10 November 2011 Internal T.I. 2011-0410851I7 - Paragraph 149(1)(l)

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: Did the Corporation qualify for the exemption from tax provided by paragraph 149(1)(l) for the years under review?

Position: No.

Reasons: The Corporation was not operated exclusively for a purpose other than profit. In addition, income of the Corporation was available for the personal benefit of its members.

							November 10, 2011

Compliance Programs Branch			Income Tax Rulings
HEADQUARTERS					  Directorate
    Specialty Audits Section 			L. Zannese
Attention:  Rubin Dressler			(613) 957-2747

							2011-041085

XXXXXXXXXX (the "Corporation")

We are writing in response to your request for our views as to whether the Corporation qualified for an exemption from tax pursuant to paragraph 149(1)(l) of the Income Tax Act (the "Act") for the taxation years under review. In particular, you asked whether the interest income earned by the Corporation prevented it from claiming this exemption. Further, in the event that the Corporation did not qualify as a 149(1)(l) organization for the years under review, you asked whether the Corporation could have qualified for a tax exemption pursuant to paragraph 149(1)(k) of the Act instead.

FACTS

Based on the information that you provided to us, our understanding of the facts is as follows:

• The Corporation was incorporated on XXXXXXXXXX, under XXXXXXXXXX
• The objects of the Corporation are to:

• group together its members in order to XXXXXXXXXX ;
• XXXXXXXXXX to live together; and
• defend and promote the interests of its members.

• The members live together in a building owned by a charity (the "XXXXXXXXXX ").
• There are no annual membership fees.
• Each year the members of the Corporation contribute all of their income to the Corporation.
• There was no minimum yearly contribution that a member was required to make to the Corporation. Contributions ranged from $XXXXXXXXXX from one member to $XXXXXXXXXX from another member.
• The members were required to give up their major assets to join the group. Generally, these assets were sold and amounts either contributed to the Corporation or distributed to family members. Members closed their personal bank accounts and transferred the amounts to the Corporation.
• The Corporation pays annual rent of $XXXXXXXXXX for the use of the building.
• The Corporation pays for members' personal and living expenses and their personal income taxes.
• The Corporation pays for general maintenance of the building.
• Contributions that were not needed to pay for current expenses were accumulated and invested in term deposits.
• The Corporation intends to use the term deposits, along with the interest earned on these investments, to ensure that it can pay for the members' future care and needs.
• The current average age of the members is XXXXXXXXXX years old. This excludes one member who is XXXXXXXXXX years old.
• The financial information of the Corporation for the last three years is as follows:

Year
			2008
			2009
			2010

Member Contributions
	$XXXXXXXXXX 	$XXXXXXXXXX
$XXXXXXXXXX 

Interest Income
$XXXXXXXXXX		$XXXXXXXXXX
$XXXXXXXXXX 

Donations
			$XXXXXXXXXX		$XXXXXXXXXX
$XXXXXXXXXX 

Net Income
$XXXXXXXXXX		$XXXXXXXXXX
$XXXXXXXXXX
Accumulated Surplus	$XXXXXXXXXX		$XXXXXXXXXX		$XXXXXXXXXX 

Term Deposits
$XXXXXXXXXX		$XXXXXXXXXX
$XXXXXXXXXX 

OUR COMMENTS

In general terms, paragraph 149(1)(l) of the Act provides that the taxable income of an organization 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 a club, society or association;
• 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
• its income is not available for the personal benefit of a member or shareholder.

Based on the information provided, it appears that the Corporation is not a charity. However, we share the auditor's concern that the Corporation may have been organized and operated for a profit purpose (together with other, not-for-profit purposes). In addition, it appears that the income of the Corporation was available for the personal benefit of its members.

It appears that the Corporation was organized and operated at least in part to accumulate funds and to invest those funds on a tax-exempt basis, in order to support its members' future personal living expenses, including health-related expenses. Thus, the Corporation did not appear to operate, nor was it organized (with respect to its object to accumulate funds) exclusively for any other purpose except profit.

It is possible for an organization claiming to be exempt under paragraph 149(1)(l) of the Act to generate a profit, but the profit must be incidental and must arise from activities that support the organization's not-for-profit objectives. For example, maintaining reasonable operating reserves or bank accounts required for ordinary operations will generally be considered to be an activity undertaken to meet the not-for-profit objectives of an organization. Consequently, incidental income arising from these reserves or accounts will not affect the status of an organization. As well, a 149(1)(l) organization will not be prevented from claiming the exemption if incidental income is used to benefit members.

In our view, the Corporation does not qualify for the exemption contained in paragraph 149(1)(l) of the Act. As stated in paragraph 8 of Interpretation Bulletin IT- 496R, "Non-Profit Organizations":

"An association may earn income in excess of its expenditures provided the requirements of the Act are met. ... 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 association's reasonable needs to carry on its non-profit activities (see paragraph 9), profit will be considered to be one of the purposes for which the association was operated. This will be particularly so where assets representing the accumulated excess are used for purposes unrelated to its objects such as the following:

• long-term investments to produce property income; ...

This may also be the case where the accumulated excess is invested in a term deposit or guaranteed investment certificate that is regularly renewed within a year and from year to year whether or not the principal is adjusted from time to time."

Moreover, as the interest income earned by the Corporation is more than incidental, none of this income may be available for the personal benefit of its members if paragraph 149(1)(l) of the Act is to apply. The Corporation intends to use the interest income from the term deposits to pay for members' personal living expenses, and in particular any medical expenses that may arise as the members age. As a result, the income of the Corporation is available for the personal benefit of members, and this prevents the Corporation from qualifying for the tax exemption.

You requested our views as to whether the Corporation could have qualified for the tax exemption provided by paragraph 149(1)(k) of the Act, in the event that we agreed that paragraph 149(1)(l) did not apply. Consequently, we have forwarded this part of your inquiry to our Charitable and Financial Institution Sectors team for their consideration. Once they have had an opportunity to review the matter, they will respond to you directly under separate cover.

We also considered briefly whether section 143 of the Act (communal organizations) may have been applicable; however it does not appear that the Corporation was a "congregation" as defined in that provision.

Please contact us, if we may be of any further assistance.

Yours truly,

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