29 April 2003 External T.I. 2003-0007335 - NPO STATUS, CORPORATE REORGANIZATION

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 CCRA.

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

Principal Issues:

Where an NPO is reorganized from a corporation with share capital to a corporation without share capital, various questions are asked pertaining to the NPO's status.

Position: In order to respond to each question, we would need all of the facts.

Reasons:

An advance income tax ruling should be requested. General information provided..

XXXXXXXXXX Renée Shields
(613) 948-5273
April 29, 2003

Dear XXXXXXXXXX:

Re: Non-profit organization (NPO) status upon conversion

This is in response to your letter of March 10, 2003 posing several questions regarding the status of an NPO upon its conversion from a corporation with share capital to a corporation without share capital and the redemption of shares.

You have asked for our views with respect to three questions:

1. Are the proceeds of disposition to the shareholders of an NPO solely the amount paid by the NPO for the share redemption or does it include the value of continuing membership?

2. Has a benefit been conferred on the shareholders by the redemption of the shares?

3. As a result of the conversion, has there been a disposition by the NPO of its assets?

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, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

The CCRA's general views regarding NPO's are contained in Interpretation Bulletin IT-496R, "Non-Profit Organizations."

One of the conditions that must be met to qualify for and maintain NPO status is that no part of the income of the association can be payable to, or otherwise made available for the personal benefit of, any proprietor, member or shareholder of the association. Where an NPO redeems shares for their issue price, and it is established that the NPO is effecting a return of capital, this can be acceptable if it is done to further the objects and purposes of the association, as set out in its instruments. Whether in a specific situation the amount paid for the shares represents only the redemption of shares or includes the value of continuing membership in the association is a question of fact that would have to be determined following a review of all pertinent details.

It is a question of fact whether a member would be in receipt of a taxable benefit upon redemption of shares. For example, subsection 84(3) of the Income Tax Act (the "Act") provides that when a corporation redeems shares, it is deemed to have paid a dividend to the shareholder to the extent that the amount paid to the shareholder exceeds the paid up capital for the shares. However, we also note that when a share redemption by a corporation occurs, other than in the context of a wind-up, paragraph 15(1)(a) of the Act provides that a benefit is not considered to have been conferred on a shareholder for purposes of that section.

A conversion from a corporation with share capital to a corporation without share capital pursuant to paragraph 34(1)(p) of the Ontario Corporations Act is accomplished by way of an application for Supplementary Letters Patent. The application must be accompanied by a special resolution of the directors and confirmed by at least 2/3 of the votes cast at a meeting of shareholders called for this purpose or confirmed in writing by 100% of the shareholders entitled to vote at such a meeting. It appears that such a conversion alters the constitution of the corporation, but would not generally result in the original corporation ceasing to exist and a new corporation being created. In order to determine whether the conversion would result in a disposition of property by the corporation, we would have to review all of the facts and proposed transactions in the context of a request for an advance income tax ruling as described above.

We trust that these comments will be of assistance.

Yours truly,

Mickey Sarazin, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch