| 19(1) | File No. 900617 |
| Bill Guglich | |
| 957-2102 |
May 24, 1990
Dear 19(1)
This is in reply to your letter of April 30, 1990 concerning non-profit organizations.
You enclosed a "Fact Sheet" and requested confirmation of the following items:
1. Paragraph 149(1)(l) of the Income Tax Act (the "Act") exempts non-profit organizations from paying tax.
2. Non-profit organizations need not be operated exclusively for charitable purposes.
3. To qualify as a non-profit organization an entity must meet two tests. First, it cannot be deemed to qualify as a registered charity for tax purposes. Second, whether a club society or association, it must be organized and operated exclusively for social welfare, civic improvement, pleasure and recreation, or for any other purpose except profit.
4. The number of non-profit organizations in Canada cannot be determined.
5. There is no registration requirement under the Act.
6. There are no annual filing requirements for non-profit organizations except for those that are incorporated or are trusts.
7. The Department of National Revenue, Taxation takes the view that an organization has profit as an objective when its principal activity is carrying on a trade or a business, as determined by four factors: the trade or business is operating in a commercial manner, its goods and services are not restricted to its members and their guests; it is operating on a profit-making rather than a cost-recovery basis; or it is operating in direct competition with taxable entities engaged in the same trade or business.
8. The Department considers that if accumulated profits exceed the reasonable needs of an organization for conducting its non-profit activities then the organization is operating for the purpose of profit.
9. The Act imposes a tax on the investment income of certain non-profit dining, recreational or sporting associations.
10. Organizations that meet the definition of fraternal societies are not restricted from having profit as an objective.
11. The legislative rules attempt to prohibit a non-profit organization from making any part of its income available for the personal benefit of any proprietor, member or shareholder.
12. If a non-profit organization abandons its non-profit status, it is possible for it to windup and distribute its assets tax free to its members.
13. We understand, that on a few occasions, to encourage a private sector company to locate in their areas, municipalities have used their non-profit status to pass on a tax concession to the company.
We agree with your views in items 1, 4, 5, 6, 7, 8 and 11 and offer the following comments respecting the other items:
2. A non-profit organization must not be a charity. An entity which is a charity can not qualify as a non-profit organization.
3. To qualify as a non-profit organization an entity must meet the conditions described in paragraph 2 of Interpretation Bulletin IT-496.
9. The income from property of non-profit organizations, whose main purpose is to provide dining, recreation or sporting facilities for its members, is subject to tax.
10. Paragraph 149(1)(k) of the Act contemplates that a benevolent or fraternal benefit society or order may carry on income generating activities and earn a profit and still qualify for exempt status, otherwise there would be no need for an exempting provision in the Act. However, in a case where the income generating activity was not carried on and the resulting income was not used by the organization to achieve its declared benevolent or fraternal benefit objectives, it would be open to doubt whether the organization retained its character as a benevolent or fraternal benefit society.
12. We are not able to confirm your views. Interpretation Bulletin IT-409 discusses the tax consequences respecting the winding-up of a non-profit organization.
13. Paragraph 149(1)(d) of the current Act was formerly paragraph 62(1)(c) of the 1952 Income Tax Act. Paragraph 62(1)(c) was amended in 1968 to preclude Canadian municipalities from arranging for exempt status for otherwise taxable corporations.
In a telephone conversation (Wheeler 19(1)) you also requested copies of any correspondence from our Department to the Department of Finance concerning problems relating to paragraph 149(1)(l) of the Act. Requests for copies of correspondence of this nature should be forwarded in writing to Mr. B. Orsini, Director, Internal Audit Division, Internal Audit and Evaluation Directorate, Corporate Affairs Branch, 875 Heron Road, Ottawa, Ontario, K1A 0L8.
We trust this will be of assistance to you.
for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch