30 March 2012 Internal T.I. 2011-0404681I7 - NPO- sports 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.

Principal Issues: Is the Association operating for a profit purpose or making income available to its members?

Position: Likely, yes to both.

Reasons: The Association appears to be operating in part for the purpose of earning profit. Income is distributed to members.

							March 30, 2012

	Specialty Audit Section			Headquarters
	Compliance Programs Branch		Income Tax Rulings
		 					Directorate

							P. Burnley
	Attention:  Rubin Dressler		(613) 957-2100

							2011-040468

XXXXXXXXXX (the “Association”)

This is in response to your letter of XXXXXXXXXX , requesting our views on whether the Association qualified for an exemption from tax provided by paragraph 149(1)(l) of the Income Tax Act (the “Act”) for the XXXXXXXXXX and XXXXXXXXXX taxation years.

In general terms, paragraph 149(1)(l) of the Act provides that the taxable income of an organization that is a club, society or association is exempt from tax under Part I of the Act for a period throughout which the organization meets all of the following conditions:

• it is not a charity;
• it is organized and operated exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit; and
• it does not distribute or otherwise make available for the personal benefit of a member or shareholder any of its income, unless the member or shareholder is an association which has as its primary purpose and function the XXXXXXXXXX .

We understand that the Association was incorporated in XXXXXXXXXX without share capital under Part II of the Canada Corporations Act to support and encourage the growth XXXXXXXXXX . The Letters Patent indicate that the Association is to be carried on without pecuniary gain. You have indicated that the Association has XXXXXXXXXX members (the “Members”) who also claim the exemption from tax provided by paragraph 149(1)(l) of the Act. The Members have members that are XXXXXXXXXX ; we do not have any information on whether these members are for-profit or exempt entities. You have also indicated that the Association is not a XXXXXXXXXX .

During XXXXXXXXXX and XXXXXXXXXX , the Association earned income from a variety of sources including sponsorships and advertising rights, both throughout the year and XXXXXXXXXX . It appears that none of the income earned by the Association was received from the Members. In XXXXXXXXXX , the Association had a large increase in income which resulted in a significant increase in Members’ equity (as described in the financial statements). The increase in Members’ equity has remained steady since that time. In each year under review, the Association recorded a surplus of approximately $XXXXXXXXXX which was distributed evenly to the Members.

You are of the view that the Association was operating for a profit purpose and that it was making income available for the personal benefit of its Members so that it did not meet the requirements of paragraph 149(1)(l) of the Act.

Our Comments

An organization can only claim the exemption from tax provided by paragraph 149(1)(l) of the Act if it is operated exclusively for a purpose other than profit. This does not mean that a 149(1)(l) organization cannot earn a profit; it can, but the profit must be incidental and must result from activities undertaken to support the organization’s not-for-profit objectives. The earning of profit cannot be or become a purpose of the organization.

Information supplied to you from the Association stated that it is “an association which provides financial assistance, obtains sponsorships and sells advertising rights for the…[Members]”. In our view, an organization generally cannot plan to provide financial assistance to its members out of surplus derived from third parties without having a profit purpose.

The surplus earned and distributed to the Members was approximately $XXXXXXXXXX in both XXXXXXXXXX and XXXXXXXXXX . These amounts do not appear to be incidental in relation to the overall income and scope of operations, particularly when it appears that the Association is generating a surplus on a regular basis. Additionally, we understand that all of this income was received from third parties and was actively pursued through the use of an agency. Based on the information provided, we agree that the Association was likely operating for a profit purpose (together with its not-for-profit purposes), and was making income available for the personal benefit of the Members.

Income may be made available for the personal benefit of a member without jeopardizing an organization’s exemption under paragraph 149(1)(l) of the Act if the member is an organization which has as its primary purpose and function XXXXXXXXXX . It is not clear to us if the Members are such organizations, however, you may wish to look into this.

If the Association was acting as an agent for its Members by obtaining sponsorships and selling advertising rights on their behalf (i.e., if the Members actually owned the advertising rights), that income would not be considered to be the income to the Association for the purposes of paragraph 149(1)(l) of the Act. However, we were not made aware of any agency agreements.

We trust that these comments will be of assistance.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.

Eliza Erskine
Manager
Non-Profit Organizations and Aboriginal Issues Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch