2021-0905311E5 NPO and sale of property

Principal Issues: Would the Society be exempt from tax on the capital gain realized on the proposed sale of its clubhouse property?

Position: Not likely.

Reasons: The Society appears to have been originally organized and operated in conformity with paragraph 149(1)(l). However, the Society appears to have begun, at some point in time, actively pursuing a profit from the operation of XXXXXXXXXX and therefore would not meet the conditions of paragraph 149(1)(l) or 149(5).

Author: Gauthier, Michel
Section: 149(1)(l); 149(1)(5)

XXXXXXXXXX                                                                     2021-090531
                                                                                             M. Gauthier

October 6, 2023

Dear XXXXXXXXXX:

Re: Non-Profit Organization and Sale of Property

This is in reply to your letter dated July 30, 2021, requesting our comments on the tax implications of a proposed sale of real property by your client, The XXXXXXXXXX Society (the “Society”). In your letter, you indicated that the Society is a tax-exempt non-profit organization under paragraph 149(1)(l) of the Income Tax Act (the “Act”). We apologize for the delay in our reply.

In this letter, all statutory references are to the provisions of the Act unless otherwise expressly stated.

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.

In general terms, paragraph 149(1)(l) 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, recreation or any other purpose except profit; and

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

For an entity that meets all of these conditions (“a 149(1)(l) entity”) and whose main purpose is to provide dining, recreational or sporting facilities for its members, subsection 149(5) contains specific rules for the property income earned by the entity. Under this subsection, an inter vivos trust is deemed to exist throughout the period during which a 149(1)(l) entity has as its main purpose the provision of dining, recreational or sporting facilities for its members. Throughout that period, the property of a 149(1)(l) entity is deemed to be the property of the deemed trust and tax is payable by the trust on any income from property (such as income from dividends, interest, rentals, taxable capital gains, etc.), excluding any taxable capital gain realized on the disposition of property used exclusively for, and directly in the course of, providing dining, recreational or sporting facilities for its members.

According to the information you provided, the Society appears to have been organized in conformity with paragraph 149(1)(l). However, as discussed during our meeting on November 2, 2021 (XXXXXXXXXX/Thomas-Wilkinson/Mahendran/Gauthier), at some point in its past, the Society appears to have begun actively pursuing a profit purpose through the public operation of its XXXXXXXXXX. Therefore, the Society likely ceased being a 149(1)(l) entity at some point in its past and any resulting taxable capital gain on the proposed sale of its real property would not be fully exempt from tax.

At the time a corporation ceases to be a 149(1)(l) entity, it ceases to be exempt and is subject to the rules in subsection 149(10). According to subsection 149(10), the taxation year of the corporation is deemed to have ended immediately before that point in time when it ceases to be exempt and a new taxation year is deemed to begin at the time it ceased to be exempt. In addition, the corporation is deemed to have disposed of all of its properties immediately before it ceased to be exempt and to have reacquired them at fair market value. In effect, the capital gain accrued after the time the Society ceased to be a 149(1)(l) entity would be subject to tax.

Alternatively, the Society may qualify for the income tax exemption under paragraph 149(1)(k). Paragraph 149(1)(k) exempts from tax under Part I all the taxable income of a labour organization or society or a benevolent or fraternal benefit society or order.

However, the Act does not define the expressions “labour organization or society” or “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.

Labour organization or society

The eleventh edition Black’s Law Dictionary does not specifically define a “labor organization” but instead refers to the definition of “union”. A “union” is defined as “[A]n organization formed to negotiate with employers, on behalf of workers collectively, about job-related issues such as salary, benefits, hours, and working conditions. Unions generally represent skilled workers in trades and crafts.”

Benevolent or fraternal benefit society or order

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 eleventh edition Black’s Law Dictionary defines a “fraternal benefit association” as “[A] voluntary organization or society created for its members' mutual aid and benefit rather than for profit, the members having dedicated themselves to a common and worthy cause, objective, or interest. These associations often have a lodge system, a governing body, rituals, and a benefits system for their members.”. It defines “benevolent association” as “[A]n unincorporated, nonprofit organization that has a philanthropic or charitable purpose.” [Our emphasis]

Based on your description of the Society in your letter dated February 22, 2022, the Society does not appear to be a labour organization or society.

Unlike paragraph 149(1)(l), there is no specific requirement in paragraph 149(1)(k) that the organization is organized and operated exclusively for any purpose other than profit. However, it is our view that the profit-generating activities cannot be the principal activity of the 149(1)(k) entity.

Nothing in this letter should be construed as implying that we are confirming that the income of the Society is, or has been at any particular time, exempt from income tax under paragraph 149(1)(k) or (l). Whether the Society qualifies for the tax exemption under paragraph 149(1)(k) or (l) for a taxation year is a question of fact to be determined at the end of the taxation year after considering all of the organization’s activities during that year.

We trust these comments will be of assistance.

Yours truly,

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

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