14 September 2001 External T.I. 2001-0094315 - PROPERTY INCOME AND CAPITAL GAINS OF NPO

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. Is rental income from renting out a vacant lot taxable income of a non-profit

organization.

2. Is a capital gain realized on the disposition of a vacant lot by a non-profit

organization taxable.

Position:

1. Yes
2. No

Reasons:

1.Non-profit organization would no longer be operated in accordance with its established not-for-profit purpose.

2.No tax is payable on the taxable income of the NPO. Income of the NPO includes capital gains.

XXXXXXXXXX 2001-009431
N. L. Storry
September 14, 2001

Dear XXXXXXXXXX:

Re: Activities of a Non-Profit Society

We are writing in response to your correspondence of July 16, 2001, wherein you requested our views regarding a change in the activities of a non-profit organization (the "Society") and whether certain for-profit activities will result in any adverse tax consequences to the Society.

You have described a situation in which a society owns a vacant lot that is used by the members as a neighborhood park. The Society is now contemplating renting out or disposing of the vacant lot.

The situation outlined in your letter involves an actual fact situation. To the extent that it relates to a past transaction you should contact the appropriate Tax Services Office ("TSO") of the Canada Customs & Revenue Agency (the "CCRA"). Since the review of such transactions falls within the responsibility of the TSO, it is the practice of the Income Tax Rulings Directorate not to comment on such transactions. In the case of a proposed transaction, assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. However, we can offer the following general comments.

Our Comments

Rent Vacant Lot

You have asked what, if any, tax consequences would result should the Society begin to rent out the vacant lot for profit.

The carrying on of for-profit activities does not necessarily preclude a corporation from being a non-profit organization ("NPO"). What is critical is whether or not a corporation is organized or operated with the objective of earning a profit. Three cases in particular illustrate this principle: Gull Bay Development Corporation, 84 DTC 6040; Woodward Pension Society, 62 DTC 1002 (S.C.C.); and, Tourbec (1979) Inc., 88 DTC 1442. Taken together, these decisions establish that for-profit activities may be carried out by an NPO only if they are strictly ancillary to a not-for-profit purpose. If the earning of profit is itself an objective of the corporation, it is not an NPO. If the corporation in fact earns profits, they must be wholly expended in accordance with the organization's non-profit purposes.

It is our opinion that at the time the Society rents out the vacant lot it will be unable to fulfill its not-for-profit purpose of holding vacant land to be used as a park by its members. As a result, when the Society commences to rent out the property, it would no longer be operated in accordance with its established not-for-profit purpose and therefore, would no longer be exempt from Part I tax by virtue of paragraph 149(1)(l) of the Income Tax Act (the "Act").

Disposition of Vacant Lot

You are concerned about the possible tax consequences to the Society should a capital gain be realized on the disposition of the vacant lot. In particular, your concern is whether the Society would lose its tax-exempt status as an NPO under paragraph 149(1)(l) of the Act if it decides to dispose of its vacant lot.

In the event that the Society has not already lost its status as an NPO by virtue of having changed the purpose of its operations (e.g. by renting out the lot), the disposition of the vacant lot will not, in and by itself, cause the Society to lose its tax-exempt status. That would depend on the purpose of the corporation after such disposition. In any event, it would seem that without the lot, the Society would be unable to operate exclusively for the purpose of providing a park for pleasure or recreation.

In the event that a decision is made to cease the operations of the Society immediately subsequent to the disposition and to wind it up, any taxable capital gains resulting from the disposition of the lot may be distributed to its members without affecting its tax-exempt status (by virtue of subsection 149(2) of the Act). While such a gain realized by the Society may not be taxable, the distribution may result in a taxable dividend to the shareholders. The CCRA's views on the winding-up of a corporation, which had qualified as a non- profit organization, are contained in IT-409, Winding-Up of a Non- Profit Organization. For your information, we have attached a copy of this Interpretation Bulletin.

We trust these comments will be of assistance.

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