WHAT YOU SHOULD KNOW ABOUT NOT-FOR-PROFITS James M. Parks Cassels Brock & Blackwell LLP Scotia Plaza, Suite 2100 40 King Street West Tel: 416-869-5340 Fax: 416-640-3053 E-mail: [email protected] © 2009 Cassels Brock & Blackwell LLP. TABLE OF CONTENTS INTRODUCTION .................................................................................................................... 1 GENERAL COMMENTS ........................................................................................................ 5 NPO’S – NOT CHARITIES..................................................................................................... 5 DEEMED TRUST ................................................................................................................... 6 CHANGE IN STATUS............................................................................................................. 9 RCAAA’S .............................................................................................................................. 10 LOW-COST HOUSING CORPORATIONS .......................................................................... 17 MUNICIPALITIES IN CANADA ............................................................................................ 19 MUNICIPAL OR PUBLIC BODIES PERFORMING A FUNCTION OF GOVERNMENT IN CANADA............................................................................................................................... 20 COMPLIANCE ISSUES........................................................................................................ 21 NON-TAX ISSUES ............................................................................................................... 23 FRATERNAL BENEFIT SOCIETIES.................................................................................... 25 LABOUR ORGANIZATIONS ................................................................................................ 27 AGRICULTURAL ORGANIZATIONS AND BOARDS OF TRADE....................................... 27 LEGAL CHARACTERIZATION OF ENTITY......................................................................... 29 CERTAIN CRA ADMINISTRATIVE POLICIES .................................................................... 30 BENEFITS TO MEMBERS................................................................................................... 34 ISSUES PECULIAR TO TRUSTS ........................................................................................ 35 MUNICIPAL TAX ISSUES.................................................................................................... 35 OTHER COMMENTS ........................................................................................................... 38 GST ...................................................................................................................................... 39 PROVINCIAL RETAIL SALES TAX...................................................................................... 42 GOVERNANCE ISSUES ...................................................................................................... 43 SUMMARY ........................................................................................................................... 44 WHAT YOU SHOULD KNOW ABOUT NOT-FOR-PROFITS Introduction This is a discussion about certain organizations that are not registered charities but are nevertheless exempt from tax under the Income Tax Act,1 in some cases are qualified donees and in some cases are entitled to special treatment for municipal tax purposes, GST purposes or other purposes. The starting point is the list of exempt organizations in subsection 149(1) of the ITA which includes the following: 1. 2. 3. 4. 5. 6. 7. a municipality in Canada or a municipal or public body performing a function of government in Canada; a corporation, commission capital or association all of the shares (other than directors’ qualifying shares) or of which was owned one or more persons each of which was the federal crown or the provincial crown; a corporation, commission or association not less than 90% of the shares (other than directors’ qualifying shares) or of the capital of which was owned by one or more persons each of which is the federal crown or the provincial crown; a corporation all of the shares (other than directors’ qualifying shares) or of the capital of which was owned by one or more persons each of which is a corporation, commission or association that is exempt under certain provision; a corporation, commission or association not less than 90% of the shares (other than director’s qualifying shares) or of the capital of which was owned by: (a) one or more persons each of which is the federal Crown or a provincial Crown or a person exempt under certain provisions; or (b) one or more municipalities in Canada in combination with one or more persons each of which is the federal crown or a provincial crown or a person exempt under certain provisions; a corporation all of the shares (other than directors’ qualifying shares) or of the capital of which was owned by one or more persons each of which is a corporation, commission or association that is exempt under certain provision; a corporation, commission or association not less than 90% of the capital of which was owned by one or more municipalities in Canada, if the income of the corporation, commission or association from activities carried on outside the geographical boundaries of the municipalities in question does not exceed 10% of its total income for the relevant period, subject to certain geographical limitations; A recent case dealt with the geographical boundaries within which corporations owned by municipalities earn their income. Under paragraph 149(1)(d.5), subject to subsection (1.2), there is an exemption for the income of a corporation not less than An earlier version of this paper was presented at a seminar held by the Charity and Not-for-Profit Law Section of the Ontario Bar Association in Toronto on November 18, 2008. 1 R.S.C. 1985, c.1 (5th Supp.), as amended, hereinafter referred to as the “Act”. Unless otherwise noted, statutory references herein are to the Act. -2- 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 90% of a capital of which was owned by one or more municipalities in Canada, if the income of the corporation from activities carried on outside the geographical boundaries of that municipality or those municipalities does not exceed 10% of its total income for the relevant period. Subsection 149(1.2) provides that income from activities carried on outside the geographical boundaries of a municipality will exclude income from activities carried on under an “agreement in writing” between the corporation and the. In Sakitawak Development Corporation v. The Queen, the Tax Court held that 2008 TCC 529 of writing an “agreement in writing” included a bylaw enacted under the Northern Municipalities Act by a “northern municipality”, in respect of the taxpayer corporation. As a result, despite the fact that the taxpayer corporation earned more than 10% of its income outside the geographical boundaries of the municipality that owned it, its income was exempt. subject to the same geographical limitations, a corporation all of the shares (other than directors’ qualifying shares) or of the capital of which was owned by one or more persons each of which is a corporation, commission or association which meets certain tests, subject to certain other limits; an agricultural organization, a board of trade or a chamber of commerce, no part of the income of which was payable to or was otherwise available for the personal benefit of any proprietor, member or shareholder; The Association of Universities and Colleges of Canada; a corporation that was constituted exclusively for the purpose of providing low-cost housing for the aged, no part of the income of which was payable to or was otherwise available for the personal benefit of any proprietor, member or shareholder; a corporation that was constituted exclusively for the purpose of carrying on or promoting scientific research and experimental development, no part of the income of which was payable to or was otherwise available for the personal benefit of any proprietor, member or shareholder, that has not acquired control of any other corporation and that during the relevant period did not carry on a business and meet certain tests: a labour organization or society or a benevolent or fraternal benefit society or order; 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 payable to or was otherwise available for the personal benefit of any proprietor, member or shareholder 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; a mutual insurance corporation that received its premiums wholly from the insurance of churches, schools or other charitable organizations; a limited-dividend housing company (within the meaning in the National Housing Act) all or substantially all of the business of which is the construction, holding or management of low-rental projects; a trust governed by a registered pension plan; a corporation incorporated and operated solely for the administration of a registered pension plan or for the administration of a registered pension plan and for no other purpose other than acting as a trustee of or administering a trust governed by a -3- 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. retirement compensation arrangement, if it has been accepted as a funding medium for purposes of the registration of the pension plan; a corporation incorporated before November 17, 1978 solely in connection with or for the administration of a registered pension plan that meets certain other requirements; a corporation that is a small business investment corporation; a trust that is prescribed to be a master trust and that files the required election; a trust under an employees profit sharing plan; a trust under a registered supplementary unemployment benefit plan; a retirement compensation arrangement trust; a trust under a registered retirement savings plan; a trust under a deferred profit sharing plan; a trust governed by an eligible funeral arrangement; an insurer that is not engaged in any business other than insurance if in the opinion of the Minister on the advice of the Superintendent of Financial Institutions or the superintendent of insurance of a province under which the insurer is incorporated, at least 20% of the gross premium income (net of reinsurance ceded) earned by the insurer (or in some cases by other insurers that are related to it ) is in respect of insurance of property used in farming or fishing or residences of farmers or fisherman; a trust governed by a registered education savings plan; a trust governed by a registered disability savings plan; a trust governed by a tax free savings account; an amateur athlete trust; a trust required under a law of Canada or a province to provide funds out of which to compensate persons for claims against an owner of a business identified in their relevant law, subject to certain requirements; a trust govern by a registered retirement income fund; a trust established pursuant to the terms of a collective agreement for the sole purpose of providing vacation pay or holiday pay, subject to certain requirements; a qualifying environmental trust; under proposed amendments, a trust created because of a requirement imposed under the Environmental Quality Act of Quebec; Under proposed amendments, a trust created because of a requirement under the Nuclear Fuel Waste Act; I do not discuss all of these exempt organizations and focus on only a few of them. These include traditional not-for-profit organizations (“NPO’s”) that are exempt under paragraph 149(1)(l), registered Canadian amateur athletic associations (“RCAAA’s”, which are a subset of NPO’s that meet certain other requirements), municipal or public bodies performing a function of government in Canada (including some First Nations bands that are recognized under the Indian Act and have a certain level of self government), certain corporations owned by the Crown or a municipality2, agricultural organizations, labour organizations, 2 A recent case dealt with the geographical boundaries within which corporations owned by municipalities earn their income. Under paragraph 149(1)(d.5), subject to subsection (1.2), there is an exemption for the income of a corporation not less than 90% of the capital of which was owned by one or more municipalities in Canada, if the income of the corporation from activities carried on -4fraternal benefit societies and non-profit housing corporations for the aged. The main focus in this discussion is on NPO’s governed by paragraph 149(1)(l) and RCAAA’s. I do not deal with the Crown itself, which is exempt from tax. There is a separate body of law dealing with the meaning of the Crown and circumstances in which an organization will be regarded as a Crown agent and therefore the equivalent of the Crown.3 A question that occasionally arises in dealing with NPO’s is whether an organization is organized and operated exclusively for purposes other than “profit” if revenues exceed expenses, but revenues are incidental to the activities carried on in furthering the purposes. Although it is not directly on point for NPO’s, a recent decision dealing with scientific research and experimental development expenses is interesting. In PSC Elstow Research Farm Inc.4, the Tax Court dealt with deductibility of certain expenses and in doing so determined whether income earned from the sale of hogs used in carrying out scientific research, caused the amounts not be deductible. Canada Revenue Agency (“CRA”) denied certain expenses as deductions. CRA said that to be deductible, the expenses should have been incurred on scientific research and experimental development related to a business that was exclusively carried on for the purpose of research, whereas the business in fact included the sale of hogs. Hogs were used in conducting the research and were a necessary and logical by-product. The Court found that the only business of the taxpayer was its research business and it was not running a commercial farm as another business. Rather, its hog production activities could not be described as being run in a business-like manner and potential revenues from the sale of hogs were sacrificed for scientific result, and not vice versa. The Court also accepted that netting the revenues from the sale of hogs against operating expenses, as reflected in the audited financial statements, was consistent with generally accepted accounting principles and with ordinary business and commercial practice. As a result, all of the revenues were derived from research activities and not from a separate business of selling hog. The Court found that the revenue from the sale of hogs was no different from the sale by a more “traditional researcher” of unused, transformed or leftover research inputs, once they were no longer required for experimentation. In the context of NPO’s and whether an activity is carried on exclusively for a purpose other than profit, this case may be of some utility. In many cases, it will be arguable that the “purpose” of an organization is exclusively non-profit, although its activities, which generate outside the geographical boundaries of that municipality or those municipalities does not exceed 10% of its total income for the relevant period. Subsection 149(1.2) provides that income from activities carried on outside the geographical boundaries of a municipality will exclude income from activities carried on under an “agreement in writing” between the corporation and the province. In Sakitawak Development Corporation v. The Queen, 2008 TCC 529, the Tax Court held that of writing an “agreement in writing” included a by-law enacted under the Northern Municipalities Act by a “northern municipality”, in respect of the taxpayer corporation. As a result, despite the fact that the taxpayer corporation earned more than 10% of its income outside the geographical boundaries of the municipality that owned it, its income was exempt. 3 See for instance, Nova Scotia Power Inc. v. The Queen, 2004 DTC 6506 (SCC). 4 PSC Elstow Research Farm Inc v. The Queen, 2008 TCC 694. -5revenue, are incidental thereto but do not constitute a separate commercial activity that “taints” the exempt status of the organization. General Comments Unlike registered charities, other exempt organizations are generally subject to relatively little regulation under the ITA. This frequently leaves much uncertainty, where a test is subjective, such as whether an organization is organized and operated exclusively for purposes “other than profit” if it carries on commercial activities, accumulates a surplus or looks to a large extent much like a “commercial” organization. CRA has set out its views on NPO’s in IT-496R and in a number of technical interpretations and advance rulings. I do not discuss all of those interpretations, but I comment on some of them, to the extent they deal with relevant issues. Parts IV, IV.I, VI and VI.I do not apply to a corporation while it is exempt from tax under section 149.5 Part IV deals with tax on dividends received, Part IV.I deals with tax on dividends paid, Part VI deals with capital tax on certain financial institutions and Part VI.I deals with a tax on corporations paying certain dividends. It is unlikely that any of these other provisions in the Act will be relevant since organizations that are corporations will generally be exempt under section 149. CRA has confirmed in several technical interpretations that a non-resident NPO can be exempt from tax under Part I of the Act, as long as it is not in the opinion of the Minister a charity and therefore disqualified from being exempt. In addition, there are treaty exemptions for certain United States-based charitable organizations that meet certain criteria. NPO’s – Not Charities The first observation about NPO’s is that they will not be exempt from tax if, in the opinion of the Minister, they are really charities. This raises issues about process. In the L.I.U.N.A. case6, one of the issues was how the Court should make a determination on this point, in the absence of any evidence that the Minister had considered the issue. There are several technical interpretations in which it had made clear by CRA that unless the Minister actually determines that the organisation is not a charity, there will always be a concern that he might later determine that it is a charity and is therefore not exempt. In many cases this issue can be avoided by ensuring that at least one of the objects is clearly non-charitable. Although the policy behind this requirement appears to be aimed at charities that could otherwise qualify for exemption, it is not limited to Canadian charities. A Canadian 5 Subsection 227.1(14). 6 L.I.U.N.A. Local 527 Members’ Training Trust Fund v. The Queen, 92 DTC 2365 (TCC). -6organization that could otherwise register as a charity presumably will do so and become exempt, while at the same time becoming subject the more stringent compliance regime imposed on registered charities. On the other hand, a foreign charity that cannot register to claim exemption as a registered charity is unable to claim an exemption under paragraph 149(1)(l), unless it can somehow “taint” itself by finding some basis on which it cannot be regarded as a “charity”.7 For this purpose, “charity” means a charitable organization or a charitable foundation. A charitable organization is defined as an organization (whether or not incorporated) all of the resources of which are devoted to charitable activities that it carries on itself (or in some cases that it is deemed to carry on under other provisions), no part of the income of which is payable to or is otherwise available for the personal benefit of any proprietor, member, shareholder, trustee or settler thereof, more than 50% of the directors, trustees, officers or like officials of which deals with each other and with each of the other directors, trustees, officers or officials at arms length, and where it has been designated as a private foundation or public foundation, or has applied after February 15, 1984 to be registered, meets certain other tests with respect to the source of its capital.8 A charitable foundation is defined as a corporation or trust (but not an unincorporated association) that is constituted and operated exclusively for charitable purposes, no part of the income of which is payable to or otherwise available for the personal benefit of any proprietor, member, shareholder, trustee or settlor thereof, and that is not a charitable organization. This theme of “personal benefit” is discussed below and is relevant not only for NPO’s but also for corporations providing low-cost housing for the aged, agricultural organizations and scientific research corporations. For this purpose, “charitable purposes” is not defined, although it includes the disbursement of funds to qualified donees. It has been held that in order to determine whether in the opinion of the Minister, an organization is or is not a charity, the organization could be required to apply for registration as a charity. In most cases this will not be practical.9 Deemed Trust Under subsection 149(5), where a club, society or association that would otherwise be exempt under paragraph 149(1)(l) has as its main purpose providing dining, recreational or 7 In order to be registered, a charity must be resident in Canada and either created or established in Canada. See the definition of “registered charity” in subsection 248(1). The Charities and Not-forProfit Law section of the Canadian Bar Association has made submissions to the Department of Finance, pointing out that this does not appear to be the intended result of the policy and suggesting that it would be appropriate to limit to the exclusion in paragraph 149(1)(l) to charities that would be entitled to be registered under the Act. 8 Under proposed amendments in what was formerly Bill C-10, the tests based on directors, trustees, officers, etc., and the source of capital will be amended retroactively. 9 In L.I.U.N.A., the Court dealt at some length with the problems that arise when the opinion of the Minister is a precondition to a determination of the status of an organization as a non-profit organization for purposes of paragraph 149(1)(l). -7sporting facilities for its members, an inter vivos trust is deemed to have been created at the beginning of the period when those facilities were available and the property of the organization is deemed to be the property of that trust. This insures that tax will be payable on the investment income of the NPO, which would otherwise be exempt. Income that is not income from property that is deemed to belong to the trust will not be caught and should be exempt under general principles as income of the NPO itself. CRA has confirmed that “main purpose” is not defined and a determination in a particular case will be a question of fact. It notes that the dictionary meaning seems to be synonymous with “chief in size or extent” or perhaps of “pre-eminent importance” or “primarily”. CRA will generally consider that a primary purpose would be one for which more than 50% of the assets, revenues, time, attention and efforts are expended. CRA also refers to the definition of “principal purpose” as set out in IT-73R6, which deals with the small business deduction for taxable corporations.10 CRA has also set out its views on the taxation of the income from property of a NPO in IT83R3. This bulletin should be read together with IT-496R which deals with NPO’s in general. In IT-83R3, CRA states that, for instance, if a club owns its premises and rents space in a building that is in excess of its current requirements, a reasonable apportionment of its expenses will be deductible in determining the income from the rental of the excess space and when the building is disposed of, any recapture of capital cost allowance will be included in the income of the deemed trust. CRA has also stated that it has not sufficient for a property to be intended for use, but there must be actual use of property for purposes other than providing facilities to members. For example, a gain on the sale of vacant land acquired in connection with a planned extension of club facilities that has been abandoned will be taxable in the deemed trust, regardless of the reason for the change in plans or the fact that the land was not used for any purpose whatever. Other examples are given in IT83R3 which are instructive. It has been argued in several cases that an organization was exempt from tax where it provided recreational facilities to its members, since the income from the deemed inter vivos trust was not income from “property”. If the income is not from “property”, the special rules for the taxation of the deemed trust will not apply. However, the Courts have held that the income will be regarded as income from property and therefore will be taxable under subsection 149(5). For instance, in the Point Grey case11, the club argued that the test as to whether interest income was or was not income from property should be based on whether the fund which generated the interest had been set aside as a dedicated fund for the “legitimate purposes” of the club and if it had been set aside for that purpose, the interest would not be income from property and would therefore not be taxable. 10 CRA document no. 2004-0060451E5, April 1, 2004. CRA has stated that although the use of assets of an association may be a factor in determining the main purpose, arguably of greater importance in making that determination will be the by-laws of the association which regulate its affairs. According to CRA, this is consistent with its views in paragraph 5 of IT-496R, which indicates that when determining the purpose for which an organization has been organized, its constating documents will normally be reviewed. 11 Point Grey Golf and Country Club v. The Queen, 2000 DTC 6217 (FCA). -8The court followed its reasoning in the Elm Ridge earlier case12, and held there was no distinction between dedicated and non-dedicated funds and if interest earned on nondedicated short-term deposits arising from temporary surpluses used in day-to-day operations income from property and taxable (as it held in the Elm Ridge case) then interest earned on a dedicated fund set up for an one-time extraordinary purpose would also be income from property and thus taxable. In the Manitoba Curling case13, the Court found that the organization was merely an umbrella organization which promoted the sport of curling and it did not own any facilities for the purpose of dining, recreation or holding sporting events. The court held that the word “facilities” should be interpreted to refer to physical buildings, rather than activities “to facilitate” the holding of sporting events. In the Laurentian Club case14, the organization was a social club which earned income from membership fees and earned interest on its investments. It borrowed for operational requirements rather than realizing on its investments and disturbing its interest income. It deducted the interest paid on the borrowed funds from its investment income. Since the organization provided facilities of the type contemplated in subsection 149(5) and its investment income was subject to tax, it argued that it should be allowed to deduct the interest on the borrowed money. The Tax Review Board held that the organization had two principal sources of income, namely membership fees and interest on its investments. It held that the income derived from its operations was exempt under paragraph 149(1)(l) but the income from its investments was taxable under the rules creating the deemed trust in subsection 149(5). The Board held that there was no doubt the borrowed money bore a direct relationship to use in permitting the organization to continue its operations and if it had not been a nonprofit organization, its interest might have been deductible, but that was not the situation. The Board did not permit a tracing of the interest paid on borrowed money to the interest earned on the investment income. It is interesting to speculate whether with the passage of time since 1982 and recent jurisprudence dealing with the deductibility of interest, a different approach might have been devised to try to trace the income stream more specifically. For instance, it is not clear whether the organization could have sold its investments, set aside an operating fund for the facilities and then borrowed money to replace the investments, and argued that the interest expense could be specifically traced to the acquisition of investment assets used for operating the facilities and governed by the deemed inter vivos trust. For purposes of subsection 149(5), taxable capital gains realized on a deposition of property in a deemed trust will not be taxable unless the property is used “exclusively” for and directly in the course of providing the dining, recreational or sporting facilities for 12 Elm Ridge Country Club Inc. v. The Queen, 99 DTC 5127 (FCA). 13 Manitoba Curling Association Inc. v. MNR, 84 DTC 1462 (TCC). 14 Laurentian Club Incorporated v. MNR, 82 DTC 1325 (TRB). -9members.15 CRA has stated that a minor hockey association may be subject to subsection 149(5) merely because it provides ice time to its members. CRA stated that where the fees collected by the association are used primarily to pay for arena ice rental with other minor costs for team sweaters, goalie equipment, etc., the association would be subject to subsection 149(5) on the basis that its main purpose was to provide recreational or sporting facilities for its members.16 CRA has confirmed that an organization that provides dining and recreational facilities for an entire community and not merely for its members will not be considered to have as its main purpose the provision of such facilities for its members and the income from its property or the income from the disposition of capital property will not be taxed in a deemed inter vivos trust.17 Change in Status Under subsection 149(10), if the status of a corporation changes and it either ceases to be exempt or becomes exempt, its taxation year deemed to have ended immediately before that time and a new taxation year is deemed to have begun. In computing its income, the corporation is required to take into account certain adjustments for prior periods where appropriate and in general terms the corporation is deemed to have disposed of its assets at their fair market value, thus recognizing accrued gains including gains on goodwill that is not recorded on its balance sheet. This effectively requires the corporation to recognize all accrued gains in the year in which it ceases to be exempt, although CRA has confirmed that it will not necessarily be seen as abusive if the corporation avoids this provision through creative structuring.18 Under provincial law, there are similar provisions, although in Ontario the tax is more punitive, since it can in some cases tax income that was previously exempt.19 There are separate rules in Ontario for taxation or winding up or discontinuance of a business if the corporation has distributed any of its income or distributed or otherwise appropriated any of its funds or property for the benefit of any proprietor, member or shareholder on the winding up or discontinuance of its business.20 As is the case under the ITA, in computing income, taxable capital gains are excluded.21 15 Subparagraph 149(5)(e)(ii). 16 CRA document no. 9802327, March 13, 1998. 17 CRA document no. 2001-0104095, December 12, 2001. 18 See, for instance, CRA document no. 2006-0198211R3, which dealt with an indirect acquisition of assets by a municipality, avoiding tax that otherwise would have been payable by a corporation, if its shares had been acquired by the municipality and the corporation had therefore become exempt. 19 Corporations Tax Act, R.S.O. 1990, c. C.40, as amended, subsection 57(2), which provides that where a corporation that would be exempt otherwise as the equivalent of a NPO under the ITA has distributed any part of its income or distributed or otherwise appropriated any of it funds or property to or for the benefit of any proprietor, member or shareholder, the corporation is liable to pay tax for the taxation year in which the distribution is made and for subsequent years, and in computing its income for the year in which the distribution is made, it is required to include all of the income from previous years. This seems to create an open ended potential liability back to the date of incorporation. 20 Ibid. 21 Corporations Tax Act, supra, note 19, subsection 57(3). - 10 RCAAA’s By definition, a RCAAA means an association that was created under any law in force in Canada that is resident in Canada and that: (a) (b) is a person described in paragraph 149(1)(l); and has, as its primary purpose and its primary function, the promotion of amateur athletics in Canada on a nation-wide basis, and that has applied to the Minister of National Revenue in prescribed form for registration, that has been registered and whose registration has not been revoked under subsection 168(2).22 The most recent and leading case is A.Y.S.A.23 The main issue in A.Y.S.A. was whether the organization, not being entitled to registration as a RCAAA because it was not formed and operated on a nation-wide basis, was eligible to be registered as a charity. This raised questions about the application of common law principles to undefined terms in the Act, such as “charitable”, the relationship between the RCAAA regime and the regime for charities and about provincial charity legislation and jurisprudence dealing with the meaning of “charitable”. It is beyond the scope of this paper to discuss in detail the arguments raised in that case or the reasoning applied by the Court in dismissing the appeal by A.Y.S.A. and confirming that it was not eligible for registration as a charity, while (in a split decision) overruling the Federal Court of Appeal which had held that the regime for RCAAA’s had effectively “occupied the field”, and left no room for an argument that an organization formed for the promotion of sport could ever qualify for registration as a charity on that basis alone. Rather, the Court held that on the particular facts A.Y.S.A. was not entitled to be registered as a charity since it did not meet the common law test for registration and provincial legislation in Ontario, which expanded the definition of “charitable purpose” and jurisprudence in the Ontario courts interpreting that legislation, were not applicable. The Court found that it was up to Parliament rather than the Courts to give sports associations the tax advantages of charitable status, noting that in the United Kingdom, such a change had in fact been brought about by statute. To qualify as a RCAAA, an association must have been created under Canadian law and must be a “person”. It is not evident that all organizations described in paragraph 149(1)(l) are necessarily persons, since they include clubs and associations that are not incorporated and therefore might not have the legal characteristic of a “person”. The Act provides in subsection 248(1) that any word or expression descriptive of a person includes any corporation and any entity exempt, because of subsection 149(1), from tax under Part I on all or part of the entity’s taxable income. This provision was amended in 1993, apparently to make it clear that entities that are exempt under subsection 149(1), such as clubs and 22 Subsection 248(1). 23 A.Y.S.A. Amateur Youth Soccer Association v. Canada Revenue Agency, 2007 DTC 5527 (SCC). - 11 associations, will be regarded as persons. Since unincorporated associations are not entities at common law, the definition appears to be defective. This is discussed below. Technically, it seems an unincorporated association may not be able to become a RCAAA, since it is not an entity and therefore not a person. However, CRA accepts applications from, and is prepared to register, unincorporated applicants, according to the instructions for completing the application form T1189. While it do not discuss all of the requirements that must be met to qualify under paragraph 149(1)(l) in the context of RCAAA’s, I discuss some of the issues below. I assume that for purposes of determining whether an association is eligible to become a RCAAA, this threshold test will be met.24 On the assumption that the organization can establish that it is organized and operated exclusively for purposes other than profit, the major requirement to become a RCAAA is that its “primary purpose” and “primary function” must be the promotion of amateur athletics in Canada on a nation-wide basis. The fact that the organization in A.Y.S.A. was deliberately not organized on a nation-wide basis was critical to the finding that it could not have become a RCAAA even if it had wished to do so. There is a limited amount of jurisprudence dealing with the requirements to become a RCAAA. A leading case is Maccabi Canada v. MNR.25 In that case, the Court suggested that the “nation-wide” requirement was “consistent with the legislative intent to ensure that the issuing of receipts to donators (sic) would come from a single organization at the national level and that Revenue Canada would not have to interface in a myriad of provincial, regional and local organizations”. As the Supreme Court noted in A.Y.S.A., the Federal Court of Appeal did not offer any evidence for this description of supposed legislative intent and those statements were found not to be “instructive” in A.Y.S.A. In Maccabi, registration had been revoked. On appeal, the Federal Court of Appeal found that the words “the promotion of amateur athletics in Canada on a nation-wide basis” connote a geographic requirement only and therefore by carrying on activities across Canada and not being provincially, regionally or locally limited, an association can comply with the registration requirements. The Court also confirmed that there was no concept of “public benefit” in determining whether an organization is eligible to become a RCAAA, unlike the situation involving registration of charities. In order to become a RCAAA, a NPO must submit an application in form T1189 and provide detailed information to CRA. The information is similar to but not as extensive as the information that is required for registration as a charity. The organization must be 24 For a discussion of some of the issues, see, for instance, IT-496R and Registered Charities Newsletter No. 19, which deals with the difference between a registered charity and a non-profit organization. See also an advance income tax ruling dealing with a foreign organization that was not eligible to be registered as a charity (foreign organizations cannot be registered) but was able to establish to the satisfaction of the Minister that it was not a charity within the meaning in paragraph 149(1)(l), and was therefore able to claim an exemption, subject to meeting the factual requirements. See CRA document no. 2005-0139001R3. 25 98 DTC 6526 (FCA). - 12 incorporated or established with a constitution and must file a copy of its governing documents, such as letters patent in the case of a corporation without share capital. If the organization is not incorporated, CRA requires documents which show the name and purposes of the organization and a statement, which is normally included in letters patent for a corporation without share capital, confirming that the organization will carry on its activities without the purpose of gain for its members and its profits will be used solely to promote its purposes. A statement of proposed activities must be submitted as part of the application, showing how the activities will relate to the purposes set out in the governing documents. As in the case of an application for registration as a charity, certain financial information must also be submitted. CRA states that the organization must not only be established for the primary purpose of promoting amateur athletics across Canada, but must also carry on broad-based activities of the same nature and states that examples of organizations that would normally qualify to become registered include associations that govern a particular sport throughout Canada. CRA also states that the requirement for a nation-wide basis excludes from consideration clubs and organizations which operate at the local, regional or provincial level. Unlike all of the other qualified donees that are not registered charities, a RCAAA is subject to the revocation procedures in the Act, although there are no sanctions of the type that apply to registered charities and there is no revocation tax, as there is for a registered charity. In particular, registration can be revoked (subject to the usual provisions for objections and appeals) if a RCAAA ceases to comply with the requirements of the Act for its registration as such, fails to file an information return as and when required under the Act or a regulation, issues a receipt for a gift otherwise than in accordance with the Act and the regulations or that contains false information or fails to comply with the requirements for record keeping, audits, inquiries, etc. 26 The first requirement for continued registration as a RCAAA is that the organization must continue to qualify as a NPO. CRA has made it clear that it considers the circumstances of a particular organization to be based on the relevant facts and, for instance, whether there is an inappropriate accumulation of surplus will be determined based on all of the circumstances.27 This issue was litigated in the Canadian Bar Insurance Association case.28 The taxpayer made insurance plans and similar plans available to its members and was assessed on the basis that it was not organized and operated exclusively for purposes other than profit. The Court relied to some extent on the letters patent and general by-law and found that there was no evidence indicating that the taxpayer was not organized and operated exclusively for profit, despite the fact that it maintained significant reserves to meet future liabilities. In IT-496R, CRA says that in determining whether an organization is operated exclusively for non-profit purposes, it is important to determine whether it is carrying on a trade or business and some of the criteria that are relevant in that regard are whether its activities constitute a trade or business in the ordinary sense and are operated 26 Section 168. I do not discuss the revocation process, the rights of objection and appeal, etc. that apply to a RCAAA.. A variety of sources are available for more detailed discussions of those issues. 27 See IT-496R. 28 The Canadian Bar Insurance Association v. The Queen, 99 DTC 653 (TCC). This is discussed below. - 13 in a normal commercial manner, whether the goods or services are restricted to members and guests, whether the organization operates on a profit basis rather than a cost recovery basis and whether it is operated in competition with taxable entities carrying on the same trade or business. CRA acknowledges that a NPO can earn income in excess of its expenditures as long as it meets all of the requirements in the Act, but if a material part of its excess is accumulated each year and the balance of accumulated excess is greater than its “reasonable needs” to carry on its non-profit activities, profit will be considered to be one of the purposes for which it was operated. According to CRA, this will be particularly so where the accumulated excess is used for unrelated purposes, such as: (a) (b) (c) long-term investments to produce property income; enlarging or expanding facilities used for normal commercial operations; or making loans to members or non-exempt persons. These factors will all be relevant to a RCAAA on an ongoing basis, since they are fundamental to its status as a NPO. The further requirement is that no part of the income of the RCAAA can be payable to or otherwise made available for the benefit of a member. There is no exception merely because a member is itself exempt or is a qualified donee, such as a registered charity. As a result, membership of NPO’s should be carefully structured, taking into account transfers on a dissolution. According to CRA, a problem could occur if the organization distributes income during the year either directly or indirectly to or for the personal benefit of a member or it has the power at any time to declare and pay dividends out of its income. CRA notes that difficulties in this regard can be avoided if the enabling documents provide that on a winding up or dissolution, all of the assets and any accumulated income are to be transferred to an organization with similar objects that is itself exempt, such as a registered charity or another NPO. Certain payments made directly to members or indirectly for their benefit will not in and of themselves disqualify the organization from being tax-exempt as a NPO. These include, for instance, reasonable salaries for services rendered that do not exceed an arm’s length equivalent. Reimbursement of legitimate expenses is also permitted. CRA notes in IT-496R that a RCAAA can distribute income to or for the benefit of a member that is itself an association, the main purpose and function of which is the promotion of amateur athletics in Canada, so a RCAAA can distribute gifts that it receives from donors to its own qualifying members without jeopardizing its tax-exempt status as a NPO or its registered status as a RCAAA. As noted above, a RCAAA must be created under a law in force in Canada and be resident in Canada. Under common law principles for corporations, this generally means that its central control and management must abide in Canada. This central control and management is generally considered to abide where the directors meet and exercise their powers. In addition, a corporation is deemed to have been resident in Canada throughout a taxation year if it was incorporated after April 26, 1965 in Canada.29 The requirement for a Canadian entity that is resident in Canada is aimed at regulation and compliance, notwithstanding that a low degree of compliance is required of a RCAAA compared to a 29 Paragraph 250(4)(a). - 14 registered charity. Unlike the definition of RCAAA, the definition of NPO does not refer to a primary purpose or a primary function, and simply requires that the organization be organized and operated exclusively for purposes other than profit. Thus, even if an organization has as its primary purpose and primary function the promotion of amateur athletics in Canada on a nation-wide basis, it cannot be a RCAAA if it does not meet the threshold test for a NPO, because it is not exclusively organized and operated for non-profit purposes. This is where the factual determination mentioned above becomes relevant. In some cases, RCAAA’s are formed to assist amateur athletes and questions arise about the relationship between donations made to the RCAAA by financial supporters and the support provided by the RCAAA to the amateur athletes. This issue arose in the Burns case30 in which the taxpayer made payments to the Canadian Ski Association during years when his daughter was a member of the training squad in the Southern Ontario Division of the Association. He claimed deductions for his donations and the CRA denied them, on the basis that he had not made a “gift” because there was a benefit to him indirectly, as a result of the fact that his daughter, as a member of the team, was receiving an advantage. While the Tax Court partly allowed the appeal, the Federal Court of Appeal reversed the decision and found that the payments made by the taxpayer were not made without consideration or material benefit and therefore were not “gifts”, at least for purposes of the Act. CRA has issued a policy statement dealing with donations to RCAAA's and the issuance of receipts.31 In it, CRA states that issuing receipts can only be delegated to a subordinate body at the provincial level and cannot be sub-delegated by a provincial level association to member clubs without the consent of the RCAAA. It states further that a local club that has raised funds can receive a percentage of them as financing for its activities that are consistent with the purposes of the RCAAA, but the percentage returned to the local club must not form part of any solicitation for funds by the local club or be part of any agreement with a prospective donor. In addition, a RCAAA cannot operate as a conduit for a local club’s own purposes and a significant amount of funds raised must be retained by the RCAAA for its own use, for contingencies or to be redistributed to other clubs. An administration fee covering the expense of receiving funds raised and issuing receipts is not considered to be a significant amount. CRA also states that in view of the widespread practice of soliciting contributions from parents whose children receive direct support from local clubs, a RCAAA should require, as part of its granting policy, an accounting from local clubs that includes the names of all athletes who receive subsidized training. If a subsequent audit uncovers any substantial abuse at the local level, the RCAAA will be deemed to have failed to meet the requirements of the Act and therefore will be subject to revocation proceedings, unless it can demonstrate that it had proper mechanisms in place to issue proper receipts. According to CRA, to qualify for a registration as a RCAAA, an organization must operate mostly, if not entirely, for the following objects: 30 Burns v. The Queen, 88 DTC 6101 (FCA). 31 Charities Policy Statement CPS-007, “RCAAA's: Receipts-Issuing Policy”, February 7, 1995. See also Charities Information Letter CIL-2002-012, August 6, 2002 which deals with the link between a RCAAA and an athlete trust for an individual athlete. - 15 (a) (b) (c) (d) (e) (f) (g) (h) (i) to regulate a sport and the way it is played; to promote the sport; to oversee a structure of local clubs and regional and provincial bodies involved in the sport; to operate a training program that brings promising athletes from the grass roots level to national and international levels through various qualifying competitive events; to operate a national team to participate at international competitions; to stage and sanction local, regional, provincial and national competitions; to act as a Canadian representative of an international federation controlling the sport; to provide a training and certification program for coaches and referees; to carry out fundraising activities and re-distribution of funds for local, regional and provincial member organizations.32 CRA also states that the following national organizations are eligible for registration: (a) (b) (c) multi-sport, national, international level events, such as the Olympics and the Commonwealth or Canada games; facilities for training athletes that are an outgrowth of an Olympic, Commonwealth or Canada games; multi-sport training centres which meet certain criteria. In addition, CRA has stated that the following national organizations are not eligible for registration: (a) (b) (c) (d) (e) organizations of a local, regional or provincial character; organizations whose primary purpose is to train and field a single team of athletes at international competitions; organizations operating a local training or other facility that is not directed towards high-performance athletes, regardless of whether the facility is open to athletes from across Canada in theory or in practice; organizations staging a single sport event, such as a gymnastics championship, regardless of whether athletes come from across Canada or whether the event is televised; organizations using sports as a medium to achieve another more primary purpose.33 Since there is a loose tax regulatory environment for RCAAA’s, there is more room for uncertainty than there is when dealing with registered charities. For instance, in addition to qualifying at all times as a NPO, the RCAAA must be able to establish that it has as its primary purpose and its primary function the promotion of amateur athletics in Canada on a 32 Charities Policy Statement CPS-011, “Registration of Canadian Amateur Athletic Associations”, October 28, 1996. I have been advised in informal discussions with officials of CRA that its only guidelines for RCAAA’s are set out in CPS-007 and CPS-011. 33 Ibid. - 16 nation-wide basis. This test does not go so far as to say that in addition to having this as its primary purpose and its primary function, the RCAAA must limit its activities, including its investments, only to those that are consistent with its primary purpose and primary function. It is unclear how one determines what the “primary function” is although the primary purpose presumably is determined by reference to the constating documents and other material reviewed by CRA at the time the application is submitted and registration is granted. The word “primary” does not imply “exclusively”, and there is room for ancillary activities, which in turn leads to uncertainty. It is interesting that the closing words in the definition of NPO in paragraph 149(1)(l) refer to an organization the “primary purpose and function” of which was the promotion of amateur athletics in Canada, suggesting that the purpose and function are a combined “thing” which together have a primary purpose, rather than the concept suggested in the definition of RCAAA, which clearly separates the purpose and the function and requires that the primary purpose and the primary function must both be the promotion of amateur athletics. Whether this is a distinction without a difference may be academic, but there is a question of interpretation and, if a RCAAA were in a situation in which its registration might be revoked, this distinction could perhaps be a factor, depending on the circumstances. At best, the argument would seem to be that the organizations that are mentioned as recipients of income in the definition of NPO could be less stringently viewed than RCAAA's, because only their primary purpose and not necessarily their primary function must be the promotion of amateur athletics. Conversely, it could be argued that the entire function but only the primary purpose must be considered. This leaves open whether the function could be something more or less than primarily for the promotion of amateur athletics or must only be the promotion of amateur athletics. In any event, it is clear that both the primary purpose and the primary function of a RCAAA are relevant. The primary purpose will likely be determined largely by the wording in the constating documents and any statements made in the application for registration. In that context, jurisprudence dealing with the general anti-avoidance rule (“GAAR”), which contains an exemption from the re-characterization rules if transactions are undertaken “primarily” for bona fide purposes other than to obtain a “tax benefit” may be relevant. In MacKay et al v. The Queen,34 one of the questions relating to the GAAR was whether the primary purpose should be examined by reference to each transaction in a series of transactions or to the series as a whole. The Tax Court found that for purposes of the GAAR, in determining the primary purpose of an individual transaction, the overall purpose of the series of transactions is relevant but not determinative and the test is an objective assessment of the relative importance of the driving forces of the transaction to be achieved, through weighing evidence to determine whether it is reasonable to conclude that a transaction was not undertaken or arranged primarily for a non-tax purpose. The Federal Court of Appeal reversed the Tax Court, holding that the purpose of each step in a series must be examined to determine whether the GAAR applies. 34 2008 DTC 6238 (FCA), reversing 2007 DTC 425 (TCC). The Supreme Court of Canada denied leave to appeal in January, 2009. In addition, see McMullen v. The Queen, 2007 DTC 286 (TCC) for a further discussion of the GAAR. The Court found that the primary purpose of a series of transactions was to divide a single business into two separate, independently owned businesses, and not to avoid tax. - 17 In theory, this type of analysis, when applied to a determination of the primary purpose of an organization such as a RCAAA, might be relevant, although there is clearly a distinction between determining the primary purpose of an organization and determining the primary purpose of a particular transaction or series of transactions. In A.Y.S.A., the Supreme Court stated that CRA is not only entitled, but obligated, to look beyond the words to the substance of the purposes and activities of an applicant for registered status. This would seem to be the case with RCAAA’s as well. The same reasoning might apply to a determination of the primary function of an organization. Since this would likely be based more on actual activities than stated purposes, the GAAR analysis might be more apposite, as it relates to a determination of what is “primary”. There does not appear to be any jurisprudence on point for RCAAA’s and CRA does not publish a list of RCAAA’s whose registration has been revoked. Therefore there is limited public information available on these points. I have been advised in informal discussions with officials of CRA that when the changes proposed in what was formerly Bill C-10 are enacted, CRA will make available to the public a list of all RCAAA’s and previously registered Canadian amateur athletic associations, including its name, registration number, date of registration and effective date of revocation, amendment or termination of registration.35 Low-Cost Housing Corporations A corporation can be exempt if it is constituted exclusively for the purpose of providing lowcost housing accommodation for the aged, as long as it meets certain other tests that are also applicable to a typical NPO governed by paragraph 149(1)(l). This requires that no part of the income of the corporation can be payable to or otherwise available for the personal benefit of any proprietor, member or shareholder. Unlike an organization that is exempt under paragraph 149(1)(l) (and that, unless it is also a RCAAA, is not for that reason alone exempt), a low-cost housing corporation need not be “organized and operated” exclusively, and need only be “constituted” exclusively, for the required purpose. This seems to suggest that a corporation could be constituted for the required purpose, without actually being “operated” for that purpose, although this is probably academic in all but extreme situations. I have been advised in informal discussions with officials of CRA that it requires the corporation to be operated exclusively for low-cost housing accommodation for the aged to be exempt and to be a qualified donee. There is no express requirement that the corporation be organized and operated for purposes other than profit, other than the restriction on payment of income to a proprietor, member or shareholder, but 35 CRA revoked the registration of Little League Baseball Canada effective January 10, 2009, stating that the organization had issued more than $82 million in donation receipts and was involved in abusive transactions arising from its role as a participant in a tax shelter arrangement that, in the opinion of the Minister of National Revenue, did not qualify as gifts. Effective August 30, 2008, CRA revoked the registration of the Canadian Amateur Football Association, stating that the organization had issued receipts for gifts otherwise than in accordance with the Act and regulations or containing false information. - 18 this seems to be implicit. For this purpose, as is the case for NPO’s in general, “income” does not include a taxable capital gain.36 CRA has issued a number of technical interpretations dealing with low-cost housing corporations. For instance, it has stated that “low-cost housing accommodation” means comfortable but modest rental accommodation at rent levels which are low relative to rent levels generally available for similar accommodation (other than subsidized or non-profit accommodation) in the same community.37 CRA has also stated that a housing corporation that covers actual documented costs without making a profit would not necessarily be eligible, since it must meet the requirements in the definition.38 CRA has also noted that certain corporations providing low-cost accommodation for the aged might qualify for registration as charities, but an organization established merely to provide housing to the aged under a life-tenancy agreement would not be regarded as a charity.39 According to CRA, “the provision of housing” is only charitable at law when it relieves conditions associated with or resulting from old age, disability or poverty. CRA does not use a technical definition of “aged” or “disabled” to determine whether an organization is pursuing a charitable purpose, but rather focuses on how associated conditions are relieved. It has stated that providing services to people of a certain age is not charitable and to qualify for registration as a charity, the activities must be geared towards relieving a condition normally associated with aging, such as mobility, deafness, mental confusion or inadequate shelter.40 CRA has stated that the relief of the aged is considered charitable and organizations that are established to relieve a need attributable to old age, including catering to persons both over and under 65 years of age, who require financial relief and/or relief associated with the condition of being aged, can qualify for relief as a charity.41 Although the discussion about 36 Subsection 149(2). It will be important to determine that a capital gain is in fact a capital gain and will not be treated as income. If a distribution is made from an amount that is assumed to arise from a capital gain but that gain is subsequently determined to have been income, there may have been a payment of income for the benefit of members and the exemption will not be available. This is particularly relevant for a NPO, for which there is an express prohibition against the payment of income to or for the benefit of a member. 37 CRA document no. 9819835, September 9, 1998. 38 CRA document no. 9730835, February 2, 1998. 39 CRA Policy Commentary CPC-004, April 10, 1992 and Joseph Rowntree Memorial Trust Housing Association Ltd. et al v. Attorney-General,  1 All E.R. 288 (Ch. D). 40 Charities Information Letter CIL-2001-019, July 27, 2001 and Charities Policy Statement CPS-020, April 1, 2003, “Applicants That Are Established to Relieve Poverty by Providing Rental Housing for Low-Income Tenants”. 41 Charities Summary Policy CSP-A05, October 25, 2002 and Charities Policy Statement CPS-002 July 6, 1990, “Relief of the Aged”. CRA has stated that prior to 1990, the standard for charitable relief was set at age 65 when beneficiaries could be presumed to be in need because of old age. However, an arbitrary 65 and over age restriction was subsequently determined not to be the most effective means of measurement, with the result that organizations established for relief of the aged must instead demonstrate that they are relieving a need that is attributable to old age, catering to persons both over and under 65 years of age. - 19 issues relating to whether an organization would qualify to be registered as a charity is not relevant to a discussion of other exempt organizations, the same principles appear to be relevant in determining whether a low-cost housing corporation would be regarded as exempt under paragraph 149(1)(i). This is essentially a question of fact and since there is no registration process, it will be important in a specific case for a low-cost housing corporation to determine if it is in fact exempt. Unlike NPO’s, low-cost housing corporations are not required to establish that they are not in the opinion of the Minister a charity. In fact, as noted above CRA has stated that a lowcost housing corporation might in appropriate circumstances be eligible to be registered as a charity. The corporation must be constituted exclusively for the purpose of providing lowcost housing accommodation for the aged, and no part of its income can be payable to or otherwise available for the personal benefit of a member. Although there is no jurisprudence on point of which I am aware, it seems that CRA’s administrative policy dealing with NPO’s should be equally applicable to low-cost housing corporations, so that reasonable salaries and reimbursements of expenses are permissible. It seems that CRA might, in what it perceives to be abusive cases, allege that a low-cost housing corporation that accumulates excess surplus is not constituted exclusively for the purpose of providing low-cost housing accommodation and if it carries on a business, the same considerations might apply as would apply in the case of a NPO. Thus, it seems that corporations seeking to be exempt under paragraph 149(1)(i) should be careful that they do not overstep any bounds by engaging in activities that are questionable, such as commercial activities or accumulation of excessive surplus. In cases of doubt, it would be prudent for the corporation to check with CRA that it is in fact exempt. Since there is no system of registration for low-cost housing corporations, and since lowcost housing corporations are qualified donees, the onus will be on a donor seeking relief for a donation to be able to establish to the satisfaction of CRA that the corporation is in fact described in paragraph 149(1)(i) and is therefore exempt. In many cases, the corporation itself will seek some type of advance confirmation from CRA to that effect, to ensure that it is exempt or assist in raising funds. However, since there is a factual element involved in determining whether a corporation is exempt, just as there is a factual element in determining whether an organization is exempt as a NPO, there will likely never be the same level of assurance that is available to a donor where the recipient organization is registered. In such a case, until the registration is revoked, the donor can rely on that fact alone, even if the organization is no longer compliant and there are grounds for revocation. Municipalities in Canada The Act does not define “municipality”. An exemption from taxation in section 149 is available for a municipality in Canada or a municipal or public body performing a function of government in Canada.42 However, until changes were proposed in what was previously Bill C-10, the concept of qualified donee was narrower than the exemption. This was accentuated in jurisprudence involving claims for exemption by corporations owned by First 42 Paragraph 149(1)(c). - 20 Nations groups recognized as Indian Bands under the Indian Act.43 For instance, in Otineka Development Corporation Limited and 72902 Manitoba Limited v. The Queen,44 an exemption was claimed on the basis that a corporation was owned by a Canadian municipality or its equivalent. The Court observed that the term “municipality” is not defined in the Act and unless there is a reason to do otherwise must be given its ordinary meaning of a community having and exercising the powers of self-government and providing the type of services customarily provided by such a body. The Court then referred to the definition of municipality that had been accepted in an Ontario Court of Appeal decision, relying on a dictionary definition and also referred to the French version of the word. Based on all of the evidence, the Court found that it had been “overwhelmingly demonstrated” that the Indian Band in question, through its chief and council both in the powers that it exercised under the authority of the Indian Act and in the services that it provided to its members, was a municipality within the meaning in the Act. As a result, although the case did not deal with the Band itself, it held that a corporation owned by an Indian Band was exempt under paragraph 149(1)(d). This suggested, therefore, that an Indian Band itself might have claimed to be exempt on the basis that it was a municipality or a municipal body performing a function of government in Canada. However, in Corporation de Developpement Tawich v. Deputy Minister of Revenue (Quebec),45 it was held that an Indian Band, not having been incorporated under appropriate legislation, could not be regarded as a municipality, notwithstanding that it performed certain functions of or similar to those performed by a government. This effectively reversed the position in Otineka. Leave was granted to appeal to the Supreme Court of Canada in Tawich, but the case was ultimately settled after subsection 149(1)(c) and related provisions of the Act were amended to include in the exemption not only a municipality but a municipal or public body performing a function of government in Canada. CRA has confirmed on a number of occasions that this includes eligible Indian Bands.46 Under the proposed amendments in what was formerly Bill C-10, there will be symmetry between the exemption from taxation in paragraph 149(1)(c) and the status of qualified donee, particularly for First Nations groups as contemplated in the Indian Act. Municipal or Public Bodies Performing a Function of Government in Canada The proposed changes in what was formerly Bill C-10 provide that an entity that is exempt under paragraph 149(1)(c) will also be a qualified donee. It is not clear why the Department of Finance chose to add a separate listing for these qualified donees, rather than simply 43 R.S.C. 1985, c. I-5, section 87. 44 94 DTC 1234 (TCC). 45 2001 DTC 5144 (Quebec Court of Appeal). 46 See, for instance, CRA document no. 2006-02021611R3, November 22, 2006 and CRA document no. 2005-0113361R3, November 2, 2005. - 21 refer to an organization described in paragraph 149(1)(c), but the result appears to be the same. This drafting approach may reflect a desire to phase in the change for donations made to municipal or public bodies that are not municipalities, after the effective date of the amendment.47 Compliance Issues The compliance provisions in the Act do not contain any significant rules dealing with organizations other than registered charities, RCAAA’s and registered national arts services organization (“RNASO’s”). The revocation provisions and intermediate sanctions in Part V apply only to registered charities and indirectly, by way of the provisions dealing with RNASO’s, to them as well. There is no revocation tax applicable to a RCAAA. I understand that CRA would likely take the position that a RCAAA that has entered into allegedly inappropriate arrangements, such as a tax shelter, would be regarded as having ceased to be organized and operated exclusively for purposes other than profit or as having ceased to be an organization whose primary purpose and primary function were the promotion of amateur athletics in Canada on a nation-wide basis, so that it would no longer be eligible for registration. In that event, CRA could take revocation proceedings Presumably, CRA would take the position that a low-cost housing corporation had ceased to be eligible for exemption and therefore had ceased to be a qualified donee, if it engaged in conduct such that it was no longer constituted exclusively for the purpose of providing low-cost housing accommodation for the aged. For instance, participation in an allegedly inappropriate tax shelter arrangement could cause CRA to take this position, and allege that gifts made to the corporation were not eligible for tax relief and that the corporation itself was no longer exempt. In that event, the loss of exempt status would result in the application of subsection 149(10), as discussed above. The sanction of suspension is not available against a qualified donee that is not a registered charity, such as a RCAAA and a low-cost housing corporation. Under subsection 149.1(6.4) of the Act, Part V applies with such modifications as the circumstances require to a RNASO as if it were a registered charity that is a charitable organization. As a result, all of the sanctions that can be applied against a registered charity can be applied against a RNASO, including suspension. The provisions dealing specifically with registered charities (and RNASO’s), such as the disbursement quota, limitations on the acquisition and retention of non-qualified investments, carrying on business, engaging in political activities, the provision of undue benefits, excess business holdings, etc. do not apply to a RCAAA or to any of the other exempt organizations. This may result in abuses and CRA would presumably attack them with the available weapons, which are not as extensive as those that are available against registered charities and RNASO’s. 47 For a recent case dealing with the attempt by an Indian Band to impose its own tax regime, particularly dealing with an alternative to GST, see Acadia Band v. MNR, 2008 FCA 1199 (FCA), in which it was held that a commodity tax imposed by the Acadia Band under its own by-laws was not a modern expression of the Communal Sharing Tradition and therefore the Band failed to establish the possible existence of a credible Aboriginal right protected by section 35 of the Constitution Act. - 22 Registered charities that are corporations are required to file an annual form T3010A but are not required to file a T2 return ordinarily required for a corporation.48 RCAAA’s must file an annual form T2052, which is quite straightforward, compared to the T3010A. Although it is not clear, it appears that a registered charity that has been formed as a trust is not required to file an annual T3 return, because it is not taxable, and it is required to file a form T3010A.49 The T3 return itself and the T3 guide clearly require some trusts that are exempt from tax to file a T3 return, such as a NPO that is a trust. A NPO that is a trust may also be required to file form T1044, the “Non-Profit Organization (NPO) Information Return”. CRA has confirmed that registered charities, RCAAA’s and RNASO’s are not required to file form T1044.50 CRA has also stated that a corporation incorporated exclusively to provide lowcost housing for the aged is not required to file form T1044 as long as no part of its income was payable to or otherwise available for the personal benefit of any proprietor, member or shareholder, and it is therefore exempt under paragraph 149(1)(i). Corporations that are not registered charities, such as RCAAA’s and low-cost housing corporations, are required to file a T2 return, despite being exempt from tax.51 Associations that are not corporations or trusts do not seem to be “entities” as contemplated in the definition of “person”, but CRA apparently treats them as persons that are required to file form T1044 under subsection 149(12).52 In the explanatory notes in 1993, when the requirement to file a return under subsection 149(12) was introduced, the Department of Finance stated that paragraphs 149(1)(e) and (l) of the Act encompass a wide range of organizations and these “entities” may take the form of corporations, trusts or “other organizations”. It stated that under the then-existing law, the requirement to file a return of income was not uniform, since it depended on the form that the organization took. The explanatory notes stated that subsection 149(12) was intended to provide a uniform requirement that all such “organizations” file information returns, in addition to any returns that may be required under the then-existing provisions of the Act. This does not appear to have addressed the technical problem that an association, despite the definition of “person”, is not an “entity” and is nothing more than a collection of its members. A number of record keeping requirements apply. In this discussion, I deal only with records that must be kept under the Act. There are other record keeping requirements, depending on the particular qualified donee.53 CRA generally does not specify the particular records that must be kept but notes that persons required to keep records include registered 48 Paragraph 150(1.1)(a). 49 The exemption from filing in paragraph 150(1.1)(b) for certain individuals (which will include a trust) appears to apply to a trust that is a registered charity. The T3 return is also an information return for purposes of section 204 of the regulations. CRA states in its T3 Guide, T4013(E), that certain trusts need not file an information return. I have been advised in informal discussions with officials of CRA that a registered charity is not required to file a T3 return. 50 T4117(E). 51 See CRA T2 Guide, T4012(E). 52 See the discussion about “persons”, supra, under “RCAAA’s”. 53 For a discussion of those record keeping requirements, see, for instance, RC4409(E), “Keeping Records”. - 23 charities, NPO’s, RCAAA’s, universities, colleges, municipal corporations, hospitals and school authorities. This list seems to be somewhat redundant, since generally universities, colleges and hospitals will likely also be registered charities. A RCAAA must maintain records that confirm its qualification for registration under the Act and that will allow CRA to verify all charitable and athletic donations that entitle donors to tax credits or deductions, as well as minutes of meetings of executives (presumably directors in the case of corporations and trustees in the case of trusts), minutes of meetings of members and copies of documents and by-laws that govern the organization. CRA has stated that books and records that must be kept include those that will verify that the purposes and activities continue to satisfy the requirements of the Act for the particular qualified donee, written agreements, contracts, annual reports, bank statements, expense accounts, investment agreements, accountant’s working papers, payroll records, promotional materials and fund raising materials. In addition, source documents such as invoices, vouchers, formal contracts, work orders, delivery slips, purchase orders and bank deposit slips must be kept.54 If a RCAAA or other exempt organization has employees, or is required to collect or remit GST, other compliance obligations will arise. It is beyond the scope of this paper to deal with those compliance requirements. If a foreign organizations operates in Canada in a manner that exposes it to Part I tax in Canada, it will have additional compliance obligations, unless it is exempt under a reciprocal tax treaty between Canada and the country in which it is resident. Where an exemption is claimed under a treaty because the foreign organization has no permanent establishment in Canada, it will generally be required to file a T2 return in any event, if it is a corporation.55 In Ontario, a corporation that is exempt from federal tax under the Act is exempt from provincial tax.56 As discussed above, there is an exemption for a NPO governed by subsection 149(1)(l) of the Act, with specific rules that apply if the corporation distributes any part of its income to a proprietor, member or shareholder, in which event the exemption is no longer available. A corporation that is exempt from the payment of tax under section 57 is not required to file a corporation tax return.57 Non-Tax Issues Unless an organization has purposes that are charitable at common law, and thus for instance, is subject to the jurisdiction of an appropriate government agency (the Public 54 Charities Summary Policy CSP-B01, October 25, 2002 (revised June 14, 2007), and the references listed therein. See also CRA website “Books and Records”, which deals with the retention period, the means of keeping records, including electronic format and the place where the records must be maintained. 55 See, for instance, CRA document no. 2005-0139001R3, supra, in which a foreign organization received confirmation that it was exempt as a NPO but was required to file a T2 return. 56 Corporations Tax Act, supra, note 19, section 57. 57 Ibid., section 75. - 24 Guardian & Trustee (“PGT”) in Ontario), the non-tax issues will generally be fairly straightforward. These will include, for instance, corporate record keeping and compliance, an audit of the financial statements where appropriate, and filing appropriate notices with relevant government agencies, at least in the case of corporations. If an organization is charitable at common law, as might be the case with a low-cost housing corporation or a “tainted” NPO, it might find that it is subject to the jurisdiction of the PGT in Ontario and equivalent authorities in other provinces. This issue arose in the Laidlaw Foundation case,58 one of the leading Canadian cases dealing with the pursuit of amateur sports and whether that pursuit is a charitable purpose under the law of Ontario. The main issue was whether a charitable foundation properly expended funds by making grants to RCAAA’s. The Divisional Court stated that promotion of amateur athletic sports under controlled conditions promotes health and is akin to those cases which have decided that the promotion of health is a charitable purpose and participation in organized competitive amateur sports is in itself educational, both in the sense of training and discipline and maintenance of a healthy body and in respect to education resulting from the interchange of people from different cultures in cases where the competitions involve more than local participants. While Laidlaw also dealt with the fact that the Charities Accounting Act of Ontario59 broadens the common law definition of “charitable purpose”, to include public benefits that would not necessarily be charitable at common law, it seems clear that there is now a disconnect between the law in Ontario and the federal law of charities resulting from the decision of the Supreme Court of Canada in A.Y.S.A. An organization that is not registered as a charity under the Act may have charitable purposes under Ontario law. The Charities Accounting Act restricts the ability of an organization that acquires land for charitable purposes to use or occupy that land other than for charitable purposes. Whether this is a concern depends on whether the organization is regarded as holding land “for a charitable purpose”. Under subsection 8(1), a person who holds land for a charitable purpose is required to hold it only for the purpose of actual use or occupation for that charitable purpose and where in the opinion of the PGT, land held for a charitable purpose has not been actually used or occupied for that charitable purpose for a period of three years, is not required for actual use or occupation for that purpose and will not be required for actual use or occupation for that purpose in the immediate future, the PGT can vest the land in himself or herself by taking appropriate steps. I understand that as practical matter, the PGT will generally provide an opportunity to an organization that it alleges holds land for a charitable purpose to comply with the Charities Accounting Act before seeking a vesting order. The important point to note is that this provision can apply to organizations that are not necessarily registered charities for purposes of the Act, particularly in light of the extended definition of “charitable purpose”. 58 Re Laidlaw Foundation (1984), 13 D.L.R. (4th) 491 (Ont. HCJ Div. Ct.) 59 R.S.O. 1990, c. C.10 - 25 A similar issue can arise under the Charitable Gifts Act.60 Wherever an interest “in a business that is carried on for gain or profit” is given to or vested in a person for any religious, charitable, educational or public purpose, the person is required to dispose of that interest to the extent that it exceeds more than 10%, after a seven year grace period, unless a court order is obtained to extend that period. This can be a significant restriction on the ability of an organization to carry on commercial activities, if those activities are considered to be an interest in a business that is carried on or gain or profit and if that interest is vested in the organization for a charitable or public purpose (which need not necessarily be a purpose that is recognized by registration as a charity under the Act). From a structural viewpoint, other issues arise, particularly with respect to RCAAA’s and fundraising. It is not clear whether a RCAAA can hold an endowment fund, either by using restricted gifts received for that purpose or by creating its own restrictions, in light of the requirements under paragraph 149(1)(l) for all NPO’s and the specific requirements in the definition of RCAAA dealing with its primary purpose and primary function. It seems that the maintenance of an endowment fund, particularly at the direction of a donor, is not inconsistent with a primary purpose and primary function of promotion of amateur athletics and the accumulation (or retention) of funds should not be regarded as inappropriate, using the tests set out in IT-496R and based on the decision in the Canadian Bar Insurance case. Municipalities will be subject to the usual requirements of municipal law, which I do not discuss. Similarly, municipal bodies performing a function of government in Canada will be subject to their own non-tax compliance requirements. This would include for instance, First Nations groups such as Indian Bands. It is beyond the scope of this discussion to consider the various rules dealing with antiterrorism, but I note that the provisions in the Act are limited to registered charities.61 Since only registered charities (and by extrapolation, RNASO’s) are subject to the revocation sanction, these rules do not apply to other exempt organizations, such as RCAAA’s or low-cost housing corporations and particularly do not apply to foreign NPO’s. To the extent the registered status of a charity is thought to be an inducement to assist terrorist fundraising, there is a gap in the legislation. Fraternal Benefit Societies CRA has stated that a benevolent or fraternal benefit society or order, not being expressly defined in the ITA, should be considered in the context of the definition of “fraternal benefit association or society” in Black’s Law Dictionary, which defines it as one whose members 60 R.S.O. 1990, c. C.8. 61 For instance, subsections 171(3.1) and (4.1), which deal with the Charities Registration (Security Information) Act. See also Registered Charities Newsletter No. 12, Spring 2002. For a very interesting and detailed discussion of some of the issues arising with respect to qualified donees other than registered charities, see Blake Bromley, “Funding Terrorism and Charities”, a paper prepared for the Commission of Inquiry into the Investigation of the Bombing of Air India Flight 182. This paper is available at www.beneficgroup.com. - 26 have adopted the same, or a very similar, calling, avocation or profession or who are working in union to accomplish some worthy object, and who for that reason have banded themselves together as an association or society to aid and assist one another, and to promote the common cause. The alternative definition in Black’s Law Dictionary is an association having a representative form of government and a lodge system with a ritualistic form of work for the meeting of its chapters, or other subordinate bodies, or a society or voluntary association organized and carried on for the mutual aid and benefit of its members, not for profit, which ordinarily has a lodge system, a ritualistic form of work and a representative government, makes provision for the payment of death benefits (and sometimes) for benefits in case of accident, sickness or old age, the funds of which are derived from dues paid or assessments levied on the members.62 CRA has stated that Black’s Law Dictionary defines “benevolent” as “philanthropic, humane having a desire or a purpose to do good to man; intended for conferring of benefits, rather than for gain or profits; loving others and actively desirous of their well being.” In a technical interpretation63, CRA determined that a trust was not a benevolent or fraternal benefit society or order when it provided for benefits for retired employees of a corporation. CRA stated that in that situation, the retirees could not be considered to have “banded themselves together as an association to aid and assist one another and to promote the common cause” and they were only entitled to benefits under the plan by virtue of their former employment, which did not amount to a means for them to “aid and assist” other retirees. Moreover, CRA stated that the trust did not exist to “promote a common cause”. It seems that in most situations, a fraternal benefit society will likely be formed to comply with insurance law, since many of the benefits that are provided are regulated under federal or provincial insurance law. Under subsection 149(3) of the Act, the exemption under subsection 149(1) does not apply to taxable income of a benevolent or fraternal society or order from carrying on a life insurance business or, greater certainty, from the sale of property used in the course of, carrying on a life insurance business. For this purpose, subsection 149(4) provides that the taxable income of a fraternal benefit society from carrying on a life insurance business is to be computed on the assumption that it had no income or loss from any other sources. The taxation of income earned by a fraternal benefit society from a life insurance business was considered in the ACTRA case64, in which it was held that, based on the regulatory provisions in what was then the Canadian and British Insurance Companies Act, ACTRA had “over-reserved” for potential liabilities in carrying on its life insurance business and therefore in computing its income from that life insurance business, it was not required to include income from those assets exceeded what was necessary for regulatory purposes. There is no prohibition against a fraternal benefit society providing benefits to its members. 62 CRA document no. 2002-0126375, April 11, 2002. 63 CRA document no. 2003 – 0000187, June 27, 2003. 64 ACTRA Fraternal Benefit Society v. The Queen, 97 DTC 5243 (FCA). - 27 This would be inconsistent with the concept of a fraternal benefit society and therefore there is more scope for these organizations to provide the type of personal benefit that cannot be provided by a NPO, a corporation providing low-cost housing for the aged, a scientific research corporation or an agricultural organization. Labour Organizations In the L.I.U.N.A. case, the taxpayer argued that it was exempt from tax as a labour organization under paragraph 149(1)(k) or as a NPO under paragraph 149(1)(l). The Court stated that although the term “labour organization” is defined in a number of provincial statues, they are not in pari materia and are of no assistance in construing the exemption in the ITA. The Court observed that the term has not been judicially defined in any Canadian Court but referred to a U.S. decision, in which it was stated that the ordinary definition of trade union or labour organization is a combination of workmen of the same trade or of several allied trades, for the purpose of securing by united action the most favourable conditions as regards wages, hours of labour, etc., for its members or alternatively, an association of workmen usually, but not necessarily, employed in the same trade, for the purpose of combined action in securing the most favourable wages and condition of labour. Without attempting to formulate an exhaustive definition of the term, the Court found that the training trust in the L.I.U.N.A. situation was not a trade union or a labour organization and stated that it would be “straining the ordinary meaning of the term” to suggest that a fund controlled equally by representatives of labour and management and substantially funded by contributions from the members of an employers’ organization was a “labour organization”. It seems that the provincial statutes to which the Court referred in the L.I.U.N.A. case as not being determinative, likely included the Rights of Labour Act.65 In addition, the Labour Relations Act66 defines “trade union” as an organization of employees formed for purposes that include the regulation of relations between employees and employers and includes a provincial, national or international trade union, a certified council of trade unions and a designated or certified employee bargaining agency. Whatever the technical meaning of “labour organization”, the trust in the L.I.U.N.A. case did not qualify, but it seems that a trade union should qualify. Agricultural Organizations and Boards of Trade There is no definition of “agricultural organization” or “board of trade” in the Act. CRA has stated that for purposes of the exemption in paragraph 149(1)(e), an agricultural organization is an entity organized and operated for one more of the following purposes: the advancement or furtherance of agriculture; the betterment of the conditions of those 65 R.S.O. 1990 c. R.33, which defines “trade union” as a combination, whether temporary or permanent, having among its objects the regulating of relations between employees and employers or between employees and employees or between employers and employers. 66 Labour Relations Act, 1995, S.O. 1995, c1. - 28 engaged in such pursuits; the improvement of the grade or quality of their pursuits or the development of a higher degree of efficiency in their respective occupations.67 CRA referred in particular to what is now the Agricultural and Horticultural Organizations Act in Ontario68 and expressed the view that an incorporated agricultural society conducting its activities in accordance with the stated objects in that statute should qualify for exemption from tax under paragraph 149(1)(e), but noted that the determination of whether an organization is exempt could only be determined after an examination of its actual operations for the period in question. In that regard, CRA noted that under the Agricultural and Horticultural Organizations Act, there are express provisions permitting compensation to be paid to certain officers of agricultural organizations along with reasonable expenses incurred by directors or officers. CRA is of the view that certain types of payments made directly to members or indirectly for their benefit would not, in and of themselves, disqualify an organization from being exempt under paragraph 149(1)(e). According to CRA, this would apply to salaries, wages, honorariums for services rendered and other payments as long as they are reasonable and in line with those paid in arms-length situations for similar services. Under the Agricultural and Horticultural Organizations Act, the objects of a newly incorporated agricultural association must be to promote the development, sale and export of agricultural products and to provide educational opportunities related to agricultural and rural life. There is a more extensive list of objects for a newly-incorporated agricultural society, which must be to encourage an awareness of agriculture and to prompt improvements in the quality of life of persons living in an agricultural community by, among other things, researching the needs of the agricultural community and developing programs to meet those needs, holding agricultural exhibitions featuring competitions for which prizes may be awarded, promoting the conservation of natural resources, encouraging the beautification of the agricultural community, supporting and providing facilities to encourage activities intended to enrich rural life and conducting or promoting horse races when authorized to do so by its by-laws. A horticultural society can be incorporated if its objects are to encourage interest and improvement in horticulture by, among other things, holding meetings respecting the theory and practice of horticulture, encouraging the planting of trees, shrubs and flowers on public and private grounds and certain other enumerated objects. It seems to follow that an organization in Ontario that does not comply with the Agricultural and Horticultural Organizations Act, either when newly-incorporated, or as a grandfathered organization, will likely not be regarded as an agricultural organization for purposes of paragraph 149(1)(e) of the Act. 67 CRA document no. 9516495, October 2, 1995. 68 R.S.O. 1990, c. A.9. This statute continues a number of organizations that were created under earlier statutes and continues the concept of “agricultural association”, “agricultural society” and “horticultural society”. Although it is not clear, it appears that all of these organizations should be regarded as agricultural organizations for purposes of paragraph 149(1)(e) of the Act. - 29 The Boards of Trade Act 69 deals with the establishment of a board of trade for a judicial district or temporary judicial district that is set up or constituted by any federal of provincial act or proclamation. In appropriate circumstances, a board of trade can be established and registered under that statute and there are restrictions on the use of the words “board of trade” or “chamber of commerce” as part of a name under which a person is incorporated or does business. For purposes of the statute, “board of trade” includes chamber of commerce. It appears that this statute is likely of little relevance except in outlying districts in Saskatchewan, Alberta, Newfoundland or British Columbia, for which provision outlying is made in the statute. In the Ontario Hog Producers’ case70, the organization was held not to be taxable on surplus it earned as a member-based co-operative which had been appointed as the marketing agency for hogs produced in Ontario. It collected the purchase price of the hogs, that were shipped to processors by its member-producers, deducted service charges and paid the balance to the producers. CRA argued that the organization was in the business of trading in hogs and earning fees for services rendered. The Board held that the organization was effectively acting as an agency of the Ontario government and therefore was not taxable. However, it also held that the income was basically the income of the members rather than the organization and in addition it held that there was no question that the organization could be classified as an agricultural organization, exempt under what is now paragraph 149(1)(e) regardless of the fact that the “surplus” was payable to its members. Based on the facts, the Board concluded that any surplus was not available for the personal benefit of the producers and therefore as an agricultural organization, the organization was exempt from tax. Legal Characterization of Entity The exemption for a NPO is available to a club, society or association. It has been held that this exemption is available to unincorporated associations.71 Technically, the exemptions in section 149 are available on the basis that no tax is payable on the taxable income of a “person” for a period when that person met certain criteria. As a result, the starting point is that there is a “person” that would otherwise be subject to tax. As a matter of legal characterization, an unincorporated association is not normally regarded as a person. For purposes of the ITA, a trust is defined as a person by reference to its trustees.72 69 R.S., 1985, c. B-6. 70 Ontario Hog Producers’ Co-operative v. MNR, 62 DTC 322 (TAB). 71 In addition, CRA has confirmed, consistent with many of the cases, that the exemption is also available to incorporated organizations. See, for instance, CRA document no. 2001-0112535, December 19, 2001. 72 Subsections 104(1) and (2) to which in effect treat a trust as an individual and state that a reference to a trust is for most purposes be read to include a reference to the trustees who have ownership or control of the trust property. - 30 The definition of “person”73 states that any word or expression descriptive of a person includes any corporation and any “entity” exempt because of subsection 149(1) from tax under Part I on all or part of its taxable income. This definition appears to be somewhat circular, in that an unincorporated association does not appear to be an “entity” the income of which is exempt, and therefore technically appears that it is probably not a “person” within the opening words of subsection 149(1). In any event, CRA clearly is of the view that an unincorporated association can qualify as a “person” and therefore its income is exempt from tax if it otherwise meets the requirements of a particular exempting provision, such as paragraph 149(1)(l). This point is also discussed above under RCAAA’s. Certain CRA Administrative Policies As noted elsewhere, in order to be exempt as a NPO under paragraph 149(1)(l), a club, society, or association must be organized and operated exclusively for purposes other than profit. CRA takes the position that an organization will not meet this test if it accumulates surplus assets that are more than reasonably required for it to carry on its non-profit purposes. This is set out in IT-496R. CRA challenged the exempt status of the Canadian Bar Insurance Association, and alleged that assets that were accumulated by the organization, in order to ensure that its obligations as an insurer could be met, were excessive. The organization had entered into complicated retention agreements with insurers and it was recognized that it engaged in a high level of commercial activity. It sent invoices and collected premiums, it negotiated lower commission rates for its selling agents and carried out a number of activities that were fairly typical of a commercial enterprise. Nevertheless, after reviewing the relevant jurisprudence dealing with the exemption under paragraph 149(1)(l), and after noting that the Minister of National Revenue may have been influenced by the size of the reserves in question, in considering the activities of the organization in a commercial world, the Court focused on the retained amount (5% of premiums) and the remitted amount (payments under the retention agreements). When it considered the third source of revenue (income earned from investing its funds in stabilization reserves), the Court found there was “even less reason” to regard that third source as evidence of a profit purpose. The Court referred to the L.I.U.N.A. case in which a trust was established with a grant from the existing training fund established by the union and an existing recreation fund. In the CBIA case, the Court said that in the L.I.U.N.A. case, the problem “seems to arise” from the fact that the trust fund in L.I.U.N.A. had accumulated money not used for training purposes in the amounts of $600,000.00 to $900,000.00 during the years in question and the issue was whether investment income earned from the use of those funds was subject to tax. The Court in the CBIA case quoted with approval the reasoning in the L.I.U.N.A. case, in which the judge had stated that: 73 Subsection 248(1). - 31 “For an organization to be operated for the purpose of earning a profit so as to disqualify it for the exemption under paragraph 149(1)(l) it would be necessary that it do more than merely earn passive investment income. The earning of such income would need to be both an operating motivation of the fund and a focus of its activity. The evidence does not support this conclusion. On the evidence the earning of the interest income was not the purpose – primary or secondary – for which the fund was operated. The earning of interest was simply an incident of the only purpose for which the fund was operated, the training of the members of the union; it was a means to an end and not an end in itself.” The court also referred to an Ontario Court of Appeal decision dealing with municipal tax.74 In the Hearst case, the Caisse Populaire was assessed for business tax under the Assessment Act on property that it occupied in connection with its operations. The Ontario Court of Appeal stated that: “Many community and charitable organizations, relying from time to time on what would be termed commercial activity to raise funds for the fulfilment of their objectives, could be classed as businesses by such a test. To attach primary importance to the commercial aspect of an operation in question will offer, in my opinion, no sure or helpful guide. In my view, the commercial activity test is too indefinite to allow consistent application. I agree that, in deciding whether or not any activity may be classed as a business under the provisions of s.7(1)(b) of The Assessment Act, all relevant factors regarding an operation must be considered and weighed. However, they must be considered weighed in order to determine not whether in some general sense the operation is of a commercial nature or has certain attributes, but whether it has as its preponderant purpose the making of a profit. If it has, it is a business; if it has not, it is not a business.” In the CBIA case, the Court stated that if the preponderant purpose test accepted by the supreme court in the Hearst case has any application in cases dealing with paragraph 149(1)(l) it would have no hesitation in finding that the preponderant purpose of the organization was to facilitate the availability of certain insurance products at cost to the legal community in Canada and because its preponderant purpose was the availability of certain insurance products at cost, it did not have a profit purpose at all. In commenting on the size of the stabilization reserves, the Court also stated that although it could be said that the organization was “parking money” in those reserves for future use in bad (i.e., negative) years, the large reserves did not reflect a profit purpose, but a “service to members” purpose. It stated that a person with a profit purpose will usually want to use any profit as some method of personal gain by the payment of dividends or salaries or by the increased value of issued shares and the organization taken did none of those things. 74 The Regional Assessment Commissioner and the Municipal Clerk of the Corporation of the Town of Hearst v. Caisse Populaire de Hearst Limitee,  1 S.C.R 57 (SCC). - 32 More recently, CRA challenged the exempt status of an organization that provided audience measurement data to its members, which included Canadian television and radio broadcasters, advertising and government agencies, colleges and universities, in exchange for fees payable by them as members. 75 Those fees were set on a cost-recovery basis based on a projected annual budget and any surpluses realized from the fees were used or held for purposes of funding the activities of the organization. CRA appears to have raised for the first time an assessing position that was at odds with well accepted conventions and its own previous assessing position. The Court rejected CRA’s claim that the exemption was not available because the organization was operated for the purposes of profit for its members, even if not for the purpose of its own profit. The Court referred to the CBIA case and an earlier decision in Gulf Log Salvage.76 It stated that the expression “organized and operated exclusively for other purpose except profit” must be read in context, according to its ordinary sense, harmoniously with the scheme of the Act, its object and the intention of Parliament. The Court then referred to the “ordinary commercial meaning” of the expression and dictionary definitions. It stated that in both CBIA and Gulf Log Salvage, there was no suggestion that in order for the “any other purpose except profit” requirement to be met, the organization cannot be engaged in an activity that is for a purpose that is related to a commercial or business activity of its members, since clearly that requirement would not have been met in either CBIA or Gulf Log Salvage. The Court said CRA had questioned why the ITA should be interpreted to provide an exemption from tax for a non-profit entity whose purpose is related to the commercial business activities of its members. That question cuts to the very heart of the position advanced by CRA in that case. It also shows that the question itself illustrates how the position advanced by CRA was at odds with well-accepted jurisprudence and CRA administrative polities prior to that time. The Court stated that the question might be a valid one if the language in the Act were ambiguous, inconsistent or unclear, but found that that was not the case. Therefore the Court was not inclined to read a public purpose requirement into the provision that is not there. It concluded by stating that if the tax authorities are unable or unwilling to persuade the Department of Finance to propose a legislative change, they should not come looking to the Court hoping that, in the guise of interpretation, the Court will usurp the sole jurisdiction of Parliament to write the law. In response to an argument by CRA that an entity will be established and operated for a purpose other than profit only if its income is use to advance a public purpose of some sort, the Court stated that it is not appropriate for the Court to add a “destination of funds” test or requirement to discern purpose as advocated by CRA. It noted that the Federal Court of Appeal had rejected a “destination of funds” test in finding that an organization was not eligible for registration as a charity.77 The Court noted that the destination of funds test had been rejected in a number of other cases as well. It observed that if the destination of funds 75 BBM Canada (formerly BBM Bureau of Measurement) v. The Queen, 2008 DTC 4129 (TCC). 76 Gulf Log Salvage Cooperative Association v. MNR, 60 DTC 239 (TAB). 77 Earth Fund v. MNR, 2003 DTC 5016 (FCA). - 33 test is not a “bright line” test to qualify for charitable purposes or to qualify for a not-for-profit tax-exempt status, it is not obvious why it should be a bright line test for disqualifying nonprofit entities for tax-exempt status. The Court referred to other cases, not dealing with the exemption under paragraph 149(1)(l), in which it was implicitly accepted that the organization was exempt. For instance, it referred to the Canadian Medical Protective Association78 case, in which there was a question about GST. It was admitted in an agreed statement of facts that the organization was a “non-profit” organization for GST purposes. Finally, in the BBM case, the Court considered the meaning of “profit” and said that there are two key requirements in paragraph 149(1)(l). The first is that the organization must be organized and operated exclusively for any purpose except profit, and the second is that no part of its income can be paid to or made available for the personal benefit of any member, proprietor or shareholder. There was no issue on the second point and the decision turned on the first point. The Court acknowledged that the first point requires a focus on purposes and not merely activities. It stated that the language in the ITA does not mandate a qualifying purpose but permits an organization to have any purpose or purposes other than the one disqualifying purpose of profit. The Court noted that earlier jurisprudence establishes that an organization cannot qualify for exemption under paragraph 149(1)(l) if it is unable to accomplish its objectives unless it realizes profits with which to do so. For instance, in Woodward’s Pension Society79, the organization could not assist in funding pension benefits unless it made a profit from its trading activities and securities. In the Tourbec case80, the organization could not provide travel for students at less than cost unless it made a profit from its sales to other customers. The Court noted that CRA had long stated in IT-496R that some things such as the realization of significant profits or the accumulation of unreasonable reserves can be evidence of a unstated profit purpose and other relevant considerations are whether the activities are operated in a normal commercial manner, whether goods and services are sold to non-members, whether the organization is operated on a profit basis rather than a cost recovery basis and whether it operates in competition with taxable entities carrying on the same trade or business. The Court stated that, in appropriate cases, these may be reasonable and relevant considerations but they cannot all be requirements and they must be weighed appropriately in the circumstances of each case and none will be determinates of. The Court stated in particular that caution must be exercised in considering the statement in IT-496R that it is relevant to consider whether the operations are carried out in a normal commercial manner. CRA had argued that BBM produced several internal reports and memoranda that stressed the need to create a business environment within BBM and to conduct its activities in a business-like manner. The Court stated that this was not sufficient 78 Canadian Medical Protective Association v. Canada,  GTC 461 (TCC). 79 Woodwards’ Pension Society v. MNR, 62 DTC 1002 (SCC). 80 Tourbec (1979) Inc. v. MNR, 88 DTC 1442 (TCC). - 34 to cause an organization to lose it exemption. It observed that this is the language typically used by strategic planning reports and action plans and in recent years the phrase “accountable to our stakeholders” would be expected to be used. The Court stated that operations of non-for-profit entities such as BBM “lack a significant attribute of commercial businesses” and there is no opportunity for their shareholders, members or controlling persons to benefit financially by way of profits, distributions, unrestricted salaries, capital appreciation of the undertaking or its assets or in similar fashion. Finally, the Court stated that a public benefit or purpose is not a prerequisite to qualifying for an exemption under paragraph 149(1)(l) and the existence of public purpose is at best debatable in the case of golf clubs and sports clubs, social and dining clubs, many of which are private, condominium corporations and homeowners’ associations, advocacy organizations and the myriad of similar Canadian organizations that rely on the exemption. Benefits to Members As noted, it is a prerequisite for an exemption as a NPO under paragraph 149(1)(l) (and some of the other exemptions), that no part of the income is payable to or otherwise available for the benefit of a member. As a matter of structuring, it is often advisable for the “member” to be an individual who represents an organization to which a distribution may be made on winding up. Although the mere possibility that a distribution may be made to a member will not disqualify the organization from claiming the exemption at the outset, CRA has stated that as soon as a decision is made to dissolve and make a payment to a member, the exemption will be lost.81 CRA has issued a number of technical interpretations dealing with the circumstances in which the exemption will be lost because a benefit is provided to members. While the payment of reasonable amounts of salaries, wages, fees or honorariums for services rendered will not in of itself disqualify an organization from being exempt, as long as the amounts paid are reasonable and in line with those paid in arm’s-length situations for similar services, CRA will question those payments if it thinks they are inappropriate.82 CRA has stated that the payment of a refund of fees, the distribution of excess cash or the provision of clothing for members would likely result in the loss of an exemption83; capital improvements made by a condominium corporation for the benefit of a member may disqualify the corporation from exempt status84; if the charter or other constating documents of an organization do not expressly prohibit the payment of income or provision of other benefits to members, it will probably not be exempt85; a housing corporation will not be 81 CRA document no. 2002-0180335, October 20, 2003. 82 CRA document no. 2002-0157525, October 25, 2002. 83 CRA document no. 2002-0141145, July 31, 2002. 84 CRA document no. 2001-0092145, November 30, 2001. 85 CRA document no. 2000-0058175, December 6, 2000. - 35 exempt if it can provide for the payment of patronage dividends to its members86; it is a question of fact whether an organization whose directors are also the directors of a for-profit company from which the organization purchases its supplies from time to time will be exempt from tax87; if an organization is otherwise exempt as a non-profit organization under paragraph 149(1)(l), it will cease to qualify as such on the date on which it amends its bylaws or charter to allow for a distribution of funds to its members;88 it is a question of act whether the provision of dance costumes to members or persons related to members of an association would result in a loss of exempt status.89 Issues Peculiar to Trusts The L.I.U.N.A. case deals with some fairly esoteric legal issues, relating to the validity of a trust. In most common law jurisdictions, there are rules against perpetuities. These rules have been abolished by statute in some provinces, such as Manitoba. In Ontario, the rules have been amended but not abolished. The issue in the L.I.U.N.A. case was whether a trust was exempt under paragraph 149(1)(l), after it was found that it was not exempt as a labour organization. The Court reviewed, on its own initiative, the question of legal validity in view of the rule against perpetuities and the statutory amendment. Although the parties themselves had conceded that the trust was validly established, the Court pointed out that matters of law are reserved to the Court and cannot be settled by agreement of the parties. The court found that under statutory provisions in the Perpetuities Act, the trust was “saved” for a period of 21 years, despite the fact that it would have been void from the outset as a matter of common law. This is an important point in any situation involving a trust established for a purpose, if the trust is not charitable. There is a common law exception from the rule against perpetuities for charitable trusts, but not for other purpose trusts. In L.I.U.N.A., the Court noted that the trust could not be saved on the alternative grounds that it was a trust established for the benefit of members, since the possibility that income could be made available to members would automatically disqualify it from exemption under paragraph 149(1)(l). The same considerations would apply to other exemptions that prohibit benefits to members, such as those for low-income housing corporations under paragraph 149(1)(i) and agricultural organizations under paragraph 149(1)(e). There is no similar prohibition in the exemption for labour organizations and fraternal benefit societies which are exempt under paragraph 149(1)(k). Municipal Tax Issues This discussion does not permit me to do more than point out that certain organizations may be eligible for relief from municipal taxes. In some cases, there is a specific provision in a 86 CRA document no. 9733195, March 13, 1998. 87 CRA document no. 2002-0157525, October 25, 2002. 88 CRA document no. 2003-0027252R3, June 9, 2004. 89 CRA document no. 2003-0053761E5, May 25, 2004. - 36 statute and in other cases the exemption is set out in the Assessment Act.90 For instance, under the Agricultural and Horticultural Organizations Act, the land, as defined in the Assessment Act, occupied by an agricultural society or a tenant of an agricultural society is exempt from tax for municipal and school purposes, other than local improvement rates, as long or the land and proceeds from the rental of the land is used solely for the purposes of the society. This applies only to agricultural societies and not to “organizations” which under that statute include an agricultural association, an agricultural society and a horticultural society to which the statute applies. In that regard, the statute specifically provides that the Western Fair Association and the Central Canada Exhibition are deemed to be agricultural societies and the local organizing committee for the annual International Plowing Match is deemed to be an agricultural society in the year in which it hosts the International Plowing Match, but only for the purposes of the application of subsection 9(2) of the Retail Sales Tax Act. Under the Assessment Act, some of the exemptions from municipal tax that are relevant to NPO’s and other organizations under discussion include the following: 1. 2. 3. 4. 5. 6. 7. 8. 90 land owned by a church or religious organization or leased to it by another church or religious organization if it is a place of worship or a church yard, cemetery or burying ground as long the land is actually being used for the interment of the dead or any ancillary purpose prescribed by regulation; land owned, used and occupied solely by a university, college, community college or school as defined in the Education Act or land leased and occupied by it if it would be exempt from tax if it were occupied by the owner; land owned, used and occupied solely by a non-profit philanthropic, religious or educational seminary of learning or land leased and occupied by it if the land would be exempt from tax if it were owned by the owner, not exceeding 50 acres; land used and occupied by a children’s treatment centre that receives provincial aid, but not any portion of the land occupied by a tenant; land owned, used and occupied by a non-profit philanthropic corporation for the purpose of a house of refuge, the reformation of offenders, the care of children or a similar purpose, excluding land used as a day care centre; land owned, used and occupied by any charitable, non-profit philanthropic corporation organized for the relief of the poor if it is supported in part by public funds; the property of a children’s aid society discharging the functions of a children’s aid society under the Child and Family Services Act whether held in the name of the society or in the name of a trustee or otherwise, if used exclusively for the purposes of and in connection with the society; the property of every public library and other public institution, literary or scientific, and of every agricultural or horticultural society or association, to the extent of the actual occupation of the property for the purposes of the institution or society and for this purpose, an agricultural society under the Agricultural and Horticultural Organizations Act is deemed to be in actual occupation where the property of the society is rented and the rent is applied solely for the purposes of the society; R.S.O. 1990, c. A. 31. - 37 9. land owned by a non-profit corporation without share capital, other than any portion of the land occupied for more than 90 consecutive days by an entity other than a non-profit corporation without share capital, on which a theatre is situated containing at least 1,000 seats that is used for a total of at least 183 days per year for the rehearsal or presentation of live performances of drama, comedy, music or dance if the performances are not presented with the intention of generating profit, including land on which a theatre is being constructed, subject to certain restrictions. In some cases, specific exemptions have been granted by special act although those organizations in many cases tend to be recognized as charities and granted registration under the Act. However, there is no necessary link between exemption from municipal tax and registration as a charity under the Act. In many cases, it will be important to ensure that the structure does not result in adverse municipal tax consequences, if alternative approaches are available. Specific advice will be warranted in any given situation. For instance, in the Causeway Foundation case91, the issue was whether land was exempt on the basis that it was used and occupied by a charitable, non-profit philanthropic corporation organized for the relief of the poor. The issue turned on whether land was “occupied” for purposes of the exemption (as it was then worded and prior to a subsequent amendment to the Assessment Act) by a charitable, non-profit philanthropic corporation organized for the relief of the poor that was supported in part by public funds. The first issue was whether the land could be considered to be “occupied” when it was rented to a third party. The second issue was whether the organization was supported in part by public funds. Distinguishing a decision in a similar case involving Ottawa Salus Corporation92, the Court held that Causeway did not occupy the land, whereas it had been held in the Salus case that an organization could occupy land that had been leased to a tenant. In Ottawa Salus, the Court of Appeal upheld a decision of the Divisional Court in which it was stated that occupation by the tenants was effectively regarded as occupation by the corporation itself. The Divisional Court distinguished earlier decisions, stating that in the other cases, the tenant had no connection with the charity whereas in the Ottawa Salus case, the “tenants” were the very persons for which the charity existed and the residents in the units that were owned and used by the charity were at the “very core of the charitable purposes”, namely the provision of low cost housing for the poor and mentally ill. In the Diocese of Toronto Camps case93 an exemption was recognized for a summer camp that was operated for the general welfare of children. At the initial hearing, the exemption was rejected on the basis that the organization was neither a seminary of learning nor a place for “the care of children”. On appeal, the Court held that the test in determining 91 Causeway Foundation v. Ontario Property Assessment Corporation and the City of Ottawa,  O.J. No. 214. 92 Ottawa Salus Corporation v. Municipal Property Assessment Corporation and the City of Ottawa,  O.J. No. 213. 93 The Diocese of Toronto Camps (Anglican Church of Canada) v. Municipal Property Assessment Corporation, Region 16 et al, 67 O.R. (3d) 619. - 38 whether an exemption is available is whether the primary purpose comes within the words defining the exemption. The Court found that some of the children who attended the camp were “cared for” by camp staff, although only about 12% of the total number of campers had “special needs”. The taxing authority had argued that the charity was competing with “commercial camps” and charged the same fees charged by those other camps. The Court noted that that “commercial camps” were run for profit, but the charity was operated on a non-profit basis. The Court said that if the exemption had been intended to be limited to camps that provided “care of children” on a year-round basis, the legislation would have so stated. Other Comments In a 1962 case94, it was held that a partnership organized to sell beer in a community was exempt from tax as a non-profit organization since none of the partners ever received any profit from the sale of beer and had no claim and no rights to the profits of the partnership. The case was argued at least partly on the basis that the partnership was a club, society or association organized and operated exclusively for non-profit purposes. There was no discussion about whether a partnership would qualify as a club, society or association. The Court stated that it seemed to be unheard of to impute to the individual who was being assessed (as a partner) a “pretended income” of which he had not received even one penny, and which he had no right to claim from the partnership. It seems that this case might have been better decided on the basis that there was no amount having the quality of income received by the taxpayer, without regard to arguments based on charitable organizations or NPO’s. Recently, CRA declined to express a view in a request for a technical interpretation in which it was proposed that a corporation would acquire a property with the intention of selling it to its members in future. The sale price of the property would be either the cost of the property to the corporation or its fair market value at the time of sale to the member. CRA declined to comment on whether the property might be regarded as inventory of a business or whether, based on the objects set out in its letters patent, the corporation could be regarded as having been organized and operated for social and cultural purposes and not for profit.95 In a combined GST and income tax case involving unreported income, CRA alleged that a taxpayer who took part in an entertainment event held in a large tent during an annual festival had personally received income and that he had not reported and had failed to collect and remit GST.96 The taxpayer argued that the event had been operated as an unincorporated “not-for-profit” arrangement run by a committee of volunteers including himself. CRA argued that the event had been operated by the taxpayer as a sole proprietorship and a personal business. The Court concluded that in determining whether the event was a business operated by the taxpayer or a not-for-profit association was a 94 MNR v. Begin, 62 DTC 1099 (Ex. Ct.). 95 CRA document no. 2008-0268941E5. 96 Katzman v. The Queen, 2004 DTC 3601 (TCC). - 39 question of fact and the primary focus was on whether the event was organized and operated for a purpose other than profit. After considering all of the evidence, the Court concluded that the event was operated as an not-for-profit association with any profit distributed to charitable organizations. The appeals were allowed for both income tax purposes and GST purposes on the basis that the taxpayer was not the proper person to be assessed. GST For most exempt organizations, particularly NPO’s, there are two aspects of GST. The first is whether the organization is required to collect and remit GST when it makes supplies. The second is whether the organization is entitled to recover any GST that it pays to its suppliers. There are general exemptions for many exempt organizations and the classifications do not necessarily follow those that are set out in the ITA. The so called “MUSH” sector (municipalities, universities, schools and hospitals) includes a variety of organizations to which a number of different policies apply for GST purposes. As a very general proposition, NPO’s that are supported with government funds may be entitled to some tax relief for GST that they pay to their suppliers. Other NPO’s are not generally entitled to any relief for GST that they pay. On the other hand, many exempt organizations, including many NPO’s, are not required to collect GST when they make supplies to third parties. There are special rules for membership fees, which are generally not subject to GST unless they entitle the member to something more than the usual benefits of membership.97 As a general proposition, supplies of goods and services made by a charity or a NPO, including leases of real property, are not subject to GST. On the other hand, the NPO usually is required to pay GST on supplies of goods and services that it purchases. A NPO can elect to treat certain exempt sales and leases of real property as taxable supplies, thereby becoming eligible to claim ITC’s for the GST that it pays. The election is available for real property that is capital property, real property held in the inventory of a business for the purpose of making a supply of it and for real property acquired under lease, licence or similar arrangement for purposes of re-supply by way of lease, licence or similar arrangement. Where an election is made, the NPO is required to charge GST on the consideration received where the sale, lease or licence of the property and the usual “primary use” rule that is normally followed to determine whether an ITC is available on the acquisition of property will not apply. Instead, the NPO must calculate its ITC based on the percentage of use of the property in its commercial activities. For this purpose, at least 10% use in commercial activities must be present to claim an ITC. The election permits the NPO 97 For a general overview of the GST implications for NPO’s, see RC4081, “GST/HST Information for Non-Profit Organizations”. - 40 to claim ITC’s on purchases and expenses related to the real property to the extent the property is used in a commercial activity. There are also “change in use” rules that can apply to NPO where property is switched from use in a commercial activity to use in an exempt activity or vice versa. Some supplies are not subject to GST because of their very nature. These are treated as “zero-rated” and are not taxable regardless of the person making the supply. These include, for instance, prescription drugs, basic groceries, most agricultural and fishery products and certain exports. Other supplies are “exempt”, which means the person receiving the supply is not required to pay GST and the person making it is not required to collect GST. The significant difference is that a person making a zero-rated supply is considered to be carrying on a commercial activity and entitled to recovery GST paid through input tax credits (“ITC’s”), whereas a person making an exempt supply is considered not to be carrying on a commercial activity and therefore is not entitled to recover GST paid in the form of ITC’s. Examples of supplies that are exempt include admission to a place of amusement, admission to an athletic event, free supplies, fundraising activities, gambling activities, goods and services sold at direct cost. They also include certain membership in NPO’s where the membership entitles the member to only the following benefits: (a) (b) (c) (d) (e) (f) an indirect benefit intended to accrue to all members collectively; the right to receive services in the nature of investigating, conciliating or settling complaints involving members; the right to vote at meetings; the right to receive or acquire goods or service for an additional fee equal to fair market value; the right to receive a discount for goods or services sold by the organization with a total value of all the discounts is less than 30% in relation to the membership fee; the right to receive periodic newsletters, reports or other publications if the value is less than 30% in relation to the membership fee or they provide information on the activities of the organization and the value is not significant in relation to the membership fee and a fee is ordinarily charged to nonmembers for the same information. Membership in a club is taxable if the main purpose of the club is to provide dining, recreational or sporting facilities to its members. This is based on the same policy that imposes tax under subsection 149(5) through the deemed trust that is created for property held by such a club. Other exemptions are available for memberships in professional organizations, membership in a registered political party, membership in and library cards issued by public libraries, certain recreational programs if they are supervised instructional classes or activities involving athletics, outdoor recreation, music, dance, crafts, arts, hobbies or other recreational pursuits primarily for children 14 years of age or younger if there is no large element of overnight supervision or if the program is provided primarily to under-privileged individuals or individuals with a disability. There are also exemptions for supplies made for - 41 the relief of poverty. Generally, there is no GST on supplies made by way of gift, including donations to a RCAAA. In some cases, when an exempt organization receives a grant or subsidy, there can be GST implications. In some cases, it is not clear whether there is a single supply, which is either exempt or zero-rated, on the one hand, or taxable, on the other hand, or there are multiple supplies. This issue arose in a case involving a charity that operated a summer camp. 98 There is an exemption for a supply made by a charity of any property or service, excluding a supply of a service involving, or a membership or other right entitling a person to, supervision or instruction in any recreational or athletic activity. The organization claimed that it was not required to collect GST from the children who attended summer camp, on the basis that it was providing religious training, rather than recreation or athletics. The organization relied on a earlier decision of the Tax Court of Canada in similar circumstances. The Federal Court of Appeal rejected that argument and stated that it felt the earlier case had probably not been decided correctly. The Court also rejected an argument that there were multiple supplies, consisting of both recreation and religious studies. The Court stated that it was not possible for the organization to have charged separate fees for the religious and the recreational and athletic services that it supplied since they were too closely integrated and as a result the organization was making only taxable supplies and was required to collect GST. If a NPO receives sponsorship payments and provides promotional services to the sponsor or allows the sponsor to use the name or logo of the organization, there will be no GST unless the payment made by the sponsor is primarily (more than 50% according to CRA) for advertising. A NPO is entitled to recover an ITC for GST paid in relation to commercial activities that are carried on. As noted, this will not apply if the activities are not commercial activities because the only supplies made are exempt. GST can generally be recovered through ITC’s for purchases of goods or services or merchandises acquired for resale, or items are bought to manufacture other goods, or capital property such as furniture or equipment is acquired primarily for use in commercial activities, for general operating expenses such as office rent, equipment rentals, etc. Some NPO’s can claim a rebate to recover part of the GST paid if they qualify as “public service bodies”. There are separate rules for NPO’s that qualify as “financial institutions”. Those rules are beyond the scope of this discussion. Generally, a NPO will be eligible for a rebate of GST if the percentage of government funding it receives in a particular year or the previous two years is at least 40% of its total revenue. Many NPO’s are also eligible for a 50% rebate of the provincial part of HST if they are resident and in a participating province. 98 Camp-Mini-Yo-We Inc. v. The Queen, 2006, FCA 413 (FCA). - 42 There are special rules for rebates of GST paid to acquire printed books, audio recordings of printed books and printed versions of religious scriptures for organizations that are “qualifying NPO’s that operate public lending libraries if the printed books or recordings or religious scriptures are not bought for resale. Qualifying NPO’s whose primary purpose is to promote literacy are also eligible for this rebate if they meet certain other requirements. There are special rules for taxable supplies of real property which are beyond the scope of this discussion. Provincial Retail Sales Tax Some organizations that are exempt from tax under the Act are also entitled to relief for provincial retail sales tax purposes. For instance, under subsection 9(2) of the Retail Sales Tax Act99 there are exemptions from tax on the price of admission to certain events. Under regulation 1012, certain organizations are prescribed, including various colleges, museums, etc. However, garden variety NPO’s are not generally prescribed and therefore do not generally qualify for relief from the general requirement to collect and remit retail sales tax on the price of admission. The general requirement with respect to the price of admission is that every purchase of admission to a place of amusement is required to pay retail sales tax at the rate of 10%. However, the exemption under subsection 9(2), which is mentioned in the Agricultural and Horticultural Organizations Act, applies to the price of admission to any entertainment, event, dance, performance or exhibition staged or held where no performer receives any remuneration or other consideration for performing or where 90% of the performers who regularly participate are Canadian citizens resident in Canada or permanent residents in Canada or where the entertainment, event, dance, performance or exhibition is staged or held in a place of amusement by or under the auspices or sponsorship of the following organizations: 1. 2. 3. 4. 5. 6. a RCAAA; a registered charity for purposes of the Act; a labour organization or society or a benevolent or a fraternal benefit society or order (which is not defined for this purpose); an agricultural society constituted under the Agricultural and Horticultural Organizations Act, during any agricultural fair held by it, except where the entertainment, event, performance or exhibition is a “sporting event”; an educational institution; or an organization that is substantially assisted or supported financially from public funds of Ontario and it is prescribed by regulation. As noted above, the regulations include a list of organizations that will not generally assist a garden variety NPO. 99 R.S.O. 1990, c. R.31. - 43 There are also enumerated exemptions in section 7 from payment of retail sales tax on the purchase of tangible personal property or taxable services, but generally speaking these are of little significance to NPO’s and other non-profit organizations that are not registered charities. For instance, there is an exemption for a purchase of used clothing or used footwear that is sold by a religious, charitable, benevolent or non-profit organization in a single transaction for consideration that is less than $50.00. While registered charities are entitled to recover a rebate for retail sales tax embedded in the cost of certain improvements on real property, this does apply to NPO’s in general. Similarly, specific exemptions for the purchase of equipment by the Ontario Cancer Treatment and Research Foundation, a public hospital or a hospital approved under the Community Psychiatric Hospitals Act will not apply to an NPO or other exempt organizations discussed herein. There are exemptions for publications, as defined, purchased by a school, school board, community college or university or by a public library established under the Public Libraries Act. Again, this will generally be of no significance for a typical NPO or other exemption organization discussed herein. As an adjunct to the exemption under subsection 9(2) for the price of admission, there is separate exemption for admissions to a place of amusement that are donated by an owner or operator of a place of amusement to a registered charity, an educational institution or a qualifying non-profit corporation, as defined for purposes of subsection 9(2). Governance Issues I do not propose to discuss governance issues in general but I do offer a few comments. For instance, corporations that are formed without share capital are subject to a different corporate law regime than corporations formed under business corporation statutes such as the Business Corporations Act (Ontario), or the Canada Business Corporations Act. As speakers at previous sessions have noted, changes are proposed both federally and in Ontario. However, under the current law, many governance problems raise issues about process, particularly where there are disputes among directors or members. In a recent decision of the British Columbia Court of Appeal, which would appear to be equally applicable in Ontario100, a member was reinstated by the Court after it found that he had been expelled as a result of a process that did not give him an opportunity to be heard. The individual was involved in a lawsuit involving a separate organization that owned the land occupied by the yacht club. Shares of the land-owning corporation were held by members of the club. Initially all of the shareholders of the land-owning corporation were also members of the yacht club. the yacht club entered into a lease with the owner of a joining property, to attain access to additional property. The rules were later changed, as a result of which it was no longer a prerequisite that ownership in the landowning company be a condition of membership in the yacht club. This resulted in acrimony among members. A petition was started to call for the expulsion of the member. The procedure was defective, in the technical sense that although he was aware of the proceedings, the Court found that he was not given an adequate opportunity to respond before the explosion became effective. Technical problems can arise in many governance situations involving corporations without share capital operated on a membership basis. 100 Struchen v. Burrard Yacht Club, 2008 BCCA 271. - 44 This illustrates that the letters patent and by-laws should be drafted carefully and perhaps a members agreement should be contemplated where appropriate to try to address these problems in advance. In any event, proper procedures must be followed where controversies arise. Summary There are exemptions from income tax in the Act for a variety of organizations, including unincorporated associations, corporations and trusts. The rules depend on the organization in question. NPO’s, including RCAAA’s as a subset, are likely to be the most prevalent, although other exempt organizations such as agricultural organizations, labour organizations, fraternal benefit societies and low-cost housing corporations are also frequently encountered. There may be charity law issues for organizations that are not registered charities, particularly in Ontario, under the Charities Accounting Act. There also may be issues under the Charitable Gifts Act if an organization is a “charity”, even if not a registered charity. There are separate issues relating to GST, municipal tax, retail sales tax and a variety of other matters. While this discussion is not intended to be exhaustive, it shows that for organizations that are exempt from income tax but not registered charities, advisors should be prepared to consider a broad spectrum of issues.
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