20 October 2003 External T.I. 2002-0180335 - NON-PROFIT ORGANIZATION

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:

1. Will Newco be regarded as a charity for purposes of 149(1)(l)?

2. Will a provision in the letters patent of Newco that allows distribution of assets of Newco to its members on dissolution prevent Newco from qualifying as an NPO until such distribution occurs?

3. Will the accumulation of funds in Newco in order to carry out its non-profit objectives (and the earning of investment income on such funds) preclude Newco from qualifying as an NPO?

Position:

1. No.

2. No. But Newco will lose its NPO (exempt) status as soon as the Directors of the corporation authorize its dissolution.

3. No, as long as the funds (including the investment earnings on such funds) are all ultimately used in the not-for-profit objective (e.g. undue accumulation of surplus investment income will jeopardize NPO status).

Reasons:

1. Resources of Newco are not dedicated to charitable activities.

2. IT-409, 149(10).

3. Short term investment income ultimately used in the not-for-profit objectives of the corporation will not, in and by itself, taint the NPO status of the corporation.

XXXXXXXXXX 			2002-018033

October 20, 2003

Dear XXXXXXXXXX:

Re: Non-Profit Organization ("NPO")

This is in reply to your letter dated April 2, 2003 regarding NPOs. We acknowledge our telephone conversation on March 27 (XXXXXXXXXX/Kauppinen) during which we discussed your letters of November 5, 28 and December 10, 2002 to Mr. Carl Juneau of our Charities Directorate and his written reply to you dated December 20, 2002. We also acknowledge Mr. Juneau's letter to you dated August 23, 2002.

You ask for our views on the application of paragraph 149(1)(l) of the Income Tax Act ("Act") with respect to a corporation ("Newco") which has been established by the XXXXXXXXXX.

Our Comments

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 NPOs are found in Interpretation Bulletin IT-496R entitled Non-Profit Organizations.

You ask if Newco would be considered to be a charity for purposes of paragraph 149(1)(l) and thus disqualify it from having NPO status. The definitions in subsection 149.1(1) of the Act define "charity" to be a charitable organization or a charitable foundation. A "charitable foundation" is defined to be, among other things, a corporation that is constituted and operated exclusively for charitable purposes. Similarly, a "charitable organization" is defined to be, among other things, an organization, whether or not incorporated, all the resources of which are devoted to charitable activities carried on by the organization itself. As noted, to be registered as a charity, an organization must be established for exclusively charitable purposes. Accordingly, it is our opinion that should the objects of Newco be modified to include clearly non-charitable objects, it could not be registered as a charity under the Act.

In his letter dated August 23, 2002, Mr. Juneau, of the CCRA Charities Directorate stated in paragraph 2:

At present, the Canada Customs and Revenue Agency is not prepared to characterize payments of tort claims as amounts expended on charitable activities. We acknowledge that payment of civil claims can be an expenditure of a charity in the normal course of operating. The Income Tax Act requires a distinction to be made between expenditures on charitable activities and expenditures on administrative or operational expenses. However, without any legal precedent specifically on point, we are not prepared to conclude definitively whether these payments can be considered a charitable activity for the purposes of the Act.

Since the activities of Newco, being primarily the settlement of tort claims, cannot be conclusively determined to be charitable activities, Newco will not be considered a charity for purposes of determining whether Newco is an NPO within the meaning assigned by paragraph 149(1)(l) of the Act.

You state that Article XXXXXXXXXX of Newco's letters patent allows for distribution of Newco's assets on dissolution to one or more organizations which may include members of Newco. We confirm that the provision in the letters patent, in and by itself, will not affect Newco's status as an NPO under paragraph 149(1)(l) of the Act. However, if Newco qualifies as an NPO, it should be noted that as soon as the Board of Directors of Newco pass a resolution authorizing the dissolution of Newco, and a member of Newco becomes entitled to receive property from Newco, Newco will lose its NPO status and will become subject to tax. For further information on this issue, please refer to Interpretation Bulletin IT-409 entitled Winding-Up of a Non-Profit Organization.

You also state that, in the course of settling judgments and claims, funds will be accumulated and will earn investment income. You ask if this will affect Newco's claim to NPO status.

The earning of investment income should not, in and by itself, deny an organization NPO status as long as all funds, including any investment income earned, are ultimately used in achieving the corporation's non-profit objectives. However, should income accumulate to create a surplus fund beyond that needed to carry on the corporation's non-profit activities, profit will be considered to be one of the purposes for which the corporation was operated. For a more detailed discussion on this issue see paragraphs 8 and 9 of IT-496R.

From the information provided to us, it appears that Newco would not offend paragraph 149(1)(l) of the Act at this point in time. However, the test for NPO status in ongoing and must be satisfied continuously. The maintenance of NPO status will be a question of fact.

We trust our comments will be of assistance to you.

Yours truly,

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