13 May 2002 External T.I. 2002-0119895 - NON-PROFIT ORGANIZATION SPORTING FACILITIES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether main purpose of a non-profit society is to provide sporting facilities for its members for the purposes of subsection 149(5).

Position:     		Question of fact

Reasons: Would need to examine by-laws and review activities to make this determination.

XXXXXXXXXX 							2002-011989
B. Kerr
May 13, 2002

Dear XXXXXXXXXX:

Re: Subsection 149(5) of the Income Tax Act (the "Act")

This is in response to your letter of January 15, 2002, concerning the non-profit status of an organization and whether it would be subject to the provisions of subsection 149(5) of the Act.

The situation outlined in your letter involves a non-profit society that was organized for the purpose of promoting a specific amateur sport in a particular province. The society would like to construct an athletic facility to assist in the promotion of amateur athletics. The facility would operate on a break-even basis and users would be charged a rental fee. The financial institution that the society deals with will not make a loan to the society directly but would provide one to a wholly owned subsidiary corporation. Accordingly, the society will incorporate a taxable corporation to hold and operate the athletic facility. The society has accumulated funds which it will loan to the subsidiary corporation to assist in the financing of the facility.

You have asked whether the provisions of subsection 149(5) of the Act would apply to the society and whether the non-profit status of the society would be affected.

Our Comments

The situation identified in your letter involves proposed transactions relating to a particular taxpayer. It is the Agency's policy not to comment on such transactions except in the context of an advance income tax ruling as stated in Information Circular 70-6R4. However, we can provide the following general comments.

Paragraph 149(1)(l) of the Act generally provides an exemption from Part I tax for a club, society or association that, inter alia, is organized and operated exclusively for social welfare, civic improvement, pleasure or recreation, or any other purpose except profit. However, when the main purpose of an association is to provide dining, recreational or sporting facilities to its members, paragraph 149(5) of the Act applies to tax its property income and certain capital gains. These are factual determinations that require an examination of the information pertaining to an association and the activities of the association for each particular year for which an exemption is sought. If the society undertook the activities as described above, it is our view that the society may have as a purpose the provision of sporting facilities for its members because of its financial and operational relationship with the subsidiary that would own the facilities, and the integration of this with the services provided to its membership.

This purpose would be a question of fact, as well as whether or not this is the society's main purpose. Since there is no definition of main purpose in the Income Tax Act, its determination in any particular case is a question of fact. The dictionary meaning seems to be synomous with "chief in size or extent" or perhaps of "preeminent importance" or "primarily". The Agency considers that the "used primarily" test will be met where more than 50% of the assets in question are used in whatever process is involved. This suggests that the main purpose test for a club would be met where more than 50% of the assets of the club are utilized to provide dining, recreational or sporting facilities for its members.

We would add that although the use of assets of a club may be a factor to be considered in determining the purpose(s) or main purpose of the club, arguably of greater importance in such a determination is the content of the by-laws enacted by the club to regulate its affairs. This is consistent with the comments in IT-496R entitled Non-Profit Organizations, where paragraph 5 states "...When determining the purpose for which an association was organized, the instruments creating the association will normally be reviewed. These instruments may include letters patent, articles of incorporation, memoranda of agreement, by-laws, articles and so on..."

The Manitoba Curling Association Inc. case (84 DTC 1462) involved a governing body whose main purpose was to organize its members and promote the sport of curling. In that case, the meaning of the word "facilities" was considered where it was stated:

"I quote from Webster Living Dictionary 1973-1974 edition the definition of "facility":

"The quality of being easily performed or guided: ease in performance: readiness proceeding from skill or use: dexterity: freedom from difficulty: the means by which the accomplishment of anything is rendered easier: often pl. something built and activated to serve a particular purpose; such as, the school's luncheon facilities."

Clearly, the word "facilities" as used in section 149(5), in the spirit of the Legislation contemplates, when it uses the word facilities, a physical thing such as a building.

The appellant owns no physical facilities other than curling rocks and its office equipment. To organize the play downs and bonspiels, the association must rely on the beneficence of its member curling clubs which, in fact own the facilities and which, at a nominal fee, provide them for play downs and bonspiels. Clearly, the Association is an umbrella organization established for the purpose of promoting the sport of curling. It is not like a tennis club or a golf club which owns its own facilities and its promotional operations in no way reflect that type of operation. In that there is no jurisprudence relating to section 149(5), I think it can be fairly stated that the purpose of Parliament in enacting this section of the Income Tax Act related to, as I mentioned, golf clubs, tennis clubs, health clubs recreation clubs etc. These clubs all have in common the fact that they either lease or own, their facilities."

With regard to whether or not the society may be operated for a profit purpose regarding the accumulation of excess funds and earning interest thereon, we refer you to the relevant comments in paragraphs 8 and 9 of IT-496R.

In order to provide a definitive answer to your questions in respect of paragraph 149(1)(l) and subsection 149(5) of the Act, we would need to review and analyze all information, relevant documentation and the activities of the society for the particular period.

We trust that these comments will be of assistance.

Yours truly,

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch