21 November 2001 External T.I. 2001-0095285 - NON-RESIDENT 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:

Whether paragraph 149(1)(l) applies equally to a non-resident NPO and a resident NPO.

Position:

The conditions set out in paragraph 149(1)(l) apply equally to resident and non-resident NPO's.

Reasons:

No reference distinguishing between residents and non-residents in paragraph 149(1)(l).

XXXXXXXXXX  					2001-009528
N. L. Storry

November 21, 2001

Dear XXXXXXXXXX:

Re: Non-Profit Organization

We are writing in response to your correspondence of July 26, 2001, wherein you requested our views regarding whether a non-resident trade association is a non-profit organization ("NPO") and whether it may obtain a waiver in respect of non-residents withholding tax under section 105 of the Income Tax Regulations (the "Regulations").

You have described a situation in which a non-resident corporation ("USco"), incorporated under the laws of one of the states of the United States as a "nonstock corporation," develops standards for its industry as well as training certifications within the industry, and provides numerous educational programs and conferences for its members and others. USco intends to solicit Canadian members and to operate an office in Canada, which will be used to provide its Canadian members with the same programs in Canada as it provides in the United States. USco expects that the forums and conventions held in Canada for its Canadian members may result in significant revenue, which will be used to carry on the corporation's not-for-profit activities in both Canada and the United States.

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.

Issues

You requested our comments on the following issues:

Issue 1: Can a non-Canadian corporation qualify as an NPO exempt from Part I tax pursuant to paragraph 149(1)(l) of the Income Tax Act (the "Act") and from "branch tax" under subsection 219(2) of the Act?

Issue 2: Will the maintenance of a reserve surplus equal to one year of expenses, in and by itself, disqualify an entity as an NPO under paragraph 149(1)(l)?

Issue 3: Will the receipt of significant revenue from conferences and other activities carried on in Canada affect the status of an entity under paragraph 149(1)(l) of the Act?

Issue 4: Will a reasonable honorarium and/or reimbursement of expenses paid to directors affect the status of an entity as an NPO under paragraph 149(1)(l) of the Act?

Issue 5: If a non-resident NPO provides services to its Canadian members in Canada, will such members be required to withhold 15% of the payments under section 105 of the Regulations? If so, will it be possible for the NPO to obtain a waiver in respect of such withholding?

Our Comments

Issue 1:

There is no requirement for an entity to be resident in Canada in order to qualify as an NPO under paragraph 149(1)(l) of the Act. Whether or not a particular entity, resident in Canada or not, qualifies as an NPO under paragraph 149(1)(l) is a question of fact. The CCRA's view on some of the factors to consider when determining whether a club, society or association would qualify as an NPO are contained in Interpretation Bulletin IT-496R entitled "Non-profit Organizations." In general terms, the conditions set out in paragraph 149(1)(l) of the Act with which a club, society or association must comply in order to qualify for exemption as a non-profit organization are as follows:

a) it must not, in the opinion of the Minister, be a charity;

b) it must be organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit;

c) it must in fact be operated exclusively for the same purpose in (b) for which it was organized or for any of the other purposes mentioned in (b); and

d) no part of its income may be paid, payable or otherwise made available for the personal benefit of any proprietor, member or shareholder, except in connection with the promotion of amateur athletics in Canada.

The CCRA considers the expression "club, society or association," used in paragraph 149(1)(l) of the Act to be wide enough to include an incorporated company. To qualify for exemption, a corporation must not only be organized exclusively for non-profit purposes, but it must in fact be operated in accordance with these purposes in each year for which it seeks exemption under paragraph 149(1)(l) of the Act.

To establish the purpose for which a corporation was organized, the CCRA will normally look to the instruments by which it was created, e.g. letters patent, by-laws, memorandum of agreement, or articles of incorporation. Accordingly, in our view, the articles or by-laws of the Corporation should specifically prevent the distribution of income during the year, either directly or indirectly, to or for the personal benefit of any director or shareholder. Furthermore, the corporation should be specifically prevented from having the power, at any time in future years, to declare and pay dividends out of income and the possibility of dissolution, winding-up or amalgamation should also be dealt with.

A determination of whether a corporation was operated exclusively for and in accordance with its non-profit purposes in a particular taxation year must be based on the facts of each case which can only be obtained by reviewing all of its activities for that year. Such a determination cannot be made in advance of or during a particular year, but only after the end of the year. An association that qualifies for exemption in a particular year may cease to qualify in a subsequent year by failing to operate in accordance with one of the purposes specified in paragraph 149(1)(l) of the Act, by revising its objectives so that it is no longer organized in accordance with that provision or by otherwise failing to meet the requirements of that paragraph. A review of this nature would be conducted by officials of the applicable Tax Services Office, who would be in a better position to appreciate all the circumstances of the case.

You have also asked whether the corporation would be exempt from "branch tax" under subsection 219(2) of the Act. Generally, if a corporation qualifies as an NPO under paragraph 149(1)(l), it is exempt from "branch tax" under paragraph 219(2)(c) of the Act.

Issue 2:

Paragraphs 8 and 9 of Interpretation Bulletin IT-496R state that it is the view of the CCRA that the accumulation of excess income will not, in and by itself, cause an NPO, resident in Canada or not, to lose its tax-exempt status. Also, in Liuna Local 527 Members' Training Trust Fund v. The Queen, 92 DTC 2365, the court in deciding that there were good and valid reasons for the "excess" accumulation stated that

Interpretation bulletin IT-496 sets out certain practical guidelines which the Department applies in administering paragraph 149(1)(l). Essentially, the bulletin is no more than a notice to the public that if too much income is earned or if large surpluses are accumulated the Minister will draw an inference of fact that the fund is being operated for profit. While I do not wish to give the bulletin a legal effect that it clearly does not have, I can see no reason for criticizing the guidelines set out in paragraphs 8 and 9. Their application, however, depends upon the facts of the particular case.

Issue 3:

You have asked whether the receipt of significant revenues from conferences and other activities will jeopardize an entity's NPO status. It should be noted that the relevant provision of the Act is with respect to profit and not revenues. Furthermore, an entity will not immediately and automatically cease to be exempt under paragraph 149(1)(l) if any of its activities, that are carried on for a purpose other than earning a profit, actually result in a profit. We also recognize that many organizations will undertake activities, including the purchase of investments (e.g. term deposits), which are undertaken specifically to generate a profit, and that this will not necessarily cause the entity to cease to be exempt under paragraph 149(1)(l). The carrying on of for-profit activities does not necessarily preclude a corporation from being an 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 corporation in fact earns profits, they must be wholly expended in accordance with the organization's non-profit purposes.

In the decision of The Gull Bay Development Corporation v. The Queen, 84 DTC 6040 (FCTD), when allowing the corporation's appeal, the court stated that

"The real issue in the present case appears to be that the corporation was not set up, as its Letters Patent indicate, to carry on a commercial activity although it is no doubt true that the motive for forming the corporation may have been that it was desirable to provide employment and training to otherwise unemployed Indians on the Reserve by engaging in a commercial activity which would not only provide such employment but raise funds to be used for the very worthy social and charitable activities required on the Reserve. ...

The social and welfare activities of Plaintiff are not a cloak to avoid payment of taxation on a commercial enterprise but are the real objectives of the Corporation.

... The Corporation is operated "exclusively" for the purpose set out in Section 149(1)(l) pursuant to its charter, even though it may raise funds for this purpose by its commercial lumbering enterprise."

It is situations where the organization devotes an unreasonable amount of its resources or energies to profit-making activities that would cause the organization to lose its tax-exempt status under paragraph 149(1)(l). This is because the profit generating activity would no longer be simply a means of funding the non-profit activities of the organization (i.e. a means to an end), but rather that the earning of profit, in and of itself, has become one of the objectives of the organization.

Issue 4:

You have asked whether the non-profit status of an entity, resident in Canada or not, will be affected by the fact that the entity will pay a reasonable honorarium and/or reimbursement of expenses to its directors.

Paragraph 12 of Interpretation Bulletin IT-496R states that

Certain types of payments made directly to members, or indirectly for their benefit, will not, in and by themselves, disqualify an association from being tax-exempt under paragraph 149(1)(l). Such payments include salaries, wages, fees or honorariums for services rendered to the association, provided the amounts paid are reasonable and no more than those paid in arm's length situations for similar services...

It is our opinion that such payments will not, in and by themselves, disqualify an entity from being an NPO under paragraph 149(1)(l) of the Act.

Issue 5:

If it is determined that a non-resident corporation is an NPO as described in paragraph 149(1)(l) of the Act, its taxable income will not be subject to any Part I tax. Section 105 of the Regulations is applicable for the fees paid by Canadian members to the non-resident corporation. However, the non-resident corporation may apply to the applicable Tax Services Office for a waiver in respect of the Regulation 105 withholding as explained in Information Circular 75-6R.

We trust these comments will be of assistance.

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