QUESTION 77
In addition to annual membership fees, recreational clubs sometimes charge new members a one-time initial fee for a new membership which extends over a specified period, say 99 years. If such a fee is properly included under paragraph 12(1)(a) in a club's income for a particular year, would a reserve generally be available to the club under paragraph 20(1)(m) in proportion to the portion of the membership term remaining after the end of the year?
DEPARTMENT'S POSITION
A reserve under paragraph 20(1)(m) of the Act may be deducted where amounts received have been included in income under paragraph 12(1)(a) in respect of; goods that will have to be delivered after the end of the year, services that will have to be rendered after the end of the year, periods for which rent has been paid in advance, or amounts that may have to be repaid. An amount is included in income under paragraph 12(1)(a) of the Act only if it is "on account of services not rendered" or "may be regarded as not having been earned in the year or a previous year". However, an amount is considered earned and is not in respect of services not rendered if the taxpayer's right to it is under no restriction, contractual or otherwise, as to its disposition, use and enjoyment, or the taxpayer's right to the amount is absolute and unconditional.
In a situation where in addition to annual membership fees, a one time initial fee is paid to the club for a new membership, the club would have to show that it was in fact under some definite restriction as to the disposition, use or enjoyment of such funds before a reserve under paragraph 20(1)(m) could be claimed. This could involve a commitment to refund a proportionate amount of the fee in the event the member leaves within a certain time period or the club ceases to operate within a particular time period. Generally the annual membership fees cover the cost of providing facilities and services and the one-time initial fee merely represents a cost to the new member for the use of facilities paid for by previous members. Where this is the case, or where the club is endeavouring to build up a fund for future contingencies such fees should be reported as income under section 9 of the Act.
Canadian Tax Foundation - B.C. Conference September 1991 Bill Guglich Section 23