22 July 2002 External T.I. 2001-0099665 - NPO EXCESS INCOME REASONABLENESS

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: Accumulated surplus and cash reserves - effect on non-profit organization's tax-exempt status under paragraph 149(1)(l)

Position:     		General Comments.

Reasons: A determination of whether an organization is "operated" exclusively for non-profit purposes is a question of fact that can only be determined by reviewing all the facts of a particular case at the end of a particular year.

XXXXXXXXXX
									2001-009966
B. Kerr
July 22, 2002

Dear XXXXXXXXXX:

Re: Paragraph 149(1)(l) of the Income Tax Act (the "Act")

This is in response to your letter of August 31, 2001, concerning non-profit organizations. In particular, you do not understand how "the amount and pattern of receipts from various sources" could be relevant in determining the reasonableness of the accumulated excess of revenue over expenditures, as stated in paragraph 9 of Interpretation Bulletin IT-496R, dated August 2, 2001. When IT-496 was in the process of being reviewed and revised, you wrote to the Canada Customs and Revenue Agency ("CCRA") expressing your concerns about the inclusion of this statement.

Our Comments

Paragraph 149(1)(l) of the Act provides an exemption from Part I tax on the taxable income of a person for a period where that person was a club, society or association that, inter alia, was organized and operated exclusively for social welfare, civic improvement, pleasure or recreation, or for any other purpose except profit. The determination of whether a person qualifies under paragraph 149(1)(l) is always a question of fact.

The purpose of IT-496R, "Non-Profit Organizations" is to set out the conditions that a club, society, or association must meet to qualify as a tax-exempt non-profit organization and to comment on some of the factors that are considered when determining whether it is tax-exempt in a particular taxation year.

We can assure you that the comments contained in your letter of March 19, 1996 sent on behalf of XXXXXXXXXX concerning draft IT-496R were considered prior to its issuance. We would like to clarify that the comments in paragraph 5 - 10 are in reference to the annual determination of whether a club, society or an association was "organized and operated exclusively" for non-profit purposes. In particular, paragraph 5 and 6 provide examples of the types of associations that may be considered organized for non-profit purposes. Paragraph 7 discusses situations where an association may be regarded as carrying on a business and therefore not qualify as a non-profit organization. It also discusses circumstances under which an association may carry on income generating activity and still qualify as tax-exempt. Paragraph 8 recognizes that an association, which earns income in excess of its expenditures for a particular year, may want to maintain part of such excess as an operating reserve. However, it also indicates that if a material part of the excess is accumulated each year and such excess is greater that the associations reasonable needs to carry on its non-profit activities, profit will be considered to be one of the purposes for which the association was operated. Paragraph 9 sets out guidelines concerning the amount of accumulated excess income that would be considered reasonable in relation to the needs of an association. This paragraph concludes by stating that when the balance of accumulated excess is excessive or an annual excess is regularly accumulated, this may be an indication that the association's aims are two-fold. (i.e. to earn profits and to carry on its non-profit activities.) If it is established that an associations aims are two-fold, the association will not meet the operated exclusively for non-profit purposes requirement in paragraph 149(1)(l) of the Act. We would note that a reference to "accumulated excess income" in paragraph 9 is not a reference to "accumulated surplus" or "cash reserves".

The accounting terminology that may be used by an association to categorize its accumulated excess income as surplus or reserve amounts may be a useful indicator of whether or not such amounts are needed to carry on non-profit activities. The CCRA recognizes that over an accounting period an association may generate an excess of income over expenditures and this fact, in and of itself, will not cause an association to be considered to be operating on a for-profit basis. Where, however, an excess of income over expenditures persists over a longer cycle of operations, the CCRA may consider that an association has a profit purpose, regardless of how such amounts may be recorded for accounting purposes.

We trust that these comments will be of assistance.

Yours truly,

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