6 August 2015 External T.I. 2015-0565651E5 F - Reliquat dévolu à une administration municipale -- translation

Principal Issues: Would an entity, who is a non-profit organization per paragraph 149(1)(l), lose its tax-exempt status due to a clause in its constitution which provides that in the event of winding-up, amalgamation or dissolution, all of its assets are to be transferred to a municipal authority within the meaning of section 149(1)(c)?

Position: First, the question is to determine if the municipal authority is a member of the NPO. The interpretation of the term "member" does not fall under the Act. a) If the municipal authority is a member of the NPO, it is our view that this NPO would lose its status as a tax-exempt organization under paragraph 149(1)(l). b) If the municipal authority is not a member of the NPO, there would be no loss of status as a tax-exempt organization under paragraph 149(1)(l).

Reasons: The Law. a) The requirement that no part of the income of which was payable to, or otherwise available for the personal benefit of, any member is not met. b) The requirement that no part of the income of which was payable to, or otherwise available for the personal benefit of any member would be met. Furthermore, the other requirements of paragraph 149(1)(l) need to be met.

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2015-056565
Anne Dagenais, Advocate, M. Fisc.

August 6, 2015

Subject: Paragraph 11 of Interpretation Bulletin IT-496R

Dear Sir,

This letter is in response to your email of 14 January 2015. You requested our interpretation of the position expressed in paragraph 11 of Interpretation Bulletin IT-496R (footnote 1).

Specifically, you wish to know if an entity described in paragraph 149(1)(l) can lose its exempt status because of a clause in its articles which provides that in the event of winding-up, dissolution, or merger, all property must be transferred to a municipal authority within the meaning of paragraph 149(1)(c). You did not specify whether the municipal authority is a member of the entity referred to in paragraph 149(1)(l).

In this regard, you drew a parallel with paragraph 11 of Interpretation Bulletin IT-496R that refers to a clause providing for a transfer of assets and accumulated income to an entity referred to in paragraph 149(1)(f) or (l).

Unless otherwise noted, all statutory references herein are references to the provisions of the Income Tax Act (the "Act").

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Paragraph 149(1)(l) establishes, in particular, that a club, society or association must be organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit and no income shall be payable to or otherwise available for the personal benefit of a proprietor, member or shareholder thereof. According to paragraph 149(1)(l), this requirement does not apply if the proprietor, member or shareholder was a club, society or association the primary purpose and function of which was the promotion of amateur athletics in Canada.

Paragraph 11 of Interpretation Bulletin IT-496R establishes the CRA position to the effect that to qualify for the exemption under paragraph 149(1)(l), no part of the income can be payable to, or otherwise made available for, the personal benefit of any member of the association.

In the same paragraph, it states that if a corporation has the power at any time to declare and pay dividends out of income to its shareholders or has the power to allocate income in the case of winding-up, merger, or dissolution, it cannot qualify as a non-profit organization. Also according to the Bulletin, to avoid difficulties in this respect, the organization may provide in its enabling documents that upon a winding-up, merger or dissolution, all of its assets and accumulated income are to be transferred to an organization with similar objects that qualifies for exemption under paragraph 149(1)(f) or (l).

Since for the purposes of paragraph 149(1)(l), the term "member" is not defined in the Act, it must be interpreted in the light of its meaning under the applicable private law. Whether or not the clause added to the enabling documents ensures that the municipal government is a member falls to be determined under the applicable private law. Consequently, since the interpretation of the term "member" does not fall to be determined under the Act, it is not come within our remit to comment on the meaning of the term.

We are of the view that the fact that the entity that receives assets and accumulated income in the event of a winding-up, merger or dissolution, was an entity referred to in paragraph 149(1)(f) or( l), does not relieve the entity that transfers the property and accumulated income earned from the requirement to comply with the requirements of paragraph 149(1)(l), including the condition that no part of the income can be payable to, or otherwise made available for, the personal benefit of any member of the association. The same principle would apply where it is a municipal government under paragraph 149(1)(c) that receives property and accumulated income in the event of a winding-up, merger or dissolution.

Where a municipal authority is a member of an entity referred to in paragraph 149(1)(l), the latter would lose its tax-exempt status by reason of the clause in its enabling documents that provided that in the event of a winding-up, merger or dissolution, all its assets and accumulated income must be transferred to the municipal authority as described in paragraph 149(1)(c). There would be loss of entitlement to the exemption under paragraph 149(1)(l) since the condition, that no part of the income can be payable to, or otherwise made available for, the personal benefit of any member of the association, would not be satisfied.

Where a municipal authority is not a member of an entity referred to in paragraph 149(1)(l), the mere fact of including in its articles a provision that in the event of a winding-up, merger or dissolution, all its assets and accumulated income must be transferred to a municipal authority within as described in paragraph 149(1)(c) would not result in the condition - that no part of the income can be payable to, or otherwise made available for, the personal benefit of any member of the association – not being satisfied. However, the other conditions referred to in paragraph 149(1)(l) must be satisfied.

We trust that our comments will be of assistance.

Michel Lambert, CPA, CA, M. Fisc.
Manager
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, footnotes contained in the original document are shown below instead:

1 CANADA REVENUE AGENCY, Interpretation Bulletin IT-496R, "Nonprofit Organizations", August 2, 2001.