Tourbec (1979) Inc. v. Minister of National Revenue, [1988] 2 CTC 2071, 88 DTC 1442

Couture, C.J.T.C. [Translation]:—These appeals concern assessments issued by the respondent for the 1980, 1981 and 1982 taxation years, dated March 1, 1985, in which the respondent disallowed the non-profit organization status claimed by the appellant which would have exempted it from income tax under the provisions of paragraph 149(1)(I) of the Income Tax Act (the "Act"). The facts relating to this appeal were recounted by the general manager of the appellant during the relevant period, Mr. Jean-Marc Eu- stache.

The appellant is the successor corporation to another corporation of the same name which had been originally incorporated in 1964 by the Union Générale des Etudiants du Québec and which was at that time called Le Bureau de Tourisme de I'UGEQ. In 1966, that name was changed to Tourbec Inc. The corporation went bankrupt in 1978 and in 1979 the appellant was incorporated under Part III of the Companies Act, c. C-38 of the Revised Statutes of Québec 1977.

The objects of the corporation are enumerated in article 5 of its Letters Patent and are as follows:

1. To act as a travel agent;

2. To promote tourism in Québec;

3. To organize trips and extended stays within Québec, more particularly for students and for young people in general, both from Québec and elsewhere;

4. To co-operate with the Ministries and government bodies with a view to promoting the discovery of Québec in all its touristic and cultural aspects;

5. To organize and operate inns and other places of accommodation and dining.

Its Letters Patent also provided that, in the event of the liquidation of the corporation ora a distribution of its property, its property would be passed on to an organization carrying on similar activities.

During the years under appeal, the appellant carried on a travel agency business as authorized by its Letters Patent.

In addition to carrying on that business, the appellant was also involved in promoting and offering to students and young people trips, both to Europe and within the Province of Québec. The meaning attributed to the words "young people" by the appellant for the purposes of its operations was persons under the age of 35.

In response to a question of the Court, the witness explained the appellant's modus operandi:

Q. Does Tourbec, the company in which you are involved, offer the same services to the general public? If I were to go to Tourbec myself, could I arrange a trip?

A. Yes. Ever since 1969, Tourbec has been dealing not only with students and young people but with the general population as a whole but, if you are not a student, or if you are not a young person, there are services to which you are not entitled. For example, Tourbec has access to an air fare which is a government agreement, a government order, between France and Canada and which is not a fare subject to normal airline regulations. It is a government order limited to young people under the age of 35. It is one of the reasons that the term "young people" was restricted to a maximum age of 35 and you would not be entitled to those fares. (The reference to the year 1969 refers to the predecessor company to the appellant.)

Another question put to the witness by the Court was the following:

Q. Mr. Eustache, can you tell me the proportions of Tourbec’s income that come from students and young people and from people outside those groups?

A. In terms of sales figures?

Q. In terms of sales figures.

A. In terms of sales figures, approximately, I would say in the order of 25% of the sales are directly to students and young people, and about 75% are to the general population.

The appellant was thus offering to the student population and to the young people of Quebec travel-related products to which other travel agencies did not have access. For example, as mentioned above, the cultural exchange air fare which resulted from an agreement between the Canadian government and the French government under which students could travel between France and Québec at reduced rates. There was a whole range of programs which was promoted by Tourbec to benefit students and for which Tourbec received a reduced commission or in certain cases, no commission. Tourbec also sold student cards which allowed them to travel around the world and to obtain certain discounts. What effectively happened was that Tourbec used the revenues that it received from its regular sales, that is the sales to the general public, to subsidize to a certain extent certain services that were reserved exclusively to its customers who were students and young people. Tourbec was not part of the international organization known as I.A.T.A. (International Air Transport Association). Because of this, it was unable to issue airline tickets and for its ticketing, it used another travel agency called Voyages Hone. Voyages Hone issued the tickets, sold them to the appellant which in turn resold them at a discount, that is, at a loss to its customers who were students or young people.

According to the witness, a travel agency must make about 12 per cent on its gross sales revenues to cover its expenses, and the part of its operations aimed at students and young people did not return such a margin of profit. It was therefore through its operations aimed at the general public that the appellant was able to assist or subsidize those other customers.

Another source of income for the appellant, in addition to the sale of tickets, was the interest earned on a trust account. The Travel Agents Act, chap. A-10 of the Revised Statutes of Québec 1977 requires operators of such businesses to deposit in trust any funds that they receive on behalf of others. The interest credited to that account remains the property of the agents.

The profits made by the appellant according to its financial statements for the taxation years under appeal were as follows: 1980 — $30,896; 1981 — $40,944 and 1982 — $149,106. For the taxation year 1979, which is not under appeal, the appellant made, according to Mr. Eustache's evidence, a profit of about $15,000. For the years following those years under appeal, that is 1983 and 1984, the company actually suffered losses in the order of $78,529 and $103,039. For 1985, again according to Mr. Eustache's evidence, it made a profit of about $35,000 and for 1986 it expected an operating surplus of $5,000. The retained earnings of the appellant according to its financial statements increased from $33,464 at December 31, 1980 to $223,514 at December 31, 1982.

The question that the Court must decide is whether the appellant qualifies as a non-profit organization within the meaning of paragraph 149(1)(l), taking into consideration the nature of its operations and the profits that it made during the years under appeal. The section reads as follows:

149(1)(l) Non-profit Organizations. A club, society or association that, in the opinion of the Minister, was not a charity within the meaning assigned by subsection 149.1(1) and that was organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, no part of the income of which was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof unless the proprietor, member or shareholder was a club, society or association the primary purpose and function of which was the promotion of amateur athletics in Canada.

It should be noted that the section requires a non-profit organization to have, as its sole purpose, social welfare, civic improvement, pleasure or recreation or any other purpose except profit. The English version of the provision reads "must be organized and operated exclusively for social welfare, civic improvement, pleasure or recreation, or any other purpose except profit." In British Launderers Research Association v. Central Middlesex Assessment Committee and Hendon Rating Authority, [1949] 1 All E.R. 21, Lord Denning, in interpreting a similar provision, stated the following with respect to the expression "exclusively":

There is one thing which is clear both on the wording of the statute and on the cases. The word “exclusively” must be given its full effect. It is not sufficient that the society should be instituted "mainly" or “primarily” or “chiefly” for the purposes of science, literature, or the fine arts, it must be instituted "exclusively" for those purposes.

The fact that the appellant was incorporated under Part III of the Companies Act, that is under the provisions governing the incorporation of nonprofit companies, is not the criterion that establishes whether it is in fact a non-profit organization within the meaning of paragraph 149(1)(l). In Sutton Lumber and Trading Co. Ltd. v. M.N.R., [1953] C.T.C. 237; 53 D.T.C. 1158, the Supreme Court of Canada stated, at page 244 (D.T.C. 1161), the following:

The question to be decided is not as to what business or trade the company might have carried on under its memorandum, but rather what was in truth the business it did engage in. To determine this, it is necessary to examine the facts with care.

The facts disclosed by the testimony of the witness for the appellant in my opinion demonstrate clearly that it was carrying on a business concern much the same as any other travel agency. From its operations, it made quite considerable profits, at least during the years under appeal. It made a financial contribution, according to its submissions, to certain customers, that is students and young people who used its services.

Given the facts, I cannot accept the appellant's submissions to the effect that it was an organization whose sole purpose was among those referred to in section 149(1 )(I) of the Act. The philanthropic aspect of its operations was only incidental to its primary purpose which was to carry on a travel agency business. That incidental aspect could not have been achieved unless it had been able to make profits from its primary business.

In the Supreme Court of Canada decision Woodward's Pension Society v. M.N.R., [1962] C.T.C. 11; 62 D.T.C. 1002, the following facts are noted:

The appellant organization was incorporated by a group of affiliated Woodward companies operating stores in various cities. The appellant's object was to assist in providing funds for the payment of pensions to employees of the Woodward companies. For this purpose, it was to acquire shares in the operating companies and to sell them to the employees thereof. Its surplus funds were to be paid from time to time to appointed pension trustees. Shares of the various Woodward companies were acquired at par. They were sold to employees at par on an instalment plan, interest at the rate of 4% being charged on the outstanding balances. In 1953 the appellant had net interest income of some $31,000. The Minister levied tax on this amount. The appellant objected on the ground that it was exempt from tax as a non-profit organization under the provisions of section 62(1)(i), maintaining that it was a society organized and operated exclusively for a purpose "except profit”. The appellant also argued that the interest it received should not be treated as income in its hands because it was obliged to pay the interest to the pension trustees, and that it was merely a trustee of its surplus funds. When the Exchequer Court dismissed its appeal (59 DTC 1253), the appellant took its case to the Supreme Court of Canada.

The case was on appeal from a decision of the Exchequer Court of Canada (as it then was) and the Honourable Mr. Justice Judson stated the following at page 14 (D.T.C. 1004):

The sole question under this section is whether the appellant was a society "organized and operated . . . for any other purpose except profit”. The judgment of the Exchequer Court under appeal holds that the appellant had failed to bring itself within that subsection. The learned President found that the purpose for the organization of the appellant was a very limited one, namely, to earn money for the purpose of providing funds for the payment of pensions by the pension trust and that this was achieved by profitable dealings in the shares of the various Woodward stores.

It is true that the appellant is not an ordinary commercial company but a society incorporated under the Societies Act, R.S.B.C. 1936, c. 265, that no part of the appellant's property is payable to or otherwise available for the personal benefit of any proprietor, member or shareholder, and that the appellant was organized for the stated object and purpose of assisting in the provision of funds for pensions to be paid to employees and ex-employees of the stores. Nevertheless, this last- named purpose could not be achieved without the share sale plan which was designed to make a profit to enable the payments to be made to the pension trustees. In the taxation year in question the appellant earned in interest alone the sum of $31,525.58, a sum which went a long way towards the payments which were made to the pension trustees. The appellant has entirely failed to establish that it was organized and operated exclusively for a purpose other than profit and the findings of the learned President that it was both organized and operated for a profitable purpose are unassailable. This ground of appeal therefore fails.

As in the Woodward's case, the appellant's philanthropic purpose or object could not have been achieved unless it had carried on its business which was a commercial operation for profit.

For these reasons, the appeal is dismissed.

Appeal dismissed.