15 May 1997 Internal T.I. 9635617 - TRANSFER OF SHARES OF AN NPO HELD IN TRUST

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 Department.

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

Principal Issues:

The tax implications of a transfer of shares of a corporation which are held "in trust" by members of a "non-profit organization" (the "Organization"), for the Organization, to other persons in similar non-profit organizations (on the winding-up of the Organization). It is expected that the members of the Organization will join these other similar non-profit organizations.

Position TAKEN:

We were not provided with sufficient information in order to establish the tax consequences of the described transactions; therefore, we provided general comments on gifting, property held "in trust", 149(1)(l), 149(1)(k) and 56(2).

Reasons FOR POSITION TAKEN:

Insufficient and contradictory information was provided. We could not establish who has the beneficial ownership of the shares of the corporation (the wording of the declaration of trust submitted was inconclusive), what types of entities are involved (corporations, associations, clubs?), whether they qualify for an exemption (i.e., it is unclear whether they are claiming to be an NPO or a fraternal benefit order, and whether they qualify for either) and the legal effect of the transfer of the shares (i.e., it is unclear how the transfer will be structured).

		May 15, 1997

	XXXXXXXXXX Tax Services Office		HEADQUARTERS
	Business Enquiries	M. Azzi
		957-8953
	Attention: XXXXXXXXXX
			7-963561

Transfer of Shares Held "In Trust"

This is in reply to your memo of October 23, 1996, wherein you requested our views on the tax implications of a transfer of shares of a corporation held "in trust" by members of a fraternal organization (the "Organization"). None of the taxpayers' names were disclosed.

The taxpayer's representative, XXXXXXXXXX, indicates that the Organization is a "fraternal order" which he has presumed to be exempt from tax pursuant to paragraph 149(1)(l) of the Income Tax Act (the "Act"). He indicates that, pursuant to a declaration of trust (an example of the declaration was submitted), members of the Organization hold in trust, for the Organization, shares of a corporation (the "Corporation"). The Corporation has been in existence since XXXXXXXXXX and its sole activity is to hold the land and building used by the Organization, and "other like fraternal groups," to meet regularly. The other fraternal groups that meet in the building have historically paid rent to the Corporation on a cost recovery basis. The representative indicates that the Corporation has historically filed as a tax-exempt corporation disclosing itself to be a "fraternal order."

The Organization is being wound-up, and it is proposed that the members who hold the shares of the Corporation, in trust, will transfer the shares to the other fraternal groups who had rented the building. We understand that these other fraternal groups are putting forward one member each to become a "Trustee/Shareholder" (i.e., to hold the shares of the Corporation in trust for the group). It is expected that the members of the Organization will join the other groups.

Our Comments

We have not been provided with sufficient information in order to establish the tax consequences of the above-described transactions. In particular, from the information provided, it is unclear who is the beneficial owner of the Corporation's shares, what types of entities are involved, and whether they qualify for any type of exemption. Furthermore, the information provided seems contradictory in that the representative presumes that the Organization is exempt from tax under paragraph 149(1)(l) of the Act as a "fraternal order," whereas a fraternal benefit society or order is exempt under paragraph 149(1)(k) of the Act. In addition, the representative indicates that the Corporation, in claiming a tax exemption, has disclosed itself as being a fraternal order. Finally, from the information provided, the legal effect of the transfer of shares is unclear (i.e., it is unclear how the transfer will be structured - such a determination would require a review of all related legal documents and agreements). For example, it is unclear whether the shares of the Corporation will be transferred by way of gift, or whether the members of the Organization will receive an interest in the shares of the Corporation, on the wind-up of the Organization, which they will then transfer to the other "fraternal groups" in return for an interest in those groups.

Although we are not in a position to firmly establish the tax consequences of the above-described transactions, we can offer the following general comments which may be of assistance.

Gift

As indicated above, it is unclear whether the shares of the Corporation will be transferred by way of gift, or whether any consideration will be received in respect of the transfer of the shares. Nonetheless, it should be noted that, when a taxpayer disposes of property to any person by way of gift inter vivos, subparagraph 69(1)(b)(ii) of the Act deems the taxpayer to have received proceeds of disposition equal to the fair market value of the property. Consequently, if the shares of the Corporation are transferred by way of gift inter vivos, a capital gain may result which would give rise to a taxable event, unless the transfer is made by a tax-exempt entity.

Shares Held "In Trust"

If it is established that the shares of the Corporation are held in trust by the members of the Organization, as agents for the Organization, the Organization would be viewed as the beneficial owner of the shares and any capital gain which would result on the transfer of the shares would be considered to be a capital gain of the Organization. In our view, however, the wording of the declaration of trust submitted is inconclusive as to who has the beneficial ownership of the shares of the Corporation (and whether the declaration was entered into at the time the shares were acquired). While the declaration indicates that a member holds the share certificate in trust for the Organization and that the member has no beneficial ownership in the share, the declaration then specifies that the member has transferred the said share certificate in blank, " XXXXXXXXXX" In this respect, the representative further indicates that "the Share Certificate is transferred in blank in favor of the company." A review of the share certificates, the shareholder register, the corporate by-laws, and other like documents would be required to establish who owns the shares of the Corporation. We would also need to establish who has the right to dividends and who has received any dividend payments in the past.

149(1)(l)

To qualify for tax-exempt status as a non-profit organization under paragraph 149(1)(l) of the Act, an organization must both be organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit. A determination of whether the organization was organized exclusively for exempt purposes would require an examination of the organization's enabling documents. These documents may include letters patent, articles of incorporation, memoranda of agreement, by-laws, articles and so on.

As indicated in paragraph 10 of IT-496, Non-Profit Organizations, a determination of whether an entity was operated exclusively for, and in accordance with, its non-profit purposes in a particular taxation year is based on the facts of each case. This information can be obtained only by reviewing, during the course of an audit, all of its activities for that year. Such a determination cannot be made in advance of or during a particular year, but only after the end of the year (and a review of this nature is normally conducted by officials of the local Tax Services Office).

Furthermore, to qualify under paragraph 149(1)(l) of the Act, no part of the income (as defined in subsection 149(2) of the Act) of an organization, whether current or accumulated, may be made available for the personal benefit of any member of the organization. As indicated in paragraph 11 of IT-496, an organization may fail to comply with this requirement in a variety of ways, such as where:

a)the organization distributed income during the year, either directly of indirectly, to or for the personal benefit of any member;

b)the organization has the power at any time in the current or future years to declare and pay dividends out of income; or

c)the organization in the case of a winding-up, dissolution or amalgamation has the power to distribute income to a member.

A review of all relevant documents (enabling documents or by-laws, for example), relating to the winding-up, dissolution or amalgamation of the Organization, is required in order to establish whether it could meet the restriction regarding the availability of income. If the Organization is a corporation, a review of its articles of incorporation would also be required to determine whether any of its shares have dividend rights.

Although taxable capital gains may be distributed to the members of a non-profit organization without affecting the organizations exempt status (by virtue of subsection 149(2) of the Act), if the organization is a corporation, the distribution may result in a taxable dividend to the shareholders. The Department's views on the winding-up of a corporation which had qualified as an non-profit organization are contained in IT-409, Winding-Up of a Non-Profit Organization.

As explained in IT-83R3, Non-profit Organizations-Taxation of Income from Property, if the main purpose of an organization is to provide dining, recreational or sporting facilities for its members, subsection 149(5) of the Act overrides the exemption provided in paragraph 149(1)(l) of the Act and deems an inter vivos trust to exist. By virtue of subparagraph 149(5)(e)(ii) of the Act, tax is payable by the deemed trust on taxable capital gains from dispositions of property, other than property used exclusively for, and directly in the course of, providing the dining, recreational or sporting facilities provided by it for its members.

Finally, it should also be noted that the tax-exempt status of an organization under paragraph 149(1)(l) of the Act, is not determined by the status of its controlling proprietor, member or shareholder. That is, an organization owned by an exempt non-profit organization does not automatically become an exempt non-profit organization, but rather must so qualify in its own right. This aspect is discussed in paragraph 3 of IT-496.

149(1)(k)

In our view, a "fraternal benefit society or order" within the meaning of paragraph 149(1)(k) of the Act, refers to an organization whose members have banded together in unison to accomplish or promote a worthy cause to aid and assist one another and to promote the common cause. We have not been provided with any details as to the Organization's objects, mandate and activities in order to establish whether it qualifies for the exemption under paragraph 149(1)(k) of the Act.

Again, the tax-exempt status of an organization is not determined by the status of its controlling proprietor, member or shareholder. Thus, the Corporation would have to qualify as a fraternal benefit society or order in its own right to qualify for the exemption under paragraph 149(1)(k) of the Act. In our view, a corporation holding and renting real estate would not meet the above definition of a fraternal benefit society or order.

Other

We have not been provided with sufficient information in order to establish whether subsection 56(2) of the Act would apply to the above-described transactions. However, this provision may be an area of concern if, for example, it is established that the Organization has beneficial ownership of the shares of the Corporation and, on the winding-up of the Organization, the members will direct the Organization to transfer the shares to the other groups, such that they may acquire an interests in the other groups. In these circumstances, subsection 56(2) of the Act may apply to include, in the income of the members, the deemed dividend (under subsection 84(2) of the Act, assuming that the Organization is a corporation - see IT-409) or capital gain which would otherwise arise on the winding-up of the Organization (i.e., on the distribution of the Organization's assets to its members and on the disposition of their interest in the Organization).

We trust that these comments will be of assistance.

John F. Oulton
Section Chief
Business, Property and Employment Section II
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch