11 April 2002 External T.I. 2002-0126375 - Tax Status of the XXXXXXXXXX

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: Tax status of the XXXXXXXXXX

Position: General comments.

Reasons: Insufficient facts to reach a conclusion.

XXXXXXXXXX 2002-012637
Éric Allard-Pouliot
April 11, 2002

Dear XXXXXXXXXX:

Re: Technical Interpretation Request : Tax-Free Status

This is in reply to your letter of December 17, 2001, in which you requested that the XXXXXXXXXX be granted tax-free status under the Income Tax Act (the "Act").

XXXXXXXXXX

The particular circumstances in your letter on which you have asked for our views refer to a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling.

Therefore, while we cannot confirm the tax status of the XXXXXXXXXX for the purposes of the ITA, we are prepared to offer the following general comments which may be of assistance to you.

Comments

There are certain provisions in the Act pursuant to which the XXXXXXXXXX and/or its employees and their family might be granted an exemption from income tax. In light of the facts submitted to us, the provisions that might be relevant in your situation are paragraphs 149(1)(k) and (l) and 81(1)(a) of the Act with respect to the XXXXXXXXXX, and paragraph 81(1)(a), subparagraph 110(1)(f)(iii) and subsection 126(3) with respect to the employees of the XXXXXXXXXX and their families. We shall briefly discuss each of these provisions.

Paragraph 149(1)(k)

Paragraph 149(1)(k) of the Act provides that no tax is payable under Part I of the Act on the taxable income of a person for a period during which that person was a "labour organization" or a "benevolent or fraternal benefit society or order". Neither of these expressions are defined in the Act. However, the Tax Court of Canada in the case of L.I.U.N.A. Local 527 Members' Training Trust Fund v. The Queen, 92 DTC 2365 (T.C.C.), has adopted the following definition of a "labour organization", at page 2374:

"The ordinary definition of trade union or labor organization is thus stated: "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.""

As for the expression "benevolent or fraternal benefit society or order", we are not aware of any judicial definition of that term and must therefore resort to its common ordinary sense. A "fraternal benefit society" is defined as follows in Black's Law Dictionary:

"one whose members 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. An association having a representative form of government and a lodge system with a ritualistic form of government for the meeting of its chapters, or other subordinate bodies. 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 being derived from dues paid or assessment levied on the members."

It is to be noted that a corporation that qualifies for the exemption under paragraph 149(1)(k) of the Act must still comply with the other requirements of the Act, such as the filing of an income tax return.

In light of the facts submitted with your request, it does not seem like the XXXXXXXXXX would qualify as a "benevolent or fraternal benefit society or order" within the meaning of paragraph 149(1)(k) of the Act. However, we do not have sufficient information to reach a definitive conclusion in this regard.

Paragraph 149(1)(l)

Pursuant to paragraph 149(1)(l) of the Act, no tax is payable under Part I of the Act on the taxable income of a person for a period when that person was:

"a club, society or association that, in the opinion of the Minister, was not a charity within the meaning of 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 thereof unless the proprietor, member or shareholder was a club, society or association the primary purpose and function of which was the promotion of amateur athletics in Canada;"

As mentioned in the preamble of Interpretation Bulletin IT-496R, a corporation qualifies as a "club, society or association".

It flows from paragraph 149(1)(l) of the Act that in order for an association to qualify for the exemption provided under this provision it must be organized and operated exclusively for non-profit purposes. The purpose for which an association was organized can generally be determined from the instruments creating it, such as letters patent, articles of incorporation, by-laws and so on.

However, it is not sufficient that an association be organized exclusively for non-profit purposes but it must in fact be also operated in accordance with these purposes in each year for which it seeks an exemption under paragraph 149(1)(l) of the Act. Such a determination must be based on the facts of each case after reviewing all of the association's activities for the year for which it seeks the exemption. Therefore, such a determination cannot be made in advance of or during a particular year but only after the end of the year.

As to whether an association may be considered to be organized and operated for non-profit purposes, paragraph 6 of Interpretation Bulletin IT-496R provides the following indications:

"An association may be considered to be organized and operated for any other purpose except profit if its aims and activities are directed toward the general improvement of conditions within one or more areas of business. An example of this would be where an association was organized to advance the educational standards within a particular industry or profession, to publicize, improve and promote the association's objectives in a general way and to encourage the exchange of relevant technical information. If the activities of such an organization were consistent with these aims, then it would qualify for exemption provided all other conditions of paragraph 149(1)(l) were complied with in the year."

As provided in paragraph 8 of Interpretation Bulletin IT-496R, an association may make a profit provided the requirements of the Act are met. However, if an important part of the excess income is accumulated each year and the balance of accumulated excess at any time is greater than the need of the association to carry on its non-profit activities, profit will be considered as one of the purposes for which the association was operated.

To qualify for exemption under paragraph 149(1)(l) of the Act, no part of the income of the association, whether current or accumulated, can be payable to, or otherwise made available for the personal benefit of, any member of the association. However, certain types of payments, such as salaries, wages, fees or honorariums for services rendered to the association, made directly to members, or indirectly for their benefit, will not, in and by themselves, disqualify an association from being tax-exempt under paragraph 149(1)(l) of the Act.

Finally, a corporation that qualifies for the exemption under paragraph 149(1)(l) of the Act must still comply with the other requirements of the Act, such as the filing of an income tax return.

Paragraph 81(1)(a)

Subsection 81(1) provides that certain amounts do not constitute income to a taxpayer for any purposes of the Act. Paragraph 81(1)(a) of the Act specifically provides that amounts which are declared to be exempt from income tax by any other enactment of the Parliament of Canada and that are not otherwise exempted by virtue of a tax convention or agreement with another country, are not to be included in computing a taxpayer's income. One of those enactments is the Foreign Missions and International Organizations Act (the "FMIOA").

The FMIOA generally provides that an "international organization", its officials and the members of their families may, by order of the Governor in Council, be exempted from any income tax in Canada. However, this exemption does not apply to Canadian citizens who are resident in Canada.

The expression "international organization" is defined in paragraph 2(1) of the FMIOA as meaning "any intergovernmental organization of which two or more states are members". It flows therefore that the FMIOA does not apply to any non-governmental organizations, such as the XXXXXXXXXX.

Subparagraphs 110(1)(f)(iii) and (v)

Pursuant to subparagraphs 110(1)(f)(iii) and (iv) of the Act, employees of a "prescribed international organization" or "prescribed international non-governmental organization" are entitled to a deduction in computing taxable income equal to their income from employment with that particular organization. Both these expressions are defined in section 8900 of the Income Tax Regulations (the "Regulations"). Pursuant to section 8900 of the Regulations, only the United Nations, and any specialized agencies that is brought into relationship with the United Nations in accordance with Article 63 of the Charter of the United Nations, are "prescribed international organizations", whereas only the International Air Transport Association and the International Society of Aeronautical Telecommunications are "prescribed international non-governmental organizations". Since the XXXXXXXXXX does not fit within either of these definitions, its employees are not eligible for the paragraph 110(1)(f) exemption.

Subsection 126(3)

Pursuant to subsection 126(3) of the Act, an individual who was employed with an international organization (other than a prescribed international organization) and was resident in Canada at any time in a taxation year is entitled to a deduction from its tax for the year otherwise payable under Part I of the Act. For the purposes of subsection 126(3) of the Act, an international organization is to be defined in accordance with section 2 of the FMIOA. As previously mentioned, pursuant to section 2 of the FMIOA, an "international organization" refers to "any intergovernmental organization of which two or more states are members".

Since the XXXXXXXXXX is a non-governmental organization, it follows that it does not qualify as an international organization within the meaning of section 2 of the FMIOA and, therefore, its employees are not entitled to a deduction under subsection 126(3) of the Act.

The above comments are an expression of opinion only and are not binding on the Canada Customs and Revenue Agency, as explained in paragraph 22 of Information Circular 70-6R4.

We trust that the foregoing will be of assistance to you.

Yours truly,

Alain Godin, Manager
International and Trusts Section
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch