8 March 1999 External T.I. E9828815 - MUNICIPAL CORPORATIONS AND NPO

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: To provide information on the tax exempt status of municipal corporations and non-profit organizations

Position: No position taken

Reasons: Question of fact. Determination can be made only in particular cases

XXXXXXXXXX 							7-982881
A. St-Amour, CA
Attention: XXXXXXXXXX 

March 8, 1999

Dear XXXXXXXXXX:

Re: Community Development Corporations

This is in reply to your letter of August 24, 1998 to the Winnipeg Tax Services Office requesting information on the exempt tax status of Community Development Corporations. The Winnipeg Tax Services Office asked us to reply to your letter. We apologize for the delay in replying.

Whether a corporation is taxable under Part I of the Income Tax Act (the "Act") or is a tax exempt entity subject to section 149 of the Act is a question of fact which may be determined only after a review of pertinent documents and activities relating to a particular corporation. This letter will provide the provisions of the Act that needs to be met by municipal subsidiary corporations as provided in paragraph 149(1)(d.5) of the Act. It will also provide general information regarding non-profit organizations subject to 149(1)(l) of the Act. As explained by Mrs. St-Amour, 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 submitted in the manner set out in Information Circular 70-6R3 (copy attached). In addition, due to the complexity of the tax statutes relating to this matter, we would recommend strongly that you consult a tax advisor. The following comments are, therefore, of a general nature only, are not binding on the Department and may not be appropriate in a particular circumstance.

Municipal Corporations

Paragraph 149(1)(d.5) of the Act exempts from tax under Part I, for a particular period, a corporation if not less than 90% of its capital is owned by one or more municipalities in Canada. Paragraph 149(1)(d.5) also includes a geographical restriction to ensure that the tax exemption for a municipal subsidiary corporation applies only where no more than 10% of its income is earned from activities carried on outside the geographical boundaries of the municipalities owning the share or capital of the corporations. The Department is of the view that where a corporation has share capital, ownership is determined solely with reference to the corporation's shares and where it is a corporation without share capital, ownership is determined solely by reference to the capital of the corporation.

Subsections 149(1.1) to 149(1.3) also provide requirements that needs to be met by corporations exempt under paragraph 149(1)(d.5). Subsection 149(1.1) requires that no person other than a government or municipality may have a right to acquire shares or capital of an otherwise eligible corporation.

Subsection 149(1.2) excludes certain income from the determination of whether more than 10% of the income of a corporation is derived from activities carried on outside the geographical boundaries of the municipality or municipalities that own the corporation. Specifically, income derived from activities carried on pursuant to an agreement in writing with Canada, a province, or a municipality, within its geographic boundaries, are not included in the determination.

Subsection 149(1.3) provides that 90% of the capital of a corporation is to be considered to be owned by one or more municipalities only if the municipalities are entitled to at least 90% of the votes associated with the shares of the corporation.

Non-profit organizations

The Department's positions on non-profit organizations are outlined in Interpretation Bulletin IT-496 (copy attached). As mentioned in paragraph 2 of the Bulletin, in order to qualify for exempt status under paragraph 149(1)(l) of the Act, a corporation must be both organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or a combination of these or for any other purpose except profit and no part of its income may be payable to or otherwise available for the personal benefit of any of its members or shareholders. To determine the purpose for which a corporation was organized, reference will normally be made to the instruments by which it was created such as letters patent, articles of incorporation, memorandums of agreement, by-laws and so on. If a review of these documents reveals that the corporation was created for other than one or more of the purposes described above, the corporation would not qualify for exemption. The Department is of the view that where the corporation's aims are two fold (the earning of a profit and an exempt status), the "organized and operated exclusively" test in paragraph 149(1)(l) would not be met. Paragraphs 7 and 8 of the Bulletin provide examples of situations where business activities which are carried on are indicative of operations which are not exclusively for non-profit purposes.

This can be distinguished from a corporation which carries on activities of a minor or insignificant nature which do not meet the above-mentioned purpose. Such a corporation may carry on income generating activities and earn income and still qualify for exempt status. However, there must be a causal relationship between the profit making activity and the exempt purpose of the corporation. In other words, the income generating activity cannot be the principal activity of the corporation and must be carried on, and the resulting income must be used, by the corporation to achieve its declared exempt objectives. For instance, in the Gull Bay Development Corporation v The Queen 84 DTC 6040, the Court held that the corporation was organized and operated exclusively for social welfare purposes, although the corporation also carried on a logging operation. In that case, the corporation was incorporated, inter alia, to promote the economic and social welfare of persons of native origin; it was not set up to carry on commercial activities even though it was engaged in a commercial activity. The profits from the logging operations were used by the corporation in social welfare activities carried on by the corporation. In addition, the social welfare activities were not a cloak to avoid payment of taxation on a commercial enterprise but were the real objectives of the corporation.

As mentioned in paragraph 10 of the Bulletin, 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. Such a determination cannot be made in advance of or during a particular year, but only after the end of the year.

As mentioned in paragraph 11 of IT-496, to qualify for exemption under 149(1)(l) no part of the income, whether current or accumulated from prior years, may be payable to or available for the personal benefit of any proprietor, shareholder or member of the organization. For example, this requirement would not be met if the corporation has the power at any time in the current or future years to declare and pay dividends out of income or, the corporation is not prohibited from distributing income to its shareholders on its winding-up, dissolution or amalgamation. Furthermore, these requirements would also not be met if a corporation's shares have dividend rights, even though the corporation may never have distributed dividends and if, on winding up or dissolution, the corporation's shareholders have any rights to the corporation's income or assets.

As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, the above comments do not constitute an advance income tax ruling and are not binding on the Department. We trust the above comments will be of assistance to you. If you have any other questions, do not hesitate to contact us.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretation Directorate