7 January 1991 Income Tax Severed Letter - Non-profit Organizations

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 Organizations

This is in reply to your letter of December 6, 1990, concerning a Consumer and Corporate Affairs' Policy Statement of October 6, 1988, and in particular the bottom of page 4 and the top of page 5 which deals with the distribution of property on its dissolution. You are concerned that the statement appears to differ from that of Revenue Canada's administrative policy set out in Interpretation Bulletin IT-496, dated February 18, 1983.

A taxpayer may incorporate under either the provincialBusiness Corporations Actor under theCanada Business Corporations Act, with or without share capital. The policy statement by Consumer and Corporate Affairs discusses policy permitting the inclusion in a corporation's by-laws of certain provisions not specifically dealt with in Part II of theCanada Corporations Act, that is, incorporations which do not involve share capital. A corporation, however, must be organized to meet the purpose of paragraph 149(1)(l) of theIncome Tax Actif the taxpayer wishes to claim an exemption under that paragraph.

To establish the purpose for which a corporation was organized, the Department will normally look to the instruments by which it was created, e.g., articles of incorporation or by-laws. Accordingly, in our view, the by-laws should specifically prevent the distribution of income during the year, either directly or indirectly, to or for the personal benefits of any director or shareholder. 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. Paragraph 11 of IT-496, suggests that enabling documents may provide that all of the “. . . assets and accumulated income are to be transferred to an organization with similar objects that qualifies for exemption pursuant to paragraphs 149(1)(f) or (l) of the Act”.

It should be noted that the Department has taken the view that if letters patent, trust documentation or by-laws of an entity indicate that more than the return of capital or taxable capital gains (as provided by subsection 149(2) of the Act) may be available to members or shareholders by way of dividend or otherwise, whether on wind-up or otherwise, such entity will not receive tax exempt treatment. The “property” referred to in paragraph c.3 of the Consumer and Corporate Affairs Policy statement can only be distributed on dissolution to members or anyone else up to the return of capital of the member or taxable capital gains (as provided by subsection 149(2) of the Act) if so specified in the charter. Moreover, the policy statement does not give any assurance that a court would find the provisions contained to be validly authorized by theCanada Corporations Actor theIncome Tax Act.

The non-profit status of the corporation will be dependent however on its ongoing satisfaction of the criteria in paragraph 149(1)(l) of the Act. The determination of whether an entity was operated exclusively for and in accordance with its non-profit purposes in a particular taxation year must be based on the facts which can only be obtained by reviewing all of its activities for the fiscal period for which it seeks to be exempt from tax. Such a determination cannot be made in advance of, or during a particular year but only after the end of the year.

We trust our comments are of assistance.