7 October 1998 External T.I. 9821185 - NON-PROFIT ORGANIZATION - CORPORATION

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: non-profit status of a corporation that has foreign subsidiaries.

Position: general comments

Reasons: factual situation

XXXXXXXXXX 982118
B. Kerr
October 7, 1998

Dear Sirs:

Re: Paragraph 149(1)(l) of the Income Tax Act (the “Act”)

This is in response to your letter of August 12, 1998, concerning the non-profit status of a Canadian corporation that has several foreign subsidiaries.

Our Comments

The situation outlined in your letter involves an actual fact situation. To the extent that it relates to a past transaction you should contact the appropriate Tax Services Office, since the review of such transactions falls within their responsibility and it is the practice of the Department not to comment on such transactions when the identities of the taxpayers are not known. If it relates to a proposed transaction, 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 IC-70-6R3 dated December 30, 1996, issued by Revenue Canada. However, we can offer the following general comments.

The Department’s views on some of the factors to consider when determining whether a club, society or association would qualify as a non-profit organization are contained in Interpretation Bulletin IT-496R.

Briefly, paragraph 149(1)(l) of the Act provides an exemption from Part I income tax for a person that is, inter alia, an association (“organization”) 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 otherwise available for the personal benefit of any proprietor, member or shareholder.

To qualify for tax exempt status under paragraph 149(1)(l), the organization must not only be organized exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, but must also be operated exclusively for the same purpose or purposes in each year for which it seeks exempt status. A determination of whether the organization was organized exclusively for exempt purposes would require an examination of the organization’s enabling documents.

A determination of whether an organization was operated exclusively for, and in accordance with, 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.

Generally, however, the Department is of the view that an organization is not operated exclusively for exempt purposes when its principal activity is the carrying on of a trade or business. Some characteristics of an activity that might be indicative that it is 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 and their guests;
• 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.

An 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. 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 its exempt purposes, the Department will consider profit to be one of the purposes for which the organization was operated. This will be particularly so where assets representing the accumulated excess are used for purposes unrelated to its exempt purposes such as the following:

• long term investments to produce property income;
• enlarging or expanding facilities used for normal commercial operations; or
• loans to members, shareholders or non-exempt persons.

To qualify for exemption pursuant to paragraph 149(1)(l), no part of the income of the organization may be made available for the personal benefit of any proprietor, member or shareholder of the organization. An organization may fail to comply with this requirement in a variety of ways. Some of these are as follows:

• the organization distributed income during the year, either directly or indirectly, to or for the personal benefit of any member;
• the organization has the power at any time in the current or future years to declare and pay dividends out of income; or
• the organization in the case of a winding-up, dissolution or amalgamation has the power to distribute income to a member.

We trust that these comments will be of assistance.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate