22 April 1997 External T.I. 9620535 - NON-PROFIT ORGANIZATION

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

		                    					962053
XXXXXXXXXX						                  B. Kerr

Attention: XXXXXXXXXX

April 22, 1997

Dear Sir/Madam:

Re: Non-Profit Organization

This is in response to your letter of April 22, 1996, wherein you requested our views on whether the XXXXXXXXXX would qualify for tax-exempt status under paragraph 149(1)(l) of the Income Tax Act (the "Act").

Our Comments

The situation described in your letter involves actual proposed transactions with identifiable taxpayers. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada. However, we can offer the following general comments.

It is a question of fact whether a particular person qualifies for exemption from Part I tax under the provisions of paragraph 149(1)(l) of the Act. We are unable to offer definitive comments regarding the tax status of an organization without a complete description of the details of its organization and operations. However, the Department's general views are outlined in Interpretation Bulletin IT-496.

Generally, paragraph 149(1)(l) of the Act exempts from Part I income tax a club, society or association (an "organization"), other than a charitable organization or foundation as defined in subsection 149.1(1) of the Act, organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, if no part of its income is payable to, or available for the personal benefit of any proprietor, member or shareholder.

To qualify for tax exempt status under paragraph 149(1)(l) of the Act, an organization must be both "organized and operated" exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit. To establish the purpose for which an organization was organized, the Department will normally look to the instruments by which it was created. These instruments may include letters patent, articles of incorporation, memoranda of agreement, by-laws, articles and so on. A determination of whether an organization was operated exclusively for, and in accordance with, its exempt purposes in a particular taxation year is based on the facts of each case. This information can be obtained only by reviewing, during the course of an audit, all of its activities for that year. Such a determination cannot be made in advance of or during a particular year but only after the filing of a return reporting the operations and claiming exemption for the year having ended. A review of this nature would be conducted by officials of a Tax Services Office, who would be in a better position to appreciate all the circumstances of the case.

The Department is of the view that an organization is not operated exclusiely 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 that it 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 competiton with taxable entites carrying on the same trade or business.

An organization may earn income in excess of its expenditures provided the requirements of the Act are met. The excess may result from the activity for which it was organized or from some other activity. To maintain its tax-exempt status, the income generating activity must be carried on, and the resulting income must be used, by the organization to achieve its declared exempt objectives. However, if a material part of the excess is accumulated each year and the balance of accumulated excess at any time is greater than the organization's reasonable needs to carry on non-profit activities, the Department will consider profit to be one of the purposes for which the club was operated. This will be particularly so where assets representing the accumulated excess are used for purposes unrelated to its objects, for example the purchase of long-term investments to produce property income. This may also be the case where the excess is invested in a term deposit or guaranteed investment certificate that is regularly renewed within a year and from year to year.

To qualify for exemption pursuant to paragraph 149(1)(l), no part of the income of an organization, whether current or accumulated, may be made available for the personal benefit of any proprietor, member or shareholder ("member") of an organization. An organization may fail to comply with this requirement in a variety of ways, for example, if the organization distributes income during the year, either directly or indirectly, to, or for, the personal benefit of any member. Subsection 149(2) of the Act provides that "income" for the purposes of paragraph 149(1)(l) is deemed to be the amount of income otherwise determined less the amount of any taxable capital gains included therein.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch