28 September 1995 External T.I. 9507025 - CONTROL- GUIDELINE 4 OF INDIAN ACT EXEMPTION GUIDELINES

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1.Whether Guideline 4 of Indian Act Exemption for Employment Income Guidelines applies to certain employees?

2.Whether employer qualifies as an NPO under paragraph 149(1)(l) of the Act?

Position TAKEN:

1.NO.

2.NO.

Reasons FOR POSITION TAKEN:

1.The Indian Organization (the employer) does not meet the: control, non-commercial activities and dedicated exclusively criteria described in Guideline 4.

2.The Organization is primarily involved in activities connected with the sale of the members goods. In addition the Organization's principal activity is the carrying on of a trade or business.

		950702
XXXXXXXXXX	Wm. P. Guglich

Attention: XXXXXXXXXX

September 28, 1995

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your letter of March 14, 1995 concerning the tax status of the XXXXXXXXXX as well as the applicability of Guideline 4 of the Indian Act Exemption for Employment Income Guidelines to certain Indian employees of the XXXXXXXXXX.

We replied on December 22, 1994 to your letters of November 2 and 4, 1994 concerning these issues and you subsequently submitted additional information. Before we comment on the various conditions described in Guideline 4 we wish to point out that in order to qualify for tax exemption under Guideline 4 all the conditions described therein must be met.

1.CONTROL OF THE ASSOCIATION

You indicate in your letter that the

XXXXXXXXXX

As a general rule the central management and control of an organization is usually considered to be exercised by the group that performs the function of a board of directors of the organization. The concept of control that is used in Guideline 4 is that kind of control that exists where there is power to command and direct. Where a Band is able to replace the board of directors of an organization, the Band could be said to control the organization.

In the case of the XXXXXXXXXX, although the Bands have influence in the appointment of the board of directors, in that they can ratify or reject the appointments by the XXXXXXXXXX committees, it could not be said that the Bands have the power to command or direct the XXXXXXXXXX In our view, it is doubtful that the Bands could be considered to control the XXXXXXXXXX

2.THE XXXXXXXXXX ACTIVITIES

You state that the XXXXXXXXXX does not make a profit, nor does it conduct its activities with the intent of making a profit. However, Guideline 4 does not refer to profits, it refers to non-commercial activities. The absence of a profit motive or operation on a cost recovery basis is not, in and by itself determinant as to whether specific activities are non-commercial. The nature of the activities must be considered.

XXXXXXXXXX

It is therefore our view that the XXXXXXXXXX carries on commercial activities.

As the XXXXXXXXXX carries on commercial activities, it is unlikely that employees could satisfy the requirement of Guideline 4 that the duties of employment are in connection with the employer's non-commercial activities.

3.DEDICATED EXCLUSIVELY TO THE SOCIAL, CULTURAL, EDUCATIONAL, OR ECONOMIC DEVELOPMENT OF INDIANS

One of the conditions that must be met to qualify under Guideline 4 is that the organization must be dedicated exclusively to the social, cultural, educational, or economic development of Indians. This condition is not met as the commercial activities carried on by the XXXXXXXXXX would not be considered social, cultural, educational, or economic development of Indians. Although part III of the XXXXXXXXXX incorporation articles describes objects and purposes that could be considered social, cultural, educational, or economic development of Indians the activities the XXXXXXXXXX currently carries on are of a commercial nature. In addition Guideline 4 requires that the organization must be exclusively dedicated to the social, cultural, educational, or economic development of Indians.

4.THE XXXXXXXXXX AS A NON-PROFIT ORGANIZATION

The requirement that no income be payable to or available to members of the organization is but one of the conditions that an organization must comply with to qualify for exemption under paragraph 149(1)(l) of the Income Tax Act (the "Act"). Some other conditions that an organization must meet, as stated in paragraph 2 of Interpretation Bulletin IT-496, are that it must be: (i) organized exclusively for social welfare, civic improvement, recreation or any other purpose except profit and (ii) the organization must in fact be operated exclusively for the same purpose or purposes described above. To establish the purpose for which an organization was organized, the Department generally looks to the incorporating documents.

As stated in paragraph 6 of IT-496 an organization which is primarily involved in an activity that is directly connected with the sales of members goods or services would not meet the "any other purpose except profit" test. Paragraph 7 of IT-496 states that an organization is not operated exclusively for non-profit purposes when its principal activity is the carrying on of a trade or business. Some characteristics of an activity that might indicate it is a trade or business include: (i) it is operated in a normal commercial manner, and (ii) it is operated in competition with taxable entities carrying on the same trade or business.

Upon further consideration the XXXXXXXXXX, in our view, does not meet the "operated exclusively for any other purpose except profit" test to qualify for exemption under paragraph 149(1)(l) of the Act. If the XXXXXXXXXX does not make a profit as you state in your letter, the matter of exemption may be a moot point as it would have no taxable income upon which tax would be exigible.

We trust our comments will be of assistance to you.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch