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 interest income earned on overdue accounts by a golf course taxable as income from property pursuant to subsection 149(5)?
Position: Yes.
Reasons: Interest earned on overdue accounts is income from property. Generally, a golf course is subject to subsection 149(5).
XXXXXXXXXX
2011-040990
P. Burnley
(613) 957-2100
September 22, 2011
Dear XXXXXXXXXX :
Re: Interest Income and Subsection 149(5) of the Income Tax Act (the "Act")
This is in response to your email correspondence dated June 13, 2011, in which you asked whether interest earned on overdue accounts was taxable under subsection 149(5) of the Act when earned by a golf course that is exempt from tax pursuant to paragraph 149(1)(l) of the Act.
The situation outlined in your email appears to relate to a factual one, 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 prepared to provide the following general comments, which we hope will be of assistance to you.
Generally, paragraph 149(1)(l) of the Act provides an exemption from Part I tax for a club, society or association that is not a charity and that is organized and operated exclusively for social welfare, civic improvement, pleasure or recreation, or any other purpose except profit. However, when the main purpose of an organization is to provide dining, recreational or sporting facilities for its members, subsection 149(5) of the Act applies and an inter vivos trust is deemed to have been created. The property of the organization is deemed to be the property of the trust, and in accordance with paragraph 149(5)(e) of the Act, tax is payable by the trust on its property income and certain capital gains. There is a general deduction of $2,000 available in computing the taxable income of the trust.
Income from property generally includes interest, dividends, rents and royalties. Interest income earned by an organization to which subsection 149(5) of the Act applies (a "club"), from the investment of surplus funds, is income from property for the purpose of subsection 149(5), regardless of whether the surplus funds result from temporary operating surpluses or an accumulation of funds for a long-term project. The Federal Court of Appeal confirmed this view of subsection 149(5) in both Elm Ridge Country Club Inc v. The Queen, 99 DTC 5127, and Point Grey Golf & Country Club v. The Queen, 2000 DTC 6217. In particular, the Federal Court of Appeal, in Elm Ridge Country Club, remarked that in enacting subsection 149(5)
"[15] Parliament has taken care to ensure that clubs ... unlike other non-profit organizations, are taxed on all their income from property and therefore, it is plain, on all their interest income...
"[16] ... There is no reason to believe that Parliament used the words "income from property" in any non-traditional sense. Nor is there any reason to believe that Parliament, in enacting legislation of such general scope with regard to clubs which it knows cannot carry on activities primarily aimed at making a profit, was concerned with the manner in which the income would be produced. Interest income is taxable regardless of the activities of the clubs that give rise to its production..."
In your view, the interest income earned on the overdue accounts of a club is not income from property within the meaning of subsection 149(5) of the Act, but rather is income from the dining- and dues-related activities of the club, and therefore should not be considered to be income from property of the deemed trust. For example, the CRA has accepted that certain rental income received by a club is not income from property for the purpose of subsection 149(5). Interpretation Bulletin IT-83R3, "Non-profit Organizations - Taxation of Income from Property" ("IT-83R3"), states:
"4. Since the club's property is deemed to be the property of the trust, any property income of the club is included as income of the inter vivos trust. Dividend and interest income is clearly income from property. Revenue derived from the rental of club facilities may be categorized, depending upon the facts of a particular situation, either as income from property or income from business. For example, the rental of building space that is in excess of a club's normal requirements would be property income, while the rental of dining facilities for a wedding reception or a golf course for a tournament would be business income. In distinguishing property income from business income, the courts have generally regarded the degree of the lessor's activity associated with the rental as determinant."
In our opinion, the jurisprudence supports the view that, for the purpose of subsection 149(5) of the Act, interest income of a club generally cannot be divided into property income and business income. The difference between the rental income described in IT-83R3 and the interest income on an overdue account is that the rental income is derived directly from one of the main activities of a club (i.e., providing certain facilities), while the interest income is not. In our view, consistent with the scheme of the Act and the related jurisprudence, interest income earned by a club, irrespective of source, is income from property for the purpose of subsection 149(5).
We trust that these comments will be of assistance.
Yours truly,
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
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