Principal Issues: Will proposed amendments to the bylaws of a non-profit organization (NPO) allowing for the distribution of profits to its members affect its NPO status under paragraph 149(1)(l) of the Act?
Position: Yes
Reasons: The CRA does not object to the proposed amendment to the bylaws; however, the NPO will no longer meet the requirements of paragraph 149(1)(l) and will become subject to tax under Part I of the Income Tax Act.
XXXXXXXXXX 2003-002725
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Entity")
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-named taxpayer. We apologize for the delay in responding to your request.
We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:
(i) in an earlier return of the taxpayer or a related person,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,
(iii) under objection by the taxpayer or a related person,
(iv) before the courts, or
(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
FACTS
1. The Entity was incorporated as a co-operative without share capital by a Memorandum of Association on XXXXXXXXXX.
2. XXXXXXXXXX (the "Registrar") is responsible for approving any changes to its articles and bylaws.
3. XXXXXXXXXX.
4. The Entity currently owns or leases approximately XXXXXXXXXX of land in XXXXXXXXXX. In accordance with its mandate, these lands are made available to the XXXXXXXXXX current members of the Entity for their own farming operations.
5. The Entity has been operating as a non-profit organization within the meaning assigned by paragraph 149(1)(l) of the Act since its inception and, as such, its income has not been subject to tax under Part I of the Act. The Entity has never filed an income tax return with the Canada Revenue Agency (the "CRA").
6. Pursuant to its existing bylaws, the Entity is not entitled to distribute any of its surplus to its members. The Entity has approached the Registrar with respect to amending its bylaws to allow for the distribution of income to its members. The Registrar will not object to the Entity's proposed bylaw amendment allowing a distribution of funds to its members if the Entity obtains written approval from the CRA.
PROPOSED TRANSACTIONS
7. The Entity will amend its bylaws to allow for the distribution of funds to its individual members. The specific bylaw amendment that impacts the distribution of funds to members, as provided in your letter to us of XXXXXXXXXX, is as follows:
Deleting section XXXXXXXXXX of the bylaws, which currently reads:
"XXXXXXXXXX
and substituting the following wording:
XXXXXXXXXX."
8. The Entity will sell a portion of its land. This sale will result in a significant capital gain.
PURPOSE OF THE PROPOSED TRANSACTIONS
9. The purpose of the proposed bylaw amendment is to allow the Entity to distribute excess funds, whether from annual surplus or from reserve funds, to its members. Specifically, the proposed bylaw amendment described in 7 above will allow the Entity to distribute the excess proceeds from its land disposition described in 8 above to its members in the proportions determined by its Board of Directors.
RULING GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are carried out as described above, we rule as follows:
A. Provided that the Entity is, in fact, a non-profit organization, the Entity will cease to qualify as a non-profit organization as of the date that it applies for the bylaw amendment described in 7 above.
The above advance income tax ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and is binding on the Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
COMMENTS
i) This Advanced Income Tax Ruling does not rule on the non-profit status of Entity prior to this bylaw amendment. This determination is a question of fact.
ii) The additional bylaw amendments you proposed in your letter to us (specifically points "a", "c", "d" and "e" respectively) are outside the scope of this ruling and, as such, we have provided no additional comments with respect to them. This ruling only addresses the impact of the Entity's proposed amendment "b(i)" and "b(ii)"to allow a distribution of surplus or reserve funds to members of the co-operative.
iii) This ruling does not rule on the taxation of amounts that will eventually be distributed to the Entity's members.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch