Section 149

Non-resident doctors, who come to Canada to participate in post-graduate residencies and sub-specialty fellowships at various Canadian medical schools, are paid a salary by the foreign government, but with a "top-up" amount paid by the respective university out of a fund provided in advance to the university by XX, in order to ensure that their salaries are equivalent to their Canadian counterparts under various collective agreements.

CRA found that under s. 149(1)(a):

the Doctors will not pay income tax under Part I of the Act on any of their taxable income, including investment income. For purposes of paragraph 149(1)(a), we will consider the top-up amount referred to above to be paid by the XX Government.

After indicating that where a registered pension plan trust made a distribution-in-kind to a member, the resulting inclusion of the distributed property’s FMV in the member’s income pursuant to s. 56(1)(a)(i) meant that such amount was deemed to be the cost of the property to the individual pursuant to s. 52(1), CRA went on to indicate that pursuant to the exemption in s. 149(1)(o), “any taxable capital gain arising from the disposition of the property distributed from the RPP to the member will not give rise to any Part I tax to the RPP trust.”

In response to a question as to whether an “organization” that was an inter-municipal authority held by four regional county municipalities was eligible for the Canada emergency wage subsidy ("CEWS"), CRA indicated that an “entity may be an ‘eligible entity’ for CEWS purposes, provided that it is not a ‘public institution,’,” whose definition included an organization described in s. 149(1)(c).

In the course of a general discussion, CRA noted that:

The term "municipality" is not defined in the Act. However, we are of the view that a "regional county municipality", which is an entity constituted by letters patent issued by the Government of Québec and which was provided for the purpose of land use planning following the adoption of the Act Respecting Land Use Planning and Development, is a municipality for the purposes of the Act.

In the course of a general discussion as to whether a registered charity would be excluded from being an eligible entity by virtue of being a “public institution” as defined in s. 125.7(1), CRA stated:

In our view, a “municipal or public body performing a function of government in Canada” was meant to apply to entities that while not legally municipalities, nevertheless possessed attributes of municipalities and provided services similar to those provided by municipalities. Historically, the CRA has required that to be performing a function of government, an entity must have the ability and powers to govern, tax, pass by-laws and provide municipal type services to its members/citizens.

A Park was established to encourage an appreciation and use of natural and recreational resources, was authorized under its constituting [Statute?] to make park bylaws and to appoint a constable to enforce them, was funded out of earmarked municipal levies and it was subject to oversight by representatives of participating municipalities or organizations, or volunteers as representatives to the Park. Before finding that the Park was a public body, and after stating that "the first condition is that the organization must be a municipal or public body and the second condition is that it must perform a function of government," CRA stated:

Generally, a public body has a governance purpose and is accountable to those governed, regulated or represented by it. ... [I]f a public body is incorporated, the federal government or a provincial or territorial government or the "public" that the corporation is serving or representing should have some specific control over the actions and operation of the corporation and the corporation should be accountable to that government and that public.

Respecting the second condition, CRA stated "providing a range of municipal-type services or providing a key service traditionally offered by the provinces or territories such as social services, oversight of the environment, health services, and education is generally considered to constitute performing a function of government," and then stated:

It is not sufficient to merely state that they are providing several municipal type services. A review of the Park's financial statements fails to show any significant expenditure on infrastructure such as roadways, buildings, and sewer systems it claims to be providing. …

In addition, while the Park… has not provided any evidence to support that they have in fact passed bylaws. …

Other evidence to support that the Park is performing a function of government may include:

• a copy of an agreement with a neighboring municipality to provide fire protection or waste removal services,
• invoices from organizations subcontracted to provide the municipal type services on behalf of the Park, and
• the name of the municipality that is charged with collecting taxes on behalf of the Park and the agreement that governs the relationship.

A First Nation is governed by an elected chief and band council, has passed by-laws respecting zoning, health and emergency measures, operates a health centre, provides fire protection and policing, delivers employment training and adult education programs and is Ruling that responsible for all aspects of housing on the Reserves. Ruling that income allocated to the First Nation from a limited partnership is exempt from tax because the First Nation is a public body performing a function of government.

The Council, which is a governing body made up of the elected chief or other authorized designate (e.g. tribal chief) of the Band Council for each Band comprising the "Nation," is authorized by the Bands to speak for them and make decisions on their behalf with respect to issues important to the Nation, including resource issues (e.g., protection of ecologically sensitive lands on the "Territory") and government-to-government negotiations, has developed and enforced various codes and applies distributions from a trust for a range of matters including environmental, heritage, education and administration.

Ruling that it is a s. 149(1)(c) public body.

In the course of a general discussion and before indicating that certain agencies and boards likely did not qualify, CRA stated:

The CRA's previous position was that an entity could be considered a municipality for the purpose of paragraph 149(1)(c) of the Act on the basis of the functions it exercises. However, in Tawich Development Corporation v. Deputy Minister of Revenue of Quebec [2001 D.T.C. 5144], the Quebec Court of Appeal found that merely exercising municipal functions was not sufficient to attribute to a body the status of a municipality. Instead, the Court held that this status could only be achieved as a result of statute, letters patent or order (in other words it has to be created by the province).

An Indian Band governed by an elected chief and band council, which provides a wide range of listed health, social, educational and economic services to its members, is ruled to be a public body performing a function of government in Canada within the meaning of s. 149(1)(c).

CRA confirms that 2009-0306281I7 and 7 March 2013 Memorandum 2011-0428491I7 continue to represent its position on s. 149(1)(c).

A municipal body is typically considered to be a body established or exercising a power under a municipal act or a similar statute of a province or territory with respect to governing the affairs or purposes of a geographic area and is accountable to those governed by it.

Generally, a public body is:

1. An Indian band as defined in the Indian Act with procedures to elect Chief and council.
2. Other Aboriginal governments with election procedures.
3. A body (whether incorporated or not, the members of which may be elected or appointed) established under or as a result of implementing a statute with specific authorization and duties assigned by the statute to the body to develop, administer or regulate governance functions.

A function of government generally means an activity or group of activities undertaken to meet a governance role or purpose within a geographic area. Historically, the CRA has required that to be performing a function of government an entity must have the ability and powers to govern, tax, pass by-laws and/or provide municipal- or provincial-type services to its members/citizens.

CRA has accepted that providing a range of municipal-type services, such as water, sewage removal, the pick-up of garbage and the maintenance of infrastructure such as roads, sewers and public buildings is a function of government. Further, providing a key service traditionally offered by the provinces or territories such as social services, overseeing of the environment, health services, and education is generally considered to constitute performing a function of government. The CRA also accepts that negotiating a treaty with the federal government, or a provincial or territorial government, is a function of government.

On behalf of a First Nation body, the correspondent sought tax-exempt treatment for the following:

36. The First Nation is currently negotiating the XXXXXXXXXX, as described in 33 above [the particulars of which were redacted], with the Government of Canada. Once an agreement is reached, the First Nation will be in receipt of a large amount of compensation funds from the Government of Canada pursuant to that agreement.

The First Nation has implemented a Financial Management by-law for the purposes set out in s. 83(1) of the Indian Act; is in the process of entering into a joint land code and transfer agreement with Aboriginal Affairs; and provides fire, ambulance, police, water, garbage collection, electricity and health procurement, community support and school bus services and "an extensive list" of "public works, social services and infrastructure programs." It also provides housing for eligible members and primary schooling, and has passed 24 by-laws pursuant to s. 81 of the Indian Act. In granting the requested ruling, CRA stated:

The First Nation is a public body performing a function of government in Canada within the meaning of paragraph 149(1)(c) of the Act and, accordingly, no tax will be payable under Part I of the Act by the First Nation on receipt of the compensation funds from the Government of Canada as described in 36 above.

S.149(1)(c) would apply to exempt income allocated to a First Nation band on a limited partnership interest held by it in a partnership engaged in fishing, given that the band would be considered to be a public body performing a function of government in Canada.

Ruling that a First Nation would be considered a public body performing a function of government in Canada, so that income attributed (under s. 75(2) or payable (under s. 104(13)) to it by a personal trust settled by it would be exempt.

"Indian band councils do not qualify as ... municipalities ... . They may, however, depending on all the circumstances, be a 'public body performing a function of government in Canada' and therefore be exempt from tax under paragraph 149(1)(c) ..."

It is CRA's position that a corporation that is a non-share corporation has its ownership determined with reference to the capital of the corporation; as the word 'capital' is not defined for this purpose, in determining the ownership of the corporation's capital CRA will look to factors such as the identity of the members, the structure of the corporation, who has the right to elect the board of directors, details regarding asset distributions on a winding-up or dissolution and whether a person other than the government has a right to acquire any capital of the corporation.

A regional district in B.C. is a Canadian municipality for purposes of s. 149(1)(d); and s. 149(1)(d) applies to a corporation owned by more than one municipality.

"The expression 'Her Majesty in Right of a Province' includes agents of Her Majesty in right of the province."

The expression "capital" does not include loans made to the corporation. "In our view, where the organization is a corporation with share capital, ownership is determined with reference to the corporation's shares and where it is a corporation without share capital, a commission or an association, ownership is determined with reference to the capital of the organization."

S.149(1)(d) is satisfied where at least 90% of the shares of the corporation are held by a combination of qualifying entities, eg., more than one municipality.

S.149(1)(d)(i) applies where a corporation, 90% of whose shares are held by the Crown, has the right to redeem those shares.

In order to qualify for the exemption, a corporation must actually be under the control of the municipality and not merely nominally owned by it.

In response to an inquiry on the Crown corporation branch of the definition of a public institution in s. 125.7(1) of the CEWS rules, CRA first paraphrased the rules in ss. 149(1)(d) to (d.6) as well as referring to the deeming rule in s. 149(1.1), and then indicated that, in determining the ownership of the “capital” of a non-share corporation for these purposes, it would consider the following factors:

• the identity of members,
• the structure of the corporation,
• who exercises control over the financing, operation and direction of the corporation,
• who has the right to elect or change the board of directors or to reverse its decision,
• who can contribute capital and receive a distribution of capital,
• details regarding asset distribution on winding-up or dissolution and
• whether a person other than her Majesty in right of Canada, a province or a Canadian municipality has any right to acquire any capital of the corporation.

Regarding the meaning of the reference to “shares: in s. 149(1)(d.3), CCRA referred to the proposed amendment to the definition of “share” in s. 248(1), and stated:

The definition of "share", as proposed, is amended so that a share means, except where the context otherwise requires, a share or a fraction of a share. For the purposes of subsection 149(1), there is no reason to conclude that the context requires that the definition of "share" in subsection 248(1) not apply. Consequently, where an entity has not issued shares in its capital stock, it is our view that its capital, for the purposes of section 149, cannot be considered to be shares.

Ruling based on the interpretation that a corporation's capital does not include its indebtedness for purposes of s. 149(1)(d.3).

In confirming that s. 149(1)(d.4) does not apply to a corporation a portion of whose shares are held by Her Majesty in right of Canada or a province, and another portion by a corporation, commission or association (an "Entity") to which one of s. 149(1)(d) to (d.4) applies, CRA stated (TaxInterpretations translation):

For an Entity to come within paragraph 149(1)(d.4), its shares (other than directors' qualifying shares) or capital must be owned by an Entity to which paragraphs 149(1)(d) to (d.4) apply. Where a part of the shares or capital of an Entity are owned directly by Her Majesty in right of Canada or a province, paragraph 149(1)(d.4) is not applicable. For example, an Entity whose shares or capital are owned partly by Her Majesty in right of Canada or a province and partly by an Entity to which paragraph 149(1)(d.1) applies, is not an entity contemplated by paragraph 149(1)(d.4).

In confirming that in the case of a share capital corporation, only the ownership of its shares is taken into account in the application of ss. 149(1)(d) to (d.4), CRA stated:

Where an Entity is one with share capital, it is the ownership of shares which is applied in determining whether the criteria stipulated in paragraphs 149(1)(d) to (d.4) are met. The ownership of capital of an Entity is applied only in the situations where the Entity is one without share capital.

A regional county municipality holds all of the capital in a corporation (“Corporation”) which will earn income from a paid service carried on by a partnership between it and a private corporation. Is the corporation exempt under s. 149(1)(d.5)? CRA responded (TaxInterpretations translation):

[A] "regional county municipality", which is an entity formed by letters patent issued by the Government of Quebec and which, following the adoption of the Land Use Planning and Development Act…, is expected to take care of the development of a territory, is a municipality for purposes of the Act. In this context, on the basis of the facts given, Corporation is 100% held by a municipality.

CRA went on to note that the Corporation nonetheless would not qualify for exemption if it was controlled (as described s. 256(5.1)) by an entity referenced in s. 149(1.3)(b).

It remains the Department's view that indebtedness is not included in "capital". S.149(1.3) completely codifies the ownership test, rather than being in addition to ownership determined on general principles.

Corporation B (wholly-owned by a corporation held by an Indian band) signed a forest management agreement with the Quebec government respecting lands located off of the reserve, but operating under the agreement was handled by an unrelated corporation which paid royalties based on the volume of timber cut.

In finding that the 10% rule in s. 149(1)(d.6) was not satisfied, CRA stated:

[T]he fact that the income is property income is not sufficient, in itself, to conclude that the income is derived from an activity carried on within the geographic boundaries of the reserve. In a situation where the income is derived from a right to harvest a volume of timber, we are of the view that, notwithstanding the fact that incidental administrative activities are carried out on the reserve, it is reasonable to consider that the activity of generating income, which is a royalty calculated based on the harvest of timber, occurs at the place where the timber is harvested.

underline;">: Proposed transactions. An organization which previously had filed as an s. 149(1)(l) organization will contract with Distributor to set up a direct distribution network in Canada whereby it will receive a set fee from the Distributor for each item distributed to "Producers" (presumably, farming enterprises) across Canada mostly through a "sales order website…[which] will appear to be a website of the Organization, will in fact be a sales order system of the Distributor." The Organization will decide, with the Manufacturer of the items, the price at which the items are to be sold to the Producers, with the Distributor collecting the proceeds from the Producers, deducting its costs and remitting the remainder to the Organization. All services will appear to Producers as being supplied by the Organization, with the Distributor providing logistics on a national basis.

Ruling

: Provided the Organization continues to meet the requirements described in paragraph 149(1)(e), income of the Organization from the sale of the XXXXXXXXXX, as a result of the proposed transactions above, will not, in and of itself, prohibit the Organization from being exempt from tax under Part I of the Act, pursuant to paragraph 149(1)(e).

Regarding how an agricultural organization might qualify as a non-profit organization, CRA stated:

In order to benefit from the tax exemption provided for in paragraph 149(1)(e), the taxpayer is not required to obtain a registration. However, the taxpayer must satisfy all the necessary requirements. The Act does not define the term "agricultural organization". Therefore, the term must be given its ordinary meaning.

CRA went on to note that an agricultural organization might also be exempted under s. 149(1)(l).

Because the constitution for a housing corporation authorized it to provide accommodation to persons other than aged persons, it did not qualify. (If the constitution did not reflect its true purposes, the constitution should be revised.) It also was noted that the fact that the corporation operated on a non-profit basis and provided accommodation primarily to persons of low or modest income did not necessarily mean that the cost of such accommodation was low. "The phrase 'low-cost housing accommodation' has been interpreted to include comfortable but modest rental accommodation at rent levels which are low relative to rent levels generally available for similar accommodations (other than subsidized or non-profit accommodations) in the same community."

In the course of a general discussion, CRA noted that a s. 149(1)(j) organization need not be approved under s. 37(1)(a)(ii), and stated:

The [Third-Party Payments] Policy sets out the following criteria for a corporation to be considered a non-profit corporation for SR&ED:

• The corporation's activities must be carried on without the purpose of gain for its members. Any profits or other accretions shall be used in promoting the corporation's objectives. No part of the income may be payable to or otherwise available for the personal benefit of any member thereof.
• The directors and members, including any director or member who also serves as an officer, shall serve in that capacity without remuneration. No director, member, or officer shall directly or indirectly receive any profit from his / her position as director, member, or officer. However, it is permitted that a director or officer may be reimbursed for reasonable expenses incurred by him / her in the performance of his / her duties.
• The corporation must not acquire control of any other corporation as defined in paragraph 149(8)(a) nor will it carry on any business as defined in subsection 248(1).
• The objects of the corporation must be to only carry on and / or promote SR&ED. The SR&ED activity may be directly undertaken by, or on behalf of, the corporation, or by an approved association or a university, college, research institute or other similar approved institution.
• The amounts to be expended in Canada on SR&ED must not be less than 90% of the corporation's gross revenue for the period as specified in subsection 149(9) and paragraph 149(8)(b).

Turning to the materials submitted, CRA stated:

According to paragraph XXXXXXXXXX of the General By-Laws, only directors receive no remuneration because of their mandate. We note that nothing in the General By-Laws or Letters Patent of the Corporation attached to your application clearly specifies a similar obligation for the Chief Executive Officer, the other members of the Board of Directors, or any other officer or shareholder of the Corporation. However, these people could receive reasonable compensation in another capacity such as, for example, researcher.

In addition, we also note that the criteria that, according to you, the Corporation meets regarding the application of paragraph 149(1)(j) and submitted in your request are not found in the By-Laws or the Corporation’s Letters Patent attached to your request.

Furthermore, paragraph XXXXXXXXXX of the Letters Patent, which provides that the Corporation may acquire and hold shares of corporations, must not contravene the criterion set out in paragraph 149(1)(j) to the effect that the corporation must not acquire control of another corporation.

In the event of the winding-up of the Corporation, Article XXXXXXXXXX of the Letters Patent of the Corporation indicates that the property will be vested in an organization carrying on a similar activity, without any other indication. Nothing in the Corporation's By-laws or Letters Patent specifies that in the event of a winding-up or dissolution of the Corporation, its property, after the payment of the debts, will be distributed to another entity described in clauses 37(1)(a)(ii) (A), (B), (C) or (E).

Discussion of distinction between an approved research institute (s.37)(1)(a)(ii)(B)) and a non-profit corporation described in s. 149(j).

Discussion of criteria to be met by a corporation if it is to be considered a non-profit corporation for scientific research and experimental development.

Discussion of criteria for determining whether approval of a research institute or similar organization will be granted.

Criteria of RC for determining whether a corporation qualifies.

The corporation seeking exemption under s. 149(1)(j)(ii) must expend at least 90% of its income on SR&ED, in addition to not carrying on any business. The higher the level of its revenues the more probable it is that a business is being carried on. If the corporation does not qualify under s. 149(1)(j), this could result in disqualifying the non-profit organization which holds the shares from exemption under s. 149(1)(l).

Background

A union that was described in s. 149(1)(k) and that had been collecting union dues held a subsidiary that was a taxable Canadian corporation. The union ceased to be the accredited bargaining agent for Organization B. It then began proceedings for its winding up, which included selling a real estate property and receiving a winding-up dividend from its subsidiary.

Proposed transaction

In the course of its winding-up and pursuant to its articles, the union will make a distribution to its union members in settlement of their interests.

Rulings

That the amount so paid to the members will constitute proceeds of disposition of their rights as members in the union, thereby resulting in a capital gain (but with no obligation of the union to prepare tax reporting slips).

The reasons provided in the summary state (TaxInterpretations translation): “[T]his is not the situation of a reimbursement of their union dues, but rather a disposition of their membership right.”

"A labour organization is generally an association of workers of the same trade, or of several allied trades, organized for the purpose of securing the most favourable conditions, wages, or hours of work for its members." An organization that has as its mandate the furtherance of interests of employers only would not be considered to be a labour organization.

The acquisition by a union of 50% of the shares of a corporation owning and carrying on a business would not, by itself, result in loss of the union's exempt status under s. 149(1)(k).

A corporation governed by the CBCA which nonetheless was intended to qualify as an NPO under s. 149(1)(l) owned an apartment building which it leased to tenants who also held all its common shares in proportion to the relative size of their apartments. The leases were rent-free except for an obligation to pick up a proportionate share of property costs (described as being economically analogous to condo fees), and presumably were very long-term leases.

It was proposed that the corporation transfer undivided interests in the property to its shareholders in proportion to their relative shareholdings so that each would acquire a co-ownership interest proportionate to the relative size of that transferee’s apartment. Such transfer would result in an extinguishing of the leases. The consideration paid by the shareholders would be a proportionate fraction of the property’s nominal appraised value.

CRA ruled inter alia that there would be no s. 15(1) benefit to the extent that the FMV of the share of the real property so transferred to each shareholder was equal to or less than the FMV of the consideration paid therefor, but did not rule on whether the corporation qualified as an NPO.

Neal Armstrong. Summary of 2021 Ruling 2020-0847671R3 F under s. 15(1).

Background

A Club has both Class A and Class B shares, which are entitled to receive dividends, outstanding, as well as common shares. However, the Club’s letters patent restrict the Club’s ability to pay dividends, so that no part of the income, as determined under s. 149(2), of the Club may be made payable to any shareholder. The Club previously acquired XX acres of land, which is used in providing recreational facilities for the enjoyment of members.

Proposed transactions

The Club will sell its land and building (the “Property”) to an arm’s length third party, and then lease part of the Property back from the purchaser and continue to operate the club in its present location for a period of a number of years. The Club will report a resulting taxable capital gain relating to the portion of the Property that was not used exclusively for and directly in the course of providing the dining, recreation and sporting facilities for its members. The Club will declare and make payable a series of capital dividends pursuant to s. 83(2) to the holders of the outstanding Class A and Class B shares in equal amounts per share. The members of the Club will evaluate potential relocation of the Club.

Purpose

To disburse proceeds, from capital gains realized on the above sale and a previous sale, that are in excess of future operating and capital requirements of the Club, including the potential acquisition of a new property for the Club.

Rulings

The disposal of the Property or the distribution of the capital gain will not, by itself, cause the Club to cease to be as described in s. 149(1)(l). There will be added to the Club’s capital dividend account the amount by which the capital gain on the disposition of the Property exceeds the taxable capital gain resulting from the sale of the Property notwithstanding that a portion of the taxable capital gain will be exempt from income tax by virtue of s. 149(5)(e)(ii).

Would an organization otherwise qualifying under s. 149(1)(l) lose its exempt status because of a clause in its articles providing that in the event of it winding-up, dissolution, or merger, all property must be transferred to a municipal authority within the meaning of paragraph 149(1)(c)? CRA responded:

Where a municipal authority is a member of an entity referred to in paragraph 149(1)(l), the latter would lose its tax-exempt status by reason of the clause in its enabling documents that provided that in the event of a winding-up, merger or dissolution, all its assets and accumulated income must be transferred to the municipal authority as described in paragraph 149(1)(c). There would be loss of entitlement to the exemption under paragraph 149(1)(l) since the condition, that no part of the income can be payable to, or otherwise made available for, the personal benefit of any member of the association, would not be satisfied.

However, the member-benefit rule would not be breached if the municipal authority was not a member.

A syndicate of co-owners holding condominium units sold one of the condominiums at a capital gain. Would this cause it to lose its status under s. 149(1)(l), what would be the treatment to it of the capital gain and what would be the consequences to the beneficiaries of a distribution to them of the gain?

After noting that in light of its separate legal personality under s. 1039 of the Civil Code, the syndicate was a corporation, and that such corporation could satisfy the not-for-profit tests of s. 1`49(1)(l), CRA noted that, in light of s. 149(2), distribution of the capital gain would not be contrary to s. 149(1)(l) (although it would give rise to a taxable s. 15(1) benefit to the members to whom the gain was distributed) and that no Part I tax would be payable by the corporation on the gain (provided that s. 149(5) did not apply).

The Institute, a not-for-profit organization, received a provincial grant and subsequently accessed provincial debentures to finance the construction of a substantial fibre-optic cable network. It will charge an access fee to commercial enterprises using the network and the cash flow generated will initially service the debt and subsequently will support community enhancement projects within the Institute's mission. CRA stated:

[T]he revenue generated from the fibre-optic cable network could affect the tax-exempt status of the Institute since it does not appear that this revenue is incidental or arises from activities directly connected to its not-for-profit objectives, which are to support the building of community capacity and the sustainability and growth of its business community.

The B.C. Business Corporations Act now allows for a "community contribution company" to do business and generate profits in the normal course of its commercial activities, while at the same time capping the dividends that can be paid out to shareholders. This structure provides a (limited) return to the investor, while providing social enterprise benefits to the community. Does such a company whose incorporating documents stipulate that 100% of its profits must be donated to a local charity which assists children and families qualify under s. 149(1)(l)? CRA stated:

[C]ommunity contribution companies are organized and operated to make a profit with which to provide both a return to investors and community benefits. … . Even though all or substantially all of the profits of this particular community contribution company are destined for a good cause…it will nevertheless be organized (and operated) for profit and, as such, would not qualify… .

A commercial condominium corporation manages the property and assets of a commercial building consisting of units that are individually owned by various businesses, and collects monthly contributions to cover common expenses and to fund a replacement reserve. Does it qualify under s. 149(1)(l)? In the course of a general non-committal response, CRA stated:

Some characteristics that might indicate that an activity is a trade or business are as follows:

(a) it is a trade or business in the ordinary meaning, that is, it is operated in a normal commercial manner;

(b) its goods or services are not restricted to members and their guests;

(c) it is operated on a profit basis rather than a cost recovery basis; or

(d) it is operated in competition with taxable entities carrying on the same trade or business.

Generally, the carrying on of a trade or business directly attributable to, or connected with, pursuing the non-profit goals and activities of an association will not cause it to be considered to be operated for profit purposes.

In response to a query on a fundraising event whose description CRA did not repeat, it stated:

Limited fundraising activities involving games of chance (e.g., lotteries, draws), or sales of donated or inexpensive goods (e.g., bake sales or plant sales, chocolate bar sales), generally do not indicate that the organization as a whole is operating for a profit purpose. However, the scope of the fundraising activities, especially by comparison with other activities, should not be so significant that fundraising can be considered a purpose of the organization, in which case the organization may not qualify as a 149(1)(l) entity.

It does not appear…that your event would meet the conditions in paragraph 149(1)(l)… as the event is not organized as a club, society or association and the scope of the fundraising activities in relation to other activities seems substantial.

A condominium corporation (the "Corporation") enters into a leasing agreement with a solar company, which would lease several roofs within the complex for the use of solar panels, with the output sold to the public electrical grid. The solar company would assume all costs of the arrangement, and the Corporation would receive annual income of approximately $XX or a percentage of the revenues generated, which would be contributed to the Corporation's reserve fund thus potentially offsetting or freezing any annual reserve fund increase, and/or reducing annual reserve fund contributions and/or reducing property owner's monthly maintenance fees. Would this jeopardize its s. 149(1)(l) exemption? CRA stated:

[I]ncidental income from the rental of common areas may be treated as income of the Corporation and generally will not affect [its] tax-exempt status… . Incidental, in this context, means both minor and directly related to activities undertaken to meet the Corporation's not-for-profit objectives of managing and maintaining the condominium property and required reserves. …

Income that is not incidental will usually be considered to be income of the unit owners, if this is appropriate under the relevant provincial law. Subsection 11(2) of the Condominium Act of Ontario (S.O. 1998, c.19) provides that "the owners are tenants in common of the common elements…". …

Where the relevant provincial law indicates that the income is the income of the Corporation, then we would agree that the Corporation may not be tax-exempt pursuant to paragraph 149(1)(l)… .

A taxable Canadian corporation was the member of a non-profit organization and its sole creditor and principal benefactor. The NPO was wound up and all its assets transferred to the member in partial satisfaction of the debt owing by it to the member, but with the whole of the debt being agreed to be settled. The fair market value of the assets distributed on the winding-up differed from CRA’s estimate of their value.

In finding that this distribution would not by itself cause the NPO to lose its status under s. 149(1)(l), CRA stated:

The repayment of the debts of XXXXXXXXXX, as part of its winding-up, is therefore effectively provided for under the applicable legislation.

We therefore agree with your position that "XXXXXXXXXX does not lose its status as an exempt organization when transferring its assets to XXXXXXXXXX because, in doing so, it does not transfer 'the remainder of its property' to another corporation that does not carry out similar activities, but is instead paying its debts (which is in accordance with corporate laws and its articles of incorporation)." …

[A] member of a non-profit organization can make a loan to a NPO without jeopardizing the status of the NPO, even if the member, as a creditor, receives interest on its debt to the extent that the interest rate on its claim is reasonable. In this regard, we refer you to document 2000-004745.

It appears to us, therefore, that in general, despite the fact that a creditor of an organization exempted under paragraph 149(1)(l) is also a member of the organization and that property is distributed to it in settlement of debts, this should not cause the corporation to lose its NPO status, as long as the financing granted to the NPO is legitimate and is not a stratagem to recover the assets at the time of the liquidation of the NPO.

A condominium corporation would probably retain its s. 149(1)(l) exemption if it were to sell a caretaker suite at fair market value and put the proceeds of disposition in its reserve fund for future repairs and improvements.

Because a rental at fair market value is a profit-generating activity, renting the caretaker suite would probably deprive the corporation of its s. 149(1)(l) exemption.

The conversion of the caretaker suite to a guest suite (rentable to tenants for their guests) may deprive the corporation of its s. 149(1)(l) exemption if it charges market prices - but charging below market prices may confer a taxable shareholder benefit on its members (i.e. tenants) pursuant to s. 15(1) and the s. 248(1) definition of "shareholder."

Converting the suite to a fitness centre will deprive the corporation of its s. 149(1)(l) exemption if the centre is operated for profit.

An NPO intended to rent vacation properties to non-members without giving up its s. 149(1)(l) exemption. CRA indicated that such activities would likely not bring the NPO out of s. 149(1)(l), provided that:

...the rental income was incidental, the rental of the property to non-members was infrequent or for a short period of time during a transition period (e.g. for a period during which the property was being prepared for sale), any incidental income earned from the rental of the property was used for the organization's not-for-profit objectives, and the incidental income earned was not made available for the personal benefit of the organization's members.

Such rental income would be subject to tax under s. 149(5), assuming it were property income (as would probably be the case). If it were business income, the NPO would probably lose its s. 149(1)(l) status, as business income intrinsically indicates a for-profit purpose.

Generally, an organization referred to under s. 149(1)(l) will not lose its s. 149(1)(l) exemption for collecting donations from members or from businesses affiliated with its members for use in a capital project that furthers the organization's non-profit purposes, nor will it lose its exemption for maintaining a "wall of honor," naming rights, or similar systems for recognizing such contributions, providing that such recognition has only nominal value.

CRA stated:

However, amounts received by an organization in exchange for naming rights may be received, either wholly or partially, in relation to advertising or other income (e.g., where the naming rights provide a prospective economic benefit to a business, or if a business is able to deduct from its income the amount as an advertising or other expense). If such income received by the organization is not incidental, the organization may be considered to have a profit purpose and may be considered to have made income available for the personal benefit of its members, particularly when the amounts are received from non-members.

...

An organization's accounting records should clearly identify the capital funds accumulated for the capital project and all transactions concerning the capital project. In addition, since the Sports Club's main purpose appears to be providing sporting and recreational facilities to its members, any property income earned from the investment of the funds that are accumulated for the capital project will be subject to tax under subsection 149(5).

The Corporation was a non-share corporation with only one member (the "Parent"). The Corporation, which had substantial retained earnings, was invested in shares of a for-profit corporation ("Subco") along with a non-exempt third party. But for the payment of substantial management fees to Parent, the Corporation would have generated profits.

The Corporation was ineligible for the s. 149(1)(l) exemption. The management fees, which likely were "unreasonable in comparison to any actual work done," had the effect of making income of the Corporation available to its member. (CRA implied that the Parent's management fees should have been on a cost-recovery basis only.)

The Corporation's substantial retained earnings and its investment in Subco (indicating that it had "excess funds available to invest in a taxable corporation") also indicated a for-profit purpose.

CRA indicated that the NPO in question would probably not qualify for s. 149(1)(l) exemption:

In our view, the fact that the Association has sufficient funds available to purchase and finance a taxable organization, whether the objects of that organization are connected to the objects of the Association or not, suggests that the Association has not been organized and operated for a purpose other than profit and thus does not meet the requirements of paragraph 149(1)(l) of the Act. Further, in our view, the amount of reserves and annual excess of revenues over expenditures, also support that the Association does not meet those requirements.

CRA previously sent "education letters" to organizations claiming s. 149(1)(l) exemption in order to remind them of the criteria of that provision. CRA's decision to discontinue these letters due to concerns expressed by some of those organizations does not indicate an intention to change how s. 149(1)(l) is applied. IT-496R continues to represent CRA's position on s. 149(1)(l).

Before concluding that a non-profit organization which make loans to a taxable subsidiary would "likely not" qualify for the exemption, CRA stated:

the fact that a 149(1)(l) organization has funds available to provide loans to its taxable subsidiaries generally suggests that the organization has retained earnings larger than is necessary to meet the organization's not-for-profit objectives and is therefore not operating exclusively for a purpose other than profit. As a result of large reserves, a 149(1)(l) organization may also be earning large amounts of tax-free investment income on funds that are not necessary to meet its not-for-profit objectives.

CRA noted that holding shares in a for-profit subsidiary will not necessarily disqualify an organization from the benefit of 149(1)(l).

...if an organization holds shares to earn income from property, it may be considered to have a profit purpose, even if the income from those shares is used in furtherance of the organization's not-for-profit objectives. However, the CRA has accepted that where an organization that otherwise qualifies for the exemption under paragraph 149(1)(l) engages in an income-generating activity that is carried out in a taxable, wholly-owned corporation, and this corporation pays dividends out of its after-tax profits to the organization to enable the organization to carry out its not-for-profit activities, the organization may still qualify for the exemption as set out in paragraph 149(1)(l).

When asked "if, instead of a taxable subsidiary corporation, a trust fund was established to carry out the for-profit activities," CRA stated that it would need "to fully review all of the facts and relevant agreements."

CRA found that an organization likely did not qualify as a non-profit organization given that the size of its operating reserves, and the rate at which the reserves were accumulating, outstripped any reasonable need the organization had to cover its operating expenses. CRA stated:

An organization should fund capital projects and establish (reasonable) operating reserves from capital contributed by members, from gifts and grants, or from accumulated, incidental profits.

CRA also noted that the Woodward's decision stands for the proposition that:

[I]f the objectives of the organization cannot be achieved without the making of a profit, then the organization must be organized and operated for the purpose of profit.

The lease or sale of lockers to members will generally not jeopardize an organization's eligibility under s. 149(1)(l), provided that doing so is incidental to the organization's activities and that the profits therefrom are used to fund the organization's activities (see IT-83R3). A condominium organization may rent out storage lockers to its members, for example.

CRA indicated that it is reasonable under s. 149(1)(l) for a non-profit organization to invest funds before it is required to distribute them (in this case, between the time that Members earn commissions and the time that they are periodically distributed) and not be found to have an income-earning purpose. However, CRA stated:

If the XXXXXXXXXX has a reserve, or is building up a reserve, for investing purposes, either by delaying payments [to Members] (amounts not paid as soon as reasonably possible) or by charging more than necessary in commissions, this could indicate that the XXXXXXXXXX is operating for a profit purpose.

CRA indicated that a corporation's large retained earnings probably disqualified the corporation from the s. 149(1)(l) exemption:

Based on the facts provided, there is little or nothing to distinguish the Corporation from a for-profit XXXXXXXXXX business, and we understand that it competes directly in this market. The regular and consistent increase in retained earnings supports the view that the Corporation has operated for a profit purpose. The net income, while not large in comparison to gross revenues, has been consistently accumulated and used to expand the business of the Corporation or to acquire investments. The fact that all of the income of the Corporation is derived from third parties is of particular concern in this regard. The objective of maximizing revenues in order to pay higher salaries and bonuses to member-employees indicates a profit purpose. Finally, we share your concern that at least some part of the reserves have been accumulated for the purpose of generating investment income.

CRA quoted from Timmmins, and indicated that an organization whose overall objective is not to earn profit may nonetheless be considered to be carrying on a business if it carries on activities regularly over a period of time, with the result that it would not be considered to be operated exclusively for non-profit purposes.

Where IT-496R, para. 12 indicates that payments may be made to delegates to cover expenses of attending conventions and meetings, "delegates" "generally means a person sent or authorized to represent others," so that it is possible that an individual will be a delegate even where the individual has not authority to vote.

Furthermore, "an activity undertaken by a member primarily for the benefit of the organization generally will not be considered to result in a personal benefit to the member...."

Consistently with its not-for-profit objects, Corporation hosts, organizes and promotes an annual out-doors festival event. Although it receives most of its revenues as government grants, it also derives a small portion of its revenues from the sale through outdoor kiosks at the festivals of products such as food, beer and wine. Are these consistent with the s. 149(1)(l) requirement of being operated exclusively for non-profit purposes?

In responding favourably, CRA stated:

[T]he retail sale of consumer products is part of the establishment of appropriate facilities for the holding of the festival event that Corporation is mandated to host, organize and promote. Consequently, we are of the view that that is an activity that is, in itself, undertaken to achieve the Corporation’s non-profit purposes.

CRA went on to clarify that it disagreed with the argument of Corporation’s representatives that, “in order to determine the non-profit nature of an organization, the study of its purposes and intent takes precedence over the study of its ad hoc activities,” and referenced inter alia in this regard the statement in the CBIA case (99 DTC 653) that "[w]hen determining purpose or object or motive, the conduct of a corporation is more important than a declared object in its charter.”

CRA indicated that the generation of profits from retail sales of consumer products such as food, beer and wine during shows and outside activities in the course of an annual festival organized and promoted by an organization, with such profits being minimal when compared with its total revenues (mostly government grants and sponsorship) would not cause it to lose its status as a non-profit organization. CRA went on to state:

[I]t appears that the objects of Corporation are written quite broadly, so that the Corporation may seek to generate profits without contravening its articles of incorporation. ... [W]e note that in the CBIA case ... the following was stated in the organization's articles of incorporation: "In no event shall the purposes of organization and/or operation of the Corporation include profit.” (para 1) [and similarly in BBM, para 11]. It may be desirable that the articles of incorporation of Corporation be amended to include a similar clause ... .

CRA went on to note the desirability of providing that any successor on a winding-up should be specified to be subject to the same limitations.

In the course of answering questions pertaining to CRA's Non-Profit Organization Risk Identification Project, comprising the random auditing over three years of 1440 of the 39,000 entities claiming NPO status and possible legislative recommendations, CRA was asked about the treatment of events connected to an NPO's not-for-profit activities where the event itself generates a profit:

Whether profit is incidental depends on the amount involved and the scope and nature of the activities compared to the operations of the organization as a whole.

The amount of the profit, both in absolute dollars and especially relative to the organization's other revenues and expenses, is relevant.

In the case of a corporation to which s. 149(1)(l) applied (non-profit corporation for recreation or pleasure), use by a shareholder of corporate property, for less than fair market value of the use, might be a taxable benefit under s. 15(1). If so, then the value of the benefit is the difference between such fair market value and the consideration paid by the shareholder.

In response to a general inquiry as to when an NPO is carrying on a business for profit, CRA stated:

Paragraph 7 of Interpretation Bulletin IT-496R (note 3) provides a list of characteristics that the CRA will consider in making this determination. The court in BBM agreed that these were reasonable considerations for the purposes of applying the tax exemption. The characteristics considered include whether

• there is a trade or business in the ordinary sense,
• goods or services are restricted to members and their guests,
• the business is operated on a profit basis rather than a cost-recovery basis, and
• the business is operated in competition with taxable entities carrying on the same trade or business.

the exemption in s. 149(1)(l) is equally available to a non-resident NPO. If the corporation qualifies as an NPO under s. 149(1)(l), it also will be exempt from branch tax under s. 219(2).

The practical guidelines in IT-496 essentially are "no more than a notice to the public that if too much income is earned or if large surpluses are accumulated the Minister will draw an inference of fact that the fund is being operated for profit."

Regarding a question on the holding of surplus funds by a non-profit organization (“NPO”), CRA stated:

The holding of surplus funds is generally an indicator of activities carried on for the purpose of generating profits, but this fact alone will not prevent an NPO from coming within paragraph 149(1)(l) if, for example, the purpose of holding the surplus funds is to fund a specific project of a capital nature. In this context, an NPO could accumulate contributions from its members and earn investment income on those amounts even though the income generated by those investments is anticipated. However, where the purpose of the funds accumulated and invested by the association is to make a profit and not to fund a specific project of a capital nature, the association would not satisfy the conditions in paragraph 149(1)(l).

CRA went on to note that taxable capital gains from a disposition were exempt subject to s. 149(5).

In the course of a general response to a query as to when a company would lose its status as a not-for-profit organization, CRA stated:

If, at any time, a corporation no longer carries on any of the activities referred to in paragraph 149(1)(l), it is our view that it ceases, at that time, to be eligible for the exemption provided for in paragraph 149(1)(l).

If, at any time, a corporation ceases to be exempt from tax under Part I on its taxable income, the rules in subsection 149(10) must be applied.

A not-for-profit condominium syndicate, which CRA found in light of article 1039 of the Civil Code, constituted a corporation, proposed to distribute its land to the members in order to benefit from a lower municipal tax rate. CRA found that the distribution would give rise to a taxable benefit under s. 15(1), and would cause the syndicate to lose its exempt status under s. 149(1)(l).

Damages received by a teminated employee that could be attributed to aggravated and punitive damages relating to malicious actions, intentional infliction of mental suffering, defamation or injury to reputation, would be exempt as would damages awarded by a Human Rights Tribunal or a settlement in lieu thereof, provided the damages did not relate to the loss of employment but related solely to damages arising from human rights violations by the former employer.

Comments on whether a non-profit forestry corporation set up by aboriginal persons and described as an aboriginal community development corporation would be tax exempt.

With reference to a testamentary trust established for the purpose of providing funds for the care and treatment of domestic animals in a specified area, RC indicated that it was its view "that trusts that are set up, not to benefit specified persons, but to ensure that particular purposes are carried out, i.e., purpose trusts, could qualify as non-profit organizations provided, among other factors, they spend their funds on furthering the non-profit purposes for which they were formed".

A company that carries on a dockside monitoring program on fish landings potentially could qualify.

"Generally, the Department is of the view that an organization is not operated exclusively for non-profit purposes, when its principal activity is the carrying on of a trade or business. Some characteristics of an activity that might be indicative of a trade or business are as follows:

• it is a trade or business in the ordinary meaning, that is, it is operated in a normal commercial manner;
• its goods or services are not restricted to members;
• it is operated on a profit basis rather than a cost recovery basis; or
• it is operated in competition with taxable entities carrying on the same trade or business."

"Employee training trust funds are similar to purpose trust and provided, among other factors, they spend their funds on furthering the non-profit purposes for which they were formed, it is likely they could qualify as non-profit organizations."

A direction in the trust deed that surplus money and assets of the trust must be distributed to the employer and other contributors in the event of the wind-up of the trust, could disqualify the trust to the extent that such property might include income of the trust.

Re Whether a subsidiary of a labour union which has purchased a building for rental to the union will qualify for exemption under s. 149(1)(l).

The provision of goods and services to persons other than members and their guests may be characteristic of a profit motive.

Where a special project requires the accumulation of funds over a number of years, monies received as capital should be deposited in one account and monies earned on it should be accumulated in the other. Funds to carry out the project should first be taken from the revenue account.

A non-profit organization that acquires office space in excess of its current needs (but not in excess of what it might be expected to need in the foreseeable future), will not jeopardize its status by earning rental income from that space.

An organization may qualify as a non-profit organization if it receives dividends from a wholly-owned taxable corporation which carries on an income-producing activity related to the organization's purpose.

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 well below cost, or (b) profits from non-members are used to acquire or maintain facilities for which the charge to members is significantly below cost, the income of the organization will be considered to be payable to or for the benefit of the members.

Where a non-profit community organization arranged to have a charity issue official receipts to members of the non-profit organization in respect of donations made by the organization to the charity, this would indicate that income of the organization was being made available for the personal benefit of the members, with the result that the organization ceased to qualify for the exemption under s. 149(1)(l).

Where an organization accumulates profits rather than using them to achieve its non-profit objectives, it may lose its NPO status.

If the letters patent, trust deeds or by-laws of an entity indicate that anything more than a return of capital or taxable capital gains may be made available to members by way of dividend or otherwise, or the entity otherwise has the power in the current or future years to declare and pay dividends out of current or retained income, it will not qualify. If the balance of the accumulated excess is greater than the non-profit organization's reasonable needs to carry on its non-profit activities, RC will consider profit to be one of the purposes for which the organization was operated.

1. Does a company that holds and manages but does not construct a low-income rental property meet the definition of a “limited-dividend housing company” in s. 2 of the National Housing Act and qualify for the tax exemption under s. 149(1)(n)?

The definition in s. 2 referred to “a company incorporated to construct, hold and manage a ‘low-rental housing project’, the dividends payable by which are limited by the terms of its charter or instrument of incorporation to five per cent per annum or less.” CRA indicated that such “definition requires a company to construct, as well as hold and manage the low-rental housing project” so that “a company that purchases and does not construct a low-rental housing project would not meet the definition.”

2. Would a company, who rents units to a registered charity which in turn rents the units to low-income families satisfy the definition of “low-rental housing project” in s, 2 of the National Housing Act? CRA responded:

A low-rental housing project is defined in section 2 of the National Housing Act as:

“a housing project undertaken to provide decent, safe and sanitary housing accommodation, complying with standards approved by the Corporation, to be leased to families of low income or to such other persons as the Corporation,

(a) in its discretion, in the case of a housing project owned by it, or
(b) under agreement with the owner, in the case of a housing project not owned by it, designates, having regard to the existence of a condition of shortage, overcrowding or congestion of housing”

The fact that the company rented units suitable for housing to a registered charity which in turn rented the units to families of low income does not appear to preclude the company from meeting the definition, where the company has been designated by the Canada Mortgage and Housing Corporation (CMHC) and the CMHC has entered into an agreement with the company, as provided for in the definition of “low-rental housing project”. However, we would most likely consult with the CMHC before making any final determination.

CRA considers that one-half of the capital gains generated by a private corporation that is exempt as a low-rental housing corporation under s. 149(1)(n) are added to its capital dividend account and can be paid out as capital dividends.

However, should it lose its exempt status, it also would lose its CDA under s. 89(1.2) – and the timing of the capital gains arising to it under the s. 149(10) disposition of its property would preclude those gains from being added to the available amount of its CDA.

Ninety percent or more of the business of a limited-dividend housing company must be demonstrated to be for the construction, holding or management of low-rental housing projects which lease accommodation to low-income families for the relevant years.

The 5% limit is calculated by reference to the invested capital, eg., the paid-up capital.

It is not possible for a corporation which was originally constituted for other purposes to be converted into a limited-dividend housing company.

S.2 of the National Housing Act and s. 149(1)(n) are in parri materia, with the result that s. 2 defines what constitutes a "low-rental housing project".

CRA indicated a segregated fund that is deemed by s. 138.1(1)(a) to be an inter vivos trust for Part I purposes is also such a trust for purposes of Reg. 5001, which defines a master trust for the purposes of s. 149(1)(o.4).

Provided all relevant conditions are satisfied, once a trust elects to be a master trust in a taxation year, it will be exempt from tax for the entire year in which the election is made.

A master trust that was in existence before the enactment of s. 149(1)(o.4) which elects under that provision will have its period of exemption commence no earlier than the beginning of the taxation year for which the election was made.

The exemption in s. 149(1)(t) is available to a non-resident insurer; and in applying ss. 149(4.1) and (4.2) the activities of the non-resident insurer as a whole must be considered rather than only those of its Canadian branch.

Settlement funds received by a law firm from the defendant in a class action suit areheld in a settlement trust, to be applied solely for compensating class members after approval of the terms of the settlement by final Court order. In the meantime, a T5 slip is issued annually to the “law firm in trust” respecting interest earned on these funds. In finding that such interest is not exempt from tax under s. 149(1)(w), CRA stated:

[T]he words of paragraph 149(1)(w) require that a trust be set up according to or pursuant to a specific law rather than pursuant to a court decision facilitating the administration of the law. There is no law in this case specifically requiring a trust to be established to provide funds out of which to compensate persons for claims against the owner of a business. Furthermore the law must identify the particular business and as such paragraph 149(1)(w) is not intended to shelter from taxation all income that may arise from funds required to be held in trust by court order.

As per the CRA summary, the income of a trust created as a result of a requirement imposed by s. 56 of the Quebec Environment Quality Act is exempted provided that s. 149(1)(z.1) is enacted as proposed.