| 921469 | ||
| 24(1) | L. Holloway | |
| (613) 957-8953 |
Attention: 19(1)
August 26, 1992
Dear Sirs:
Re: 149(1)(l) Technical Interpretation
This is in reply to your letter dated May 11, 1992, requesting the Department's opinion on the activities of a non-profit organization ("NPO").
24(1)
In your opinion the accumulation of funds to replace a capital asset should not jeopardize the tax-free status of the organization. You asked for our comments on this matter. In addition you asked if the earning of rental income would impact the non profit status of the corporation.
Our Comments
The particular circumstances outlined in your letter appear to involve an actual taxpayer and specific transactions. As explained in Information Circular 70-6R2, it is not the Department's practice to comment on proposed transactions involving specific taxpayers other than in the form of advanced income tax rulings. Should this situation involve actual completed transactions, the tax exempt status of this organization should be discussed with an official of your local district taxation office. We are therefore not in a position to give you a definitive answer to your questions. We will however, provide the following general comments which may be of assistance to you.
In Interpretation Bulletin IT-496, Non-Profit Organizations, the Department has outlined some of the factors that are considered relevant in determining the exempt status of an entity under 149(1)(l) and under what circumstances such an entity would lose its exempt status.
As pointed out in this Bulletin, one of the characteristics of an activity that might be indicative of a trade or business is that the organization's goods or services are not restricted to members and their guests. In our view, this statement is generally valid when the organization's goods and services are offered to others with a profit motive in mind, and particularly where the association competes with taxable entities.
In a situation where income is received from renting space in excess of that currently needed by an organization in a building that it owns, the exempt status of such an organization could be jeopardized. Generally, we would not be concerned when an organization rents space in its building which is in excess of its current needs to carry out its objects. We would be concerned, however, when an organization acquires property that is considerably in excess of what it might reasonably be expected to need in the foreseeable future, that the property may have been acquired for the purpose of earning income. Depending on the nature of the organization and the use to which these profits are put, this may or may not be objectionable.
Normally having surplus funds in excess of an NPO's current needs could endanger its NPO status. However, in exceptional cases where a special project requires a time period in excess of the current and prior year to accumulate the necessary funds, we would expect such funds to be accounted for in a separate special project fund until sufficient funds are accumulated to carry out the specific special project. The special project fund should consist of a least two separate accounts to be held at a Canadian financial institution. All monies received by the special project fund representing the capital of the fund should be credited to one account and all amounts earned on those monies should be maintained in a separate account. Funds to complete the project should be taken first from the second (interest or other revenue) account and subsequently from the capital account. The accounting records should be able to track these accounts at all times.
An NPO that is described in subsection 149(5) is taxable on its property income to the extent indicated in that subsection. Provided that the funds accumulated in its special project capital fund are used for that project, or to further the objects an purposes of the NPO, there should not be any other tax consequences.
We trust these comments will be of assistance to you.
Yours truly,
G. Thornleyfor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch