Late last year, the Canada Revenue Agency ("CRA") released a technical interpretation, CRA document no. 2013-0474101E5 -- "NPO wind-up – asset distribution" (November 20, 2014), pertaining to the distribution of assets from a tax-exempt 149(1)(l) not-for-profit organization ("NPO"). The interpretation request concerned an NPO holding private company shares that had appreciated significantly in value since the NPO acquired them for a nominal sum. The NPO wanted to transfer either ownership or proceeds of disposition of the shares to some of its members either before or during the NPO's wind-up. The high points of the CRA's responses to a number of specific questions from the NPO with respect to the consequences of those transactions are as follows:
- When an NPO holds long-term investments to generate property income, it may be considered to have a profit purpose. As such, when an NPO holds shares, the facts surrounding that holding must be examined as holding shares as a long-term investment could jeopardize an NPO's eligibility for tax-exempt status under paragraph 149(1)(l) of the Income Tax Act (Canada) ("Tax Act") where the investment is made for a profit purpose.
- An NPO can distribute both the taxable and non-taxable portion of a capital gain to its members without affecting its tax-exempt status under paragraph 149(1)(l) since the definition of "income" in section 3 of the Tax Act does not include either of those capital gain portions.
- The bar on an NPO making income payable to or otherwise available for the benefit of a proprietor, member or shareholder applies whether the proprietor, member or shareholder is tax-exempt or not. As such, regardless of whether the proprietor, member or shareholder is itself, for instance, an NPO or a registered charity, an NPO will not be able to distribute any of its income to that proprietor, member or shareholder without risking its tax-exempt status. This is the case even if the income is distributed on the condition that the proprietor, member or shareholder use the income for a purpose consistent with the distributing NPO's purposes.
- If an NPO ceases to qualify for tax-exempt status under paragraph 149(1)(l), it will, among other things, have a deemed disposition of all of its assets at fair market value. If shares held as capital property by the NPO are included in this deemed disposition, any amounts that would have been added to the NPO's capital dividend account as a result of that deemed disposition will not be available to the NPO as its capital dividend account will be reduced to nil where it ceases to be tax-exempt.
- Where an entity transfers any part of its income to a proprietor, member or shareholder by gift, it will no longer be eligible for tax exemption under paragraph 149(1)(l) – regardless of the fact that the distribution was by gift.
In addition to the foregoing guidance, this technical interpretation also provides a somewhat helpful refresher on the CRA's administrative position regarding the distribution of an NPO's assets both within and outside of the winding-up context.