In the January newsletter we wrote about a recent technical interpretation that had been published by the Canada Revenue Agency Rulings Directorate (“CRA”) regarding whether or not a particular organization or operation established as a non-share capital entity could qualify as a non-profit organization under the Income Tax Act.

Another technical interpretation was released by CRA which furthers this discussion. This article will highlight some of the comments in that letter and our thoughts on whether or not these comments are further evidence of a change in the direction of CRA when determining whether or not an entity qualifies as a tax exempt non-profit organization.

In this particular interpretation, the CRA responded to the following two questions:

1. Can a condominium corporation rent a suite for an amount in excess of its cost of operating and maintaining the suite and still qualify for the exemption from tax provided by paragraph 149(1)(l) of the Act?

2. If the rental profits are used to reduce members’ fees, does this affect the tax exemption?

In responding to these questions, the CRA stated that in its view, where the condominium corporation leased the premises for an amount that could generate a surplus, that in and of itself could be considered to be indicative of an intention to make a profit, and thus the entity would not qualify for the exemption from tax provided under paragraph 149(1)(l) of the Act. Further, the response indicated that when a condominium corporation reduces members’ fees as a consequence of intentionally charging rent in excess of costs, then that would be making the income of the condominium corporation available for the personal benefit of its members which is also contrary to paragraph 149(1)(l) of the Act.

This author questions the responses provided by CRA, and also is reminded of the age old adage – ‘be careful what you ask for’. There is not a large body of case law on when an organization qualifies for tax exempt status as a non-profit organization, nor has CRA historically devoted much time to this issue. It is therefore difficult to conclude whether these responses are an accurate statement or interpretation of the Act.

Paragraph 149(1)(l) provides:

A club, society or association that in the opinion of the minister was not a charity within the meaning assigned by subsection 149.1(1) and that was organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, no part of the income of which was available to or was otherwise available for the personal benefit of any proprietor, member or shareholder thereof unless the proprietor, member or shareholder was a club, society or association the primary purpose and function of which was the promotion of amateur athletics in Canada.

It is this author’s view that in today’s world, many legitimately non-profit entities that operate for social welfare, civic improvement, recreation, or other purposes (other than profit) operate as effectively and efficiently as they can to achieve their objects in a fiscally prudent manner. This may involve generating revenue from one activity and using that revenue for another activity while operating on an overall cost recovery basis. CRA’s response in this letter appears to suggest that if any activity earns a surplus, the test in paragraph 149(1)(l) is not met. I think that to conclude that such a manner of operation is indicative of the entity as a whole having an intent to make a profit is questionable.

Further, to conclude that when these entities operate prudently with the result that their membership fees do not increase or are reduced is an indication that there is a personal benefit to the member seems to be a conclusion reached out of context. Suggesting that an entity must plan to spend all revenues – even if such expenditures are not necessary at that moment in time, seems to be inconsistent with the overwhelming public interest for organizations to be fiscally prudent and responsible. CRA has acknowledged this in the past, Interpretation Bulletin IT-496R Non-Profit Organizations states that a non-profit can accumulate a reasonable amount of excess income.

We concluded our earlier article by suggesting that we were hopeful that the answers in the particular technical interpretation were driven mostly by the particular questions asked (which of course are not available as the original letter sent to CRA is not posted on the website). We remain of that view, but are concerned that these responses are indicative of new administrative positions in this area.