10 January 2012 External T.I. 2010-0389021E5 - Application of 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: Does the Corporation qualify for the exemption from tax provided by paragraph 149(1)(l) of the Act?

Position: General comments only.

Reasons: This is a question of fact.

XXXXXXXXXX 				2010-038902
					L. Zannese
					(613) 957-2747
January 10, 2012

Dear XXXXXXXXXX :

Re: Application of Paragraph 149(1)(l) of the Income Tax Act

This is in response to your letter dated November 26, 2010, in which you asked for our views as to whether the XXXXXXXXXX (the "Corporation") qualifies for a tax exemption pursuant to paragraph 149(1)(l) of the Income Tax Act (the "Act").

The situation outlined in your letter relates to a factual situation, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings." This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on our website at http://www.cra-arc.gc.ca. However, we are able to provide the following general comments, which may be of assistance.

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.

Whether any particular organization has met the above requirements for any specific time period is a question of fact that can only be determined once all the facts of the situation have been reviewed.

An organization that is a charity, whether or not it is a registered charity, will not qualify for the exemption provided by paragraph 149(1)(l) of the Act. If the Corporation is a charity, then it must be a registered charity to qualify for a tax exemption.

The CRA generally reviews an organization's constating documents, such as its articles of incorporation, by-laws and other relevant documents when determining how the organization is organized. These documents provide information as to the objects of the organization and, in some instances, how the organization will be operated. In addition, how the assets will be distributed upon the dissolution of the organization and whether the organization is authorized to pay dividends or make other payments to its members will be relevant when determining whether income of an organization is available for the personal benefit of its members.

With respect to the requirement to be operated for any purpose except profit, we have the following general comments that may be of assistance to you:

• An organization can earn profits, but the profits should be incidental and arise from activities that are undertaken to meet the organization's not-for-profit objectives (these profits are referred to below as "incidental profits").
• Earning profits to fund not-for-profit objectives is not considered to be itself a not-for-profit objective.
• An organization should fund capital projects and establish (reasonable) operating reserves from capital contributed by members, from gifts and grants, or from accumulated, incidental profits.
• Capital contributions, gifts and grants, and incidental profits should generally be accumulated solely for use in the operations of the organization (including funding capital projects or setting up operating reserves) and should not be used to establish long-term reserves designed primarily to generate investment income.
• 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.
• Limited fundraising activities involving games of chance (e.g., lotteries, draws), or sales of donated or inexpensive goods (e.g., bake sales or plant sales, chocolate bar sales), generally do not indicate that the organization as a whole is operating for a profit purpose.

In determining whether an organization is operated for any purpose except profit, the activities of the organization must be reviewed both independently and in the context of the organization as a whole. Generally, we consider an organization that is offering its services at or near the cost of those services to be operating for a purpose other than profit.

An organization will not be exempt from tax pursuant to paragraph 149(1)(l) of the Act if earning profits is a purpose of the organization, even if the profits are destined to support the not-for-profit purposes of the organization or another organization. This "destination of funds" argument has been rejected by the Canada Revenue Agency and the courts on numerous occasions for both charities and 149(1)(l) organizations.

We trust that these comments will be of 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