5-901539
R.D. Mundell
(613) 957-2139
Attention: 19(1)Dear Sirs:
Re: Paragraph 149(1)(1)
This will reply to your letter of June 29, 1990, in which you requested our interpretation of paragraph 149(1)(1) of the Income Tax Act with respect to a non-profit corporation owned and operated by a Native Indian Band.
Our understanding of the relevant facts is as follows:
24(1)
You have requested our assistance in answering the following questions:
1. If the net surplus from operations is used to provide housing for certain band members, will certain conditions of paragraph 149(1)(1) be violated which will render the company to be a taxable entity whereby all surpluses are taxable?
2. If 149(1)(1) is violated in one year, will the company not be able to obtain its non-profit status for any subsequent year?
3. Will 149(1)(1) not be violated if surpluses are specifically earmarked for recreation or civic improvement? For example, construction of a recreational hall for the benefit of all band members will be acceptable.
4. Will reasonable salaries paid by the company to its employees, who are band members, be permitted under 149(1)(1)?
5. If surpluses are used to provide job training or education to all band members, but attended only by members who wanted the training, will this be acceptable? Our Comments The fact situation which you set out is quite specific and it appears that it may relate to definite contemplated transactions.
Assurance as to the tax consequences of contemplated transactions can only be given in response to a request for an advance income tax ruling. If you wish to obtain any binding commitment with respect to an actual case with facts similar to your example, an advance income tax ruling application should be submitted. If, on the other hand, your situation reflects factual historic occurrences, the determination with respect to qualifying under 149(1)(1) of the Act would generally be carried out by personnel from your local District Taxation Office. We do, however, provide the following comments for your information.
To qualify for exemption under 149(1)(1) of the Act an organization must be organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit. To establish the purpose for which an organization was organized, the Department will normally look to the instruments by which it was created, such as letters patent, articles of incorporation and so on. For a more complete discussion of this area we refer you to paragraph 5 of IT 496. If a review of these documents reveals that an organization was created for other than one or more of the purposes described above the organization would not qualify as a non-profit organization exempt from tax. Subsection 149(1)(1) of the Act contemplates that an organization may carry on income generating activities and earnincome and still qualify for exempt status. However, the income generating activity must be carried on and the resulting income must be used, by the organization, to achieve its declared exempt objectives. In this regard we refer you to the case of GULL BAY DEVELOPMENT, 84 DTC 6040 where the corporation, in order to achieve the social welfare and civic improvement objectives of the Indian Band Council, operated a logging business.
The court held that having the corporation carry on the logging activities was the most efficient way of achieving the Band Council's social welfare and civic improvement objectives.
With regard to your specific questions, our comments are as follows:
1. As regards the status of a non-profit organization used as a vehicle to provide housing to its members, we note that no part of the income of an organization is to be paid to or otherwise made available for the personal benefit, of a proprietor, member or shareholder of such a non-profit organization.
2. An organization must not only be organized exclusively for non-profit purposes but it must in fact be operated in accordance with those purposes in each year for which it seeks exemption. This determination must be based on the facts of each case on a yearly basis.
3. Construction of a recreational hall for the benefit of all band members would be acceptable if such an activity is one of the purposes for which the organization was created. However, the Department's view, as set out in paragraphs 8 and 9 of IT 496, is that the amount of accumulated income in excess of expenditure must be reasonable in relation to the needs of the organization.
It is noted that where the present value of accumulated excess is excessive or an annual excess is regularly accumulated it may indicate that the organization's aims are two-fold, to earn profits and to carry out its non-profit purposes. In such a case, the "operate exclusively" test in paragraph 149(1)(1) would not be. met.
4. It is the Department's view that payments such as salaries, wages, fees or honorariums for services rendered to an organization will not, in and by themselves, disqualify the organization from being exempted, provided the amounts are reasonable.
5. An organization cannot qualify as a non-profit organization if it is registrable as a charity. Charitable objects fall into four main categories, one of which is the advancement of education. In this regard we again refer you to the GULL BAY case.
We caution that our comments are based upon the limited information provided and should therefore be treated as general in nature. Our comments are an expression of opinion only and are not binding on the Department.
In a particular fact situation, with access to all pertinent documents and other relevant information, our reply might very well appear to be different.
We trust this will be of assistance.
Yours truly
for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch