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.
Principal Issues: Whether the NPO meets the requirements of paragraph 149(1)(l).
Position: Likely no.
Reasons: Fact specific.
September 28, 2012
Small & Medium Enterprises Directorate HEADQUARTERS
112 Kent Street, 19th Floor Income Tax Rulings
Ottawa, ON K1A 0L5 Directorate
Lori Merrigan
(613) 957-9229
Attention: Rubin Dressler 2011-042761
NPO Project – XXXXXXXXXX
This is in response to your correspondence of November 4, 2011, asking for our comments with respect to the tax-exempt status of XXXXXXXXXX (the “Corporation”) pursuant to paragraph 149(1)(l) of the Income Tax Act (the “Act”) for the XXXXXXXXXX years ended XXXXXXXXXX.
FACTS
These are the facts as we understand them:
- The Corporation is a XXXXXXXXXX and files its tax returns claiming a tax exemption pursuant to paragraph 149(1)(l).
- The Corporation’s profit (net of depreciation) has steadily increased from around XXXXXXXXXX% in XXXXXXXXXX to XXXXXXXXXX% in XXXXXXXXXX.
- Member’s equity has increased from $XXXXXXXXXX in XXXXXXXXXX to nearly $XXXXXXXXXX in XXXXXXXXXX. Total revenue for the XXXXXXXXXX taxation year was $XXXXXXXXXX.
- Investment income is averaging around $XXXXXXXXXX.
- XXXXXXXXXX.
ANALYSIS
In order for the Corporation to qualify as a 149(1)(l) entity it must be exclusively organized and operated for a purpose other than profit. Based on the limited facts as provided above, it appears that the Corporation may not be operating for a purpose other than profit.
An organization claiming a paragraph 149(1)(l) exemption can earn a profit, as long as the profit is incidental and arises from activities directly connected to its not-for-profit objectives. In this particular situation, the profits earned have been consistently increasing and do not appear to be incidental; profit margins (net of depreciation) were XXXXXXXXXX% and XXXXXXXXXX% of total revenues, respectively, for the XXXXXXXXXX and XXXXXXXXXX taxation years, suggesting that the Corporation has a profit purpose.
In addition, the growth in the member’s equity account suggests that the Corporation could be accumulating funds for the purpose of earning tax-exempt investment income. As stated in Interpretation Bulletin IT-496R, “Non-Profit Organizations”, an organization that retains excess funds in order to invest them and earn income is not considered to be operating exclusively for a purpose other than profit.
CONCLUSION
In our view, based on the limited facts and analysis provided above, the Corporation has not been operating for a purpose other than profit and, thus, does not meet the requirements of paragraph 149(1)(l) of the Act.
R.A. Albert, CA
Manager
Non-Profit Organizations and Aboriginal Issues Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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