Principal Issues: 1) Does an association that has an accumulated surplus invested in term deposits meet the conditions of paragraph 149(1)(l)?
2) Where an association loses its NPO status, what portion of its income is taxable?
3) If an NPO realizes a gain on the sale of real property, is that gain subject to tax?
4) Where an NPO winds up, is the transfer of property to members/shareholders taxable?
Position: (1) Usually yes, if the surplus is not anticipated.
(2) Income earned after the loss of NPO status is generally taxable.
(3) No, subject to the application of subsection 149(5).
(4) May generate a deemed dividend or a disposition of capital property.
Reasons: (1) The association must not be operated for profit. See IT-496R, para. 8.
(2) The association shall compute its income by taking into account its deemed taxation years under subsection 149(10).
(3) Text of 149(1)(l), 149(5).
(4) 84(2) and definition of disposition in subsection 248(1).
XXXXXXXXXX 2009-035223
February 25, 2010
Dear Madam,
Subject: Not-Profit Organizations - 149(1)(l) Income Tax Act
This is further to your letter of December 14, 2009, in which you asked us various questions about non-profit organizations (NPOs).
Please note that unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
It appears to us that the situation described in your letter may constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involves a specific taxpayer and a completed transaction, you should provide all relevant facts and documentation to the appropriate Tax Services Office for its views. However, we are prepared to provide the following general comments that may be helpful to you.
An NPO subject to paragraph 149(1)(l) is a club, society or association that, in the opinion of the Minister, was not a charity within the meaning assigned by subsection 149.1(1) and that was organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, no part of the income of which was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof. No tax is payable under Part I of the Income Tax Act on the taxable income of such an association for the period in which it is subject to paragraph 149(1)(l).
Whether an association is an NPO subject to paragraph 149(1)(l) is a question of fact that can only be determined after an examination of the objects and activities of the association.
NPO with an accumulated surplus invested in term investments
As stated above, to be an NPO subject to paragraph 149(1)(l), an association must be, inter alia, operated for the purpose of carrying on a non-profit activity. Nevertheless, in certain circumstances, an NPO may hold funds in excess of the resources it reasonably needs to carry on its non-profit activities. 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).
The question of whether an association has been operated solely for non-profit purposes and in accordance with its non-profit objectives in a particular taxation year must be analyzed on the facts of each case; only by examining all activities in the year can this determination be made. This determination cannot be made before or in a particular year, but only at the end of the year. For more certainty regarding the determination of the status of a particular association, we invite you to contact the Tax Services Office in your area. To assist you in locating it, you can visit the CRA's Web site at http://www.cra-arc.gc.ca/cntct/tso-bsf-eng.html.
Tax payable on the income of an NPO that no longer satisfies paragraph 149(1)(l)
Where the association is a corporation, subsection 149(10) contains rules that apply if the corporation ceases, at any time, to be exempt from tax under paragraph 149(1)(l). For this purpose, the corporation is deemed to have a taxation year that ends immediately before the time the corporation ceases to be exempt and a new taxation year is deemed to have begun at that time. Income earned by the association after that time will be taxable for a taxation year ending after that time. In addition, the corporation will be deemed to have disposed of property owned by it immediately before that time for an amount equal to its fair market value and to have reacquired it at that time at a cost equal to that fair market value.
Sale of a capital property by an NPO
Where a corporation subject to paragraph 149(1)(l) disposes of a capital property, the resulting taxable capital gain is included in computing its income under Part I of the Act, but no Part I tax will be payable. However, as specified in subsection 149(5), where the principal purpose of the association is to provide dining, recreational or sporting facilities for its members for its members, an inter vivos trust is deemed to have been created and that trust will be liable to pay Part I tax if it has taxable income including, among other things, taxable capital gains from dispositions of property, other than property used exclusively and directly for the purpose of providing meals, recreational services or sports facilities for its members.
Winding-up an NPO
The tax implications of winding-up an association subject to paragraph 149(1)(l) may vary depending on the legal nature of the association. If the association is a corporation with capital stock, subsection 84(2) could apply to the transfer of property to the shareholders so that the corporation is deemed to have paid a dividend to them. Under subsection 84(2), the shareholder will be deemed to have received that dividend. However, if the association does not have capital stock, such a transfer to a member could be a payment on account of capital and represent the proceeds of disposition of a member's interest. In the latter situation, subsection 84(2) would not apply.
In the context of this request for a technical interpretation, it is impossible to provide you with a definitive opinion on all the tax consequences of transferring the association's property to a shareholder or member. However, if you provide us with all the relevant information and documentation, we may be able to analyze this situation if you submit a request for an advance income tax ruling.
We hope that our comments will be of assistance to you.
Best regards.
Ghislain Martineau
Manager, Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.