2014-0522451E5 149(1)(l) - Admin Fund Management

Principal Issues: Taxpayer requested information with respect to management of funds of an NPO.

Position: General information on NPOs provided.

Reasons: Not a specific tax question.

Author: Merrigan, Lori
Section: 149(1)(l); 149(1)(k)

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                                                                                                                                                      2014-052245
                                                                                                                                                      Lori Merrigan
                                                                                                                                                      (613) 957-9229

October 23, 2014

Dear XXXXXXXXXX:

Re:  Paragraph 149(1)(l)

This is in reply to your letter that the Canada Revenue Agency (“CRA”) received on August 8, 2013, in which you requested information with respect to the management of funds of a non-profit organization, in particular an organization described in paragraph 149(1)(l) of the Income Tax Act (the “Act”). In this letter, unless otherwise expressly stated, all statutory references are to the provisions of the Act.

This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

In particular, you have asked us to comment on the legal and moral issues surrounding the operations of your organization; however, these are are not tax questions to which we can respond. Although we cannot comment on these issues, we can provide the following information with respect to the tax treatment of organizations (NPOs) as described in paragraph 149(1)(l).Paragraph 149(1)(l) provides an exemption from Part I tax for a club, society, or association for a period throughout which the organization complies with the following conditions:
*     It is not a charity;
*     It is organized and operated exclusively for social welfare, civic improvement, pleasure or recreation, or for any other purpose except profit;
and
*     No part of the income of the club, society or association can be payable or be available for the personal benefit of any of its members.

Where the main purpose of such an organization is to provide dining, recreational or sporting facilities to its members, subsection 149(5) will then apply to deem the existence of an inter vivos trust. The property of the organization is deemed to be the property of the trust and income tax is payable by the trust on its property income and certain capital gains.  The CRA’s general views regarding subsection 149(5) can be found in Interpretation Bulletin IT-83R3, Non-profit organizations - Taxation of income from property.

To qualify for the exemption from tax, an association must not only be organized exclusively for non-profit purposes but it must in fact be operated in accordance with these purposes in each year for which it seeks exemption under paragraph 149(1)(l). A determination of whether an association was operated exclusively for and in accordance with its non-profit purposes in a particular taxation year must be based on the facts of each case, which can be obtained only by reviewing all of its activities for that year. An association that qualifies for the exemption in a particular year may cease to qualify in a subsequent year by failing to operate in accordance with the requirements in paragraph 149(1)(l). The earning of profit cannot be or become a purpose of the organization. 

A 149(1)(l) organization can earn a profit but the profit must be incidental and must result from activities undertaken to support the organization’s not-for-profit objectives. As mentioned previously, an organization claiming a paragraph 149(1)(l) tax exemption can earn a profit, as long as the profit is incidental and arises from activities directly connected to its not-for-profit objectives. Examples of profitable activities that might be undertaken through a 149(1)(l) organization include running a canteen at a rink used for amateur hockey or a cafeteria at a not-for-profit youth hostel, or charging admission above direct cost for a children's concert (where the not-for-profit purpose of the organization was to organize and promote youth participation in music).

Generally, fundraising by its very nature, is considered a profit activity. Therefore, an organization cannot qualify for the exemption if holding or participating in fundraising events amounts to a purpose, and in particular if it is the sole purpose of the organization. 

The CRA accepts that certain fundraising activities can be carried on directly by a 149(1)(l) entity without jeopardizing its tax-exempt status. In particular, where a 149(1)(l) entity (usually a 149(1)(l) entity organized for social welfare, civic improvement, or pleasure or recreation) raises funds through activities carried out by volunteers, especially activities involving the sale of donated goods or services, or involving games of chance (including lotteries and bingos), carrying out these activities will not generally indicate a profit purpose within the meaning of paragraph 149(1)(l). However, the scope of the fundraising activities, especially by comparison with other activities, should not be so significant that fundraising can be considered a purpose of the organization.

One of the requirements of paragraph 149(1)(l) is that no part of the income of the organization can be payable to or is otherwise available for the personal benefit of any member. Paragraph 12 of IT-496 states that:

“Certain types of payments made directly to members or indirectly for their benefit, will not, in and by themselves disqualify an association from being tax-exempt under paragraph 149(1)(l).  Such payments include salaries, wages, fees or honorariums for services rendered to the association, provided the amounts paid are reasonable and no more than those paid in arm's length situations for similar services.  Also included are payments made to employees or other members of the association to assist them in covering their expenses to attend various conventions and meetings as delegates on behalf of the association, provided attendance at such conventions and meetings is to further the aims and objectives of the association.”

Paragraph 149(1)(k) also provides an exemption from tax under Part I on the taxable income of a person for a period when that person was “a labour organization or society or a benevolent or fraternal benefit society or order.” However, the Act does not define the expression “a benevolent or fraternal benefit society or order” as referred to in paragraph 149(1)(k). Therefore, we refer to the common use of those terms.

The Canadian Oxford Dictionary defines the term “fraternal society” as “an association, usually of men, devoted to philanthropic, religious, or social activities” and the term “benevolent” as “wishing to do good; actively friendly and helpful; charitable.”

The seventh addition Black’s Law Dictionary describes a “fraternal benefit association” as “a voluntary organization or society created for its members’ mutual aid and benefit rather than for profit and whose members have a common and worthy cause, objective or interest. These associations usually have a lodge system, a governing body, rituals, and a benefits system for their members.” It defines “benevolent association” to mean “an unincorporated, non-profit organization that has a philanthropic or charitable purpose.” Whether an organization qualifies for the tax exemption provided for in either paragraph 149(1)(l) or (k) is a question of fact to be determined after a review of the relevant facts.

We trust that these comments will be of assistance.

Yours truly,

Roger Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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