX is performing a function of government:
XXXXXXXXXX
In addition to performing a function of government, paragraph 149(1)(c) of the Act also requires the XXXXXXXXXX be considered as a “public body”. The term “public body” is not defined in the Act and must, therefore, be considered to have the meaning assigned to it by dictionaries and common usage. Webster’s Collegiate Dictionary (tenth edition) defines the word “public” as meaning:
“...of, relating to, or affecting all the people or the whole area of a nation or state; of or relating to government; of or relating to people in general;...of or relating to business or community interest as opposed to private affairs; devoted tot he general or national welfare...”
We note that paragraph XXXXXXXXXX of the agreement states as follows:
XXXXXXXXXX
In our view, it would appear that the XXXXXXXXXX is performing a function of government, however, it is unclear whether the XXXXXXXXXX can be considered a public body given that 3 members and three alternative members shall be appointed from nominees put forward by each of the XXXXXXXXXX and government.
Paragraph 149(1)(l):
To qualify for tax exempt status under paragraph 149(1)(l) of the Act, an association must be both "organized and operated" exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit. To establish the purpose for which an association was organized, the Department will normally look to the instruments by which it was created. These instruments may include letters patent, articles of incorporation, memoranda of agreement, by-laws, articles and so on. In the case, of the XXXXXXXXXX it would likely qualify under the category of “civic improvement” or “any other purpose except profit”. Paragraph 5 of IT-496 states that civic improvement includes the enhancement in value or quality of community or civic life.
Paragraph 5 of IT-496 also indicates that “any other purpose except profit” is interpreted as a catch-all for associations that are organized and operated for other than commercial or financial reasons. Paragraph 6 of IT-496 states that an association will probably not so qualify if it is primarily involved, for example, in an activity that is directly connected with the sales of member's goods or services and for such services receives a fee or commission computed in relation to sales promoted. Such an association is normally considered to be an extension of the member's sales organizations and will be considered to carrying on a normal commercial operation. Paragraph 7 of IT-496 indicates 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 indicate it is a trade or business are: (a) it is operated in a normal commercial manner, (b) its goods or services are not restricted to members and their guests, (c) it is operated on a profit basis rather than a cost recovery basis, or (d) it is operated in competition with taxable entities carrying on the same trade or business. As indicated in paragraph 10 of IT-496, a determination of whether an entity was operated exclusively for, and in accordance with its non-profit 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 the local Tax Services Office, who would be in a better position to appreciate all the circumstances of the case.
Although an organization claiming exemption under this paragraph may earn a profit, these profits must be used by it for the purposes of achieving its exempt objectives. Where a material part of the profit earned by an otherwise exempt organization is accumulated each year and the balance of the accumulated profits is greater than the organization’s reasonable needs in carrying on its activities it is the Department’s general view that the organization is not “operated exclusively for...any other purpose except profit”.
Finally, under paragraph 149(1)(l), we would have to be satisfied that none of the income of the association was payable to or otherwise available for the personal benefit of any member. Paragraph 11 of IT-496 states that an association may fail to comply with this requirement in a variety of ways. For example: the association distributed income during the year, either directly or indirectly, to or for the personal benefit of any member; the association has the power at any time in the current or future years to declare and pay dividends out of income; or the association in the case of winding-up, dissolution or amalgamation has the power to distribute income to a proprietor, member or shareholder.
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. However, if the XXXXXXXXXX qualified under the category of “any other purpose except profit”, an accumulation of funds would not be acceptable.
We trust our comments will be of assistance to you.
Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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