Principal Issues: General questions on the tax consequences concerning several options being considered by an NPO for use of proceeds of disposition of property.
Position: General comments only.
Reasons: Whether an NPO will continue to qualify for an exemption under paragraph 149(1)(l) of the Act is a question of fact.
XXXXXXXXXX 2005-011405 J. Gibbons, CGA April 18, 2005
Dear XXXXXXXXXX:
Re: Disposition of Capital Property by Non-Profit Organization
We are replying to your letter dated January 25, 2005, concerning a disposition of a building that was used by a non-profit corporation (the "Corporation") to conduct its social activities. You have requested our comments concerning several options the Corporation is considering regarding the possible use of the proceeds of disposition, i.e., purchasing a new building, reinvesting the proceeds to earn investment income, or winding-up and distributing amounts to its members.
Written confirmation of the tax implications inherent in particular transactions is provided by us only where the transactions are proposed and the subject matter of an advanced income tax ruling request submitted in the manner set out in Information Circular 70-6R5. However, we have provided some general comments below, which we hope will be of some assistance to you.
In general terms, paragraph 149(1)(l) of the Income Tax Act (the "Act") provides that a non-profit organization (an "NPO") within the meaning of that paragraph is exempt from Part I tax. In order to qualify as an NPO, an organization must:
(a) not be a charity;
(b) be organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit;
(c) be in fact operated exclusively for the non-profit purpose(s) for which it was organized; and
(d) not distribute or otherwise make available for the personal benefit of a member any of its income unless the member is an association whose primary purpose and function is the promotion of amateur athletics in Canada.
Whether a particular association qualifies as an NPO under paragraph 149(1)(l) in a particular taxation year is a question of fact that can only be determined after reviewing the purpose for which the NPO was organized and its activities in the year. See Interpretation Bulletin IT-496R, Non-Profit Organizations, for further information.
An NPO whose main purpose is to provide dining, recreational or sporting facilities for its members will be subject to tax on its property income, as well as on most taxable capital gains, pursuant to subsection 149(5) of the Act. However, an NPO's taxable capital gains from the disposition of property used exclusively and directly by the NPO in the course of providing the dining recreational and sporting facilities provided by it for its members are excluded under this provision and so remain tax-exempt. See IT-83, Non-profit organizations - Taxation of income from property.
The fact that an NPO, which would otherwise be exempt under paragraph 149(1)(l) of the Act, generates profits from some of its activities will not in and of itself, cause the NPO to lose its exempt status. For example, an entity's status as an NPO will generally not be jeopardized where it generates income from investing excess cash and expends such investment income in accordance with its non-profit purposes.
An NPO may lose its exempt status on a winding-up if a determination is made that some of its income will become payable to, or otherwise available for the benefit of, a member. However, subsection 149(2) provides that, in making such a determination, such income is deemed to be the amount of income determined on the assumption that the amount of any taxable capital gain or allowable capital loss is nil. This subsection operates to allow an association that is a tax-exempt NPO to distribute its net taxable capital gains (taxable capital gains less allowable capital losses) to a member without prejudicing its tax-exempt status. See paragraph 11 of IT-496R.
In your letter, you also indicated the possibility of the Corporation acquiring a "replacement property." It is not clear whether you are referring to the replacement property rules in subsection 44(1) of the Act, which permit a taxpayer to elect to defer the recognition of capital gains on the voluntary disposition of a "former business property." Under these rules as they apply to voluntary dispositions, a taxpayer must acquire a "replacement property" by the end of the first taxation year following the year in which an amount has become receivable by the taxpayer as proceeds of disposition. These rules would not ordinarily apply to an NPO since subsection 248(1) of the Act defines a "former business property" as capital property that was used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business.
You can find all of the interpretation bulletins referred to above on our website at www.cra.gc.ca.
We trust that these comments will be of assistance.
Yours truly,
Roxane Brazeau-LeBlond, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
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