2017-0684761E5 Subsection 138(1) and paragraph 149(1)(l)

Principal Issues: Whether views expressed in 2001-010706 remain valid?

Position: Yes, if the fact situation is the same.

Reasons: 138(1) deems the organization to have been carrying on an insurance business in the year for profit for the purposes of the Act, therefore, it will not qualify as a tax-exempt NPO under paragraph 149(1)(l) unless it is otherwise factually organized and operated exclusively on a cost-recovery basis for social welfare, civic improvement, or pleasure or recreation.

Author: Townsend, Ann
Section: 149(1)(l) and 138(1)

XXXXXXXXXX                                                             2017-068476
                                                                                     A. Townsend

November 7, 2023

Dear XXXXXXXXXX:

Re: Subsection 138(1) and Paragraph 149(1)(l) of the Income Tax Act

This is in response to your email asking whether an entity to which subsection 138(1) of the Income Tax Act (“Act”) applies, is precluded from qualifying as a tax-exempt non-profit organization under paragraph 149(1)(l) of Act. In particular, you asked whether the views expressed in Technical Interpretation 2001-0107065(E), dated January 23, 2002, remain valid. In that interpretation, we stated:

“We are of the view that where an entity which has been organized exclusively for non-profit purposes enters into insurance contracts on a cost recovery basis but otherwise operates exclusively for non-profit purposes such an entity could qualify as a non-profit organization pursuant to paragraph 149(1)(l) of the Act provided the other requirements of that provision are satisfied. In our view subsection 138(1) of the Act would not in and of itself preclude such a corporation from qualifying as being exempt under paragraph 149(1)(l) of the Act.”

We apologize for the delay in our reply.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). 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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Paragraph 149(1)(l) of the Act provides that the taxable income of an organization is exempt from tax under Part I for a period throughout which the organization meets all of the following conditions:

* It is a club, society or association;

* It is not a charity;

* It is organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or any other purpose except profit; and

* Its income is not available for the personal benefit of a member or shareholder, unless the member or shareholder is an association which has as its primary purpose and function the promotion of amateur athletics in Canada.

As stated above, paragraph 149(1)(l) of the Act requires that an organization be organized and operated exclusively for social welfare, civic improvement, pleasure, recreation or for any other purpose except profit. It is our longstanding position that the use of the word “exclusively” indicates that while an organization may have several purposes, none of those purposes can be to earn a profit, even if that profit is intended to be used to support its not-for-profit purposes.

Any corporation that carries on an insurance business (insurers) within the meaning assigned by subsection 138(1) of the Act is deemed by that subsection, for purposes of the Act, to carry on that business in the year for profit. Where subsection 138(1) of the Act applies to a corporation and the corporation is not otherwise organized and operated exclusively on a cost-recovery basis for purposes of social welfare, civic improvement, pleasure or recreation, it will not qualify for the tax exemption under paragraph 149(1)(l) of the Act. These views are consistent with those expressed in Technical Interpretation 2001-0107065(E). However, we note that insurers are generally regulated and required by the regulator to maintain sufficient capital and surplus to meet their issued insurance contracts obligations. As a result, most insurers likely will not operate on a cost-recovery basis.

We trust these comments will be of assistance to you.

Yours truly,

Ms. Nerill Thomas-Wilkinson, CPA, CA
Manager
Non-Profit Organizations and Indigenous Issues
Specialty Tax Division
Income Tax Rulings Directorate

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