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.
Principal Issues: 1. Whether the conversion of DLCC to a non-share capital corporation impacts whether it meets the requirements of paragraph 149(1)(l) of the Act?
2. Is there any disposition on the conversion of the DLCC from a share-capital corporation to a non-share capital corporation?
3. If there is a disposition, will section 51 of the Act apply?
4. Is the DLCC required to file a T1044 Non-profit Organization (NPO) Information Return under subsection 149(12)?
5. Whether the continuance of the DLCC under the Canada Business Corporations Act (the “CBCA”) or the Canada Not-for-Profit Corporations Act (the “CNFPCA”) would, in and by itself, impact its qualification for the income tax exemption under paragraph 149(1)(l)?
Position: 1. The conversion to a non-share capital corporation, in and by itself, does not impact whether it qualifies under paragraph 149(1)(l).
2. In circumstances where, as a matter of law, the shares of a corporation are converted to membership interests without the shares being redeemed, acquired or cancelled, the CRA would not consider the shareholders to have disposed of their shares provided the rights and privileges of the shareholders have not been modified in a substantive way.
3. In cases involving the conversion of a share to a membership interest in a non-share capital corporation, section 51 does not appear to have any application.
4. Maybe, if its income from dividends, interest, rentals or royalties exceeds $10,000 in the fiscal period.
5. No, it is a question of fact.
Reasons: 1. It is a question of fact whether DLCC qualifies for the exemption under paragraph 149(1)(l). It is possible for an organization to meet the requirements of federal or provincial “not-for-profit” corporate legislation, but not qualify for the tax exemption provided under paragraph 149(1)(l).
2. In circumstances where, as a matter of law, the shares of a corporation are converted to membership interests without the shares being redeemed, acquired or cancelled, the CRA would not consider the shareholders to have disposed of their shares provided the rights and privileges of the shareholders have not been modified in a substantive way.
3. Section 51 of the Act would apply only if a membership interest qualified as a “share of the capital stock” of the corporation.
3. Subsection 149(12) of the Act
4. Whether the corporation qualifies for the tax exemption under paragraph 149(1)(l) is a question of fact and is not dependent on whether the corporation is continued under the Canada Business Corporations Act or the Canada Not-for-profit Corporations Act.
May 1, 2023
XXXXXXXXXX 2021-092110
Ananthy Mahendran
Dear XXXXXXXXXX:
Re: XXXXXXXXXX (the “DLCC”)
This is in reply to your correspondence of March 8, 2021, to the XXXXXXXXXX and XXXXXXXXXX tax centres, wherein you asked for their comments on various issues related to the situation described below. Your correspondence was forwarded to this Directorate on December 13, 2021.
Per your description of the situation, the DLCC was incorporated as a share-capital corporation under the XXXXXXXXXX Act (the “DLCC Act”) and operates a XXXXXXXXXX club for the purposes of pleasure and recreation of the members and of the community. The DLCC Act was repealed on XXXXXXXXXX, and the DLCC was continued under the Corporations Act (XXXXXXXXXX) as a non-share capital corporation. The DLCC shares were exchanged for membership interests.
You stated that the DLCC shareholders/members did not take any profits from the DLCC and all amounts earned by the DLCC are invested into maintaining the XXXXXXXXXX club. Pursuant to the articles of amendment filed under the Corporations Act (XXXXXXXXXX) and the by-laws of the DLCC, the DLCC is restricted from operating the XXXXXXXXXX club for the purpose of profit of its members, directors, or officers.
In this letter, unless otherwise expressly stated, all statutory references are to the provisions of the Income Tax Act (the “Act”).
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations.
Whether the conversion of DLCC to a non-share capital corporation impacts whether it meets the requirements of paragraph 149(1)(l) of the Act?
In general terms, paragraph 149(1)(l) provides that the taxable income of an organization is exempt from tax under Part I of the Act for a period throughout which the organization meets all of the following conditions:
- it is a club, society or association;
- it is not a charity;
- it is organized and operated exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit; and
- its income is not available for the personal benefit of a member or shareholder.
For purposes of paragraph 149(1)(l), an organization may be a share capital or non-share capital corporation, however, no part of the corporation’s income may be payable to or available for the personal benefit of any shareholder or member of the corporation.
Further, as noted above, paragraph 149(1)(l) requires that an organization be organized and operated “exclusively for any other purpose except profit” in order to be exempt from tax under that paragraph. In our view, the use of the word “exclusively” indicates that while an organization may have many purposes, none of those purposes may be to earn a profit. Thus, where an organization intends, at any time, to earn a profit, it will not be exempt from tax under paragraph 149(1)(l) even if it expects to use or actually uses that profit to support its not-for-profit objectives.
Whether any particular corporation (with or without share capital) has met the requirements of paragraph 149(1)(l) for any specific time period is a question of fact that can generally only be determined after the end of the organization’s fiscal year.
Further, it is possible for an organization to meet the requirements of federal or provincial “not-for-profit” corporate legislation, but not qualify for the tax exemption provided under paragraph 149(1)(l). The conversion to a non-share capital corporation, in and by itself, does not impact whether it qualifies under paragraph 149(1)(l). Consequently, we cannot confirm that the DLCC operated in a manner which satisfies the requirements of paragraph 149(1)(l) before or after it converted to a non-share capital corporation.
Is there any disposition on the conversion of the DLCC from a share-capital corporation to a non-share capital corporation?
In circumstances where, as a matter of law, the conversion of the shares of a corporation to membership interests results in the cancellation, acquisition, or redemption of the shares, the determination as to whether there has been a disposition of the shares would normally be resolved by reference to paragraph (b) of the definition of “disposition” in subsection 248(1). This paragraph states that, except as expressly otherwise provided, a disposition includes any transaction or event by which, among other things, a share is in whole or in part redeemed, acquired, or cancelled.
If, as a matter of law, the shares of the DLCC were converted to membership interests without the shares being redeemed, acquired, or cancelled, we would not consider the shareholders to have disposed of their shares provided the rights and privileges of the shareholders have not been modified in a substantive way. For general guidance on when a modification to the rights and privileges attached to a share may, or may not, result in a disposition, see paragraphs 9 – 16 in Interpretation Bulletin IT-448, Dispositions – Changes in Terms of Securities (Archived).
If there is a disposition, will section 51 of the Act apply?
If the circumstances of the conversion are such that the shares have been disposed of by the shareholders in consideration for membership interests, we note that section 51 would apply only if a membership interest qualified as a “share of the capital stock” of the corporation.
The term “share” is defined in subsection 248(1) as follows:
Except as the context otherwise requires, means a share or a fraction of a share of the capital stock of a corporation and, for greater certainty, a share of the capital stock of a corporation includes a share of the capital of a cooperative (within the meaning assigned by subsection 136(2)), a share of the capital of an agricultural cooperative corporation (within the meaning assigned by subsection 135.1(1)) and a share of the capital of a credit union.
In technical interpretation 2013-0473771E5, we confirmed that a person who has a membership interest in a non-share capital corporation would not be considered to hold a share in that corporation. Accordingly, in cases involving the conversion of a share to a membership interest in a non-share capital corporation, section 51 does not appear to have any application.
For guidance on computing a capital gain or loss on the disposition of a share, please refer to the most recent version of Guide T4037, Capital Gains.
Is the DLCC required to file a T1044 Non-profit Organization (NPO) Information Return under subsection 149(12)?
Where paragraph 149(1)(l) applies to a corporation, it is required to file a T1044 information return within 6 months after the end of each fiscal year if one of the following conditions in subsection 149(12) is met:
- it received or is entitled to receive taxable dividends, interest, rentals or royalties totaling more than $10,000 in the fiscal year;
- it owned assets valued at more than $200,000 at the end of the immediately preceding fiscal year; or
- it had to file a T1044 information return for a previous fiscal year.
You are of the view that the DLCC does not need to file a T1044 information return for 2021 as it did not have more than $200,000 of total assets at the end of the immediately preceding fiscal year. However, as noted above there are two other conditions. Based on the 2020 financial statements you provided, it appears plausible that the DLCC may have had income from rentals exceeding $10,000 in 2021. When determining if a corporation had income from rentals exceeding $10,000, it should not deduct any related rental expenses. In other words, it is the gross rentals. If the DLCC did meet this condition or was required to file a T1044 information return in a prior year, it would be required to file a T1044 information return for 2021.
Whether the continuance of the DLCC under the Canada Business Corporations Act (the “CBCA”) or the Canada Not-for-Profit Corporations Act (the “CNFPCA”) would, in and by itself, impact its qualification for the income tax exemption under paragraph 149(1)(l)?
The CNFPCA sets out how an organization must be organized and operated if it wants to be considered a not-for-profit under that legislation. While we cannot comment in detail on the CNFPCA, we note that the criteria contained in the CNFPCA are not the same as the criteria required to qualify for the income tax exemption under paragraph 149(1)(l). In particular, the CNFPCA provides that “no part of a corporation’s profits or of its property or accretions to the value of the property may be distributed, directly or indirectly, to a member....except in furtherance of its activities...” This suggests that organizations incorporated under this statute can operate with a profit purpose, as long as that profit is used by the organization to support its objectives.
As discussed above, in our view, any profit purpose prevents a corporation from qualifying for the income tax exemption under paragraph 149(1)(l). Consequently, it is possible for a corporation to meet the requirements of the CNFPCA, but not qualify for the tax exemption provided under paragraph 149(1)(l). Therefore, whether the DLCC qualifies for the tax exemption under paragraph 149(1)(l) is a question of fact and is not dependent on whether it is continued under the CNFPCA or the CBCA.
We trust these comments will be of assistance to you.
Yours truly,
Ms. Nerill Thomas-Wilkinson, CPA, CA
Manager
Non-Profit Organizations and Indigenous Issues Section
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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