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.
Dear Sirs:
Re: Non-profit club
This is in reply to your letter of July 17, 1991, addressed to the Toronto District Taxation Office, concerning the taxation of guest fees. You ask whether or not the fees received from individuals and other persons who are not members of a non-profit ski or golf club are taxable in the hands of the non-profit club. In this regard you seek our views.
Generally, where the facilities of an organization are available to non-members and used by them to a significant degree with the result that:
- (a) activities carried on for the members are subsidized by the profits earned from non-members because the fees or assessments charged to the members are either well below cost or nil
or
- (b) profits from non-members are used to acquire and maintain facilities or other properties which the members use for no charge or for a fee well below cost.
the income of the organization would be considered payable to or available for the benefit of members and as a result the non-profit club would no longer qualify under paragraph 149(1)(l) of the Income Tax Act (the "Act") and cease to qualify for the income tax exemption for that year. Accordingly, the income earned by the club in that year would be taxable.
This would not be the case where the facilities are used by bona fide guests of members. A person would be considered to be a bona fide guest of a member if the guest was a spouse, parent or child of the member. Other bona fide guests of members include individuals where the member is required to be present with his guest, and there are reasonable restrictions on the number of guests a member may have at any one time and on the number of times a person can be invited to participate in the organization's activities as the guest of a member.
In our view, where a non-profit club receives income from bona fide guests such income would form part of the total income of the club and provided the club otherwise maintains its non-profit objectives and operates exclusively for pleasure or recreation or for any other purpose except profit, the income would not be taxable. The use of the word "exclusively" from a strict technical view means 100%.
However, subsection 149(1)(l) of the Act contemplates that an organization may carry on income generating activities and earn a profit and still qualify for exempt status. Accordingly, in our view, provided the profits earned from the guest fees serve solely to contribute to the club's objectives, provided of course that the regular members do not pay fees well below costs, the income from the guest fees would not, in and by themselves, disqualify the club from claiming the tax exemption. Although, it would be a question of fact, if the profits earned from the non-members are excessive, in our view, the club would not be operating "exclusively" towards its non-profit objectives.
Notwithstanding that a particular organization is qualified to be a tax exempt pursuant to paragraph 149(1)(l) of the Act, it may pursuant to subsection 149(5) of the Act, be subject to tax on its property income and on certain taxable capital gains. The guest fees form part of the business income of the club while the investment income such as interest is property income. Consequently, the guest fees are treated differently than investment income.
While it is true that a private operator pays income tax on all his income that make up the net profits for the year, non-profit clubs are generally operating at a break-even basis; any incomes that are earned by the tax exempt must be used to further their non-profit objectives.
These comments set out our understanding of the provisions of the Income Tax Act with respect to non-profit organizations. If you have concerns with respect to the policies reflected in the law, we suggest you correspond with the Tax Policy - Legislation Division of the Department of Finance, L'Esplanade Laurier, 140 O'Connor Street, Ottawa, K1A 0A6.
We trust our comments are of assistance to you.
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© Her Majesty the Queen in Right of Canada, 1991
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© Sa Majesté la Reine du Chef du Canada, 1991
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