This TI is based on Question 5 of the CRA Round Table at the 2012 B.C. Tax Conference.
Paragraph 149(1)(l) of the Act exempts from income tax a club, society or association (other than a charitable organization or foundation as defined in subsection 149.1(1)) organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or any other purpose except profit, if no part of its income is payable to, or available for the personal benefit of any proprietor, member or shareholder.
However, subsection 149(5) overrides the general exemption in paragraph 149(1)(l) and taxes the income from property of clubs, societies and associations whose primary purpose is to provide dining, recreational or sporting facilities for their members.
If subsection 149(5) applies to an NPO whose primary purpose is to provide dining, recreational or sporting facilities, an inter vivos trust is deemed to exist, the following rules, among others, apply:
- The property of the NPO is deemed to be the property of the trust (subparagraph 149(5)(a))
- Tax is payable under Part I of the Act by the trust upon its taxable income for each taxation year (subparagraph 149(5)(d))
- The income and taxable income of the deemed trust for each taxation year will be computed on the assumption that it had no incomes or losses other than:
- Incomes and losses from property (subparagraph 149(5)(e)(i))
- Taxable capital gains and allowable capital losses from dispositions of property, other than property used exclusively for, and directly in the course of, providing the dining, recreational or sporting facilities for its members (subparagraph 149(5)(e)(ii)).
TI expands on Question 5
In question 5 of the CRA Round Table at the 2012 B.C. Tax Conference, the CRA was asked to provide guidance as to CRA's assessing position on the characterization of income earned from various types of payment plans offered by clubs for membership entrance fees, monthly dues, and fees for the use of club resources (the Fees).
In particular, the CRA was asked to consider a club whose main purpose was to provide dining, recreational or sporting facilities for its members. The TI notes that in this situation, an inter vivos trust is deemed to have been created under subsection 149(5), and all of the property of the club is deemed to be property of the trust for purposes of computing the trust's tax liability under Part I. The taxable income of the deemed trust is calculated under paragraph 149(5)(e), which excludes income earned in the course of the club's business, but includes "income and losses from property".
In a previous 2011 TI, the CRA said that interest income earned by a club on overdue accounts is characterized as income from property, and that interest income is income from property whether the source giving rise to the interest was capital or income in nature. This opinion was confirmed in two Federal Court of Appeal (FCA) cases, Elm Ridge Country Club Inc. v. The Queen (99 DTC 5127), and Point Grey Golf and Country Club v. The Queen (2000 DTC 6217).
In Interpretation Bulletin 83R3, "Non-profit organizations - Taxation of income from property", the CRA also takes the position that rental income can be income from property or income from business, depending on whether the rents were derived from one of the main activities of the club or ancillary to the activities of the club. From this view, it appears that the character of the income can be discerned from the nature of the activities undertaken to earn the income.
In The Queen v. Irving Oil Ltd. (2001 FCA 364), the FCA concluded that interest earned on an income tax refund can be business income of a taxpayer. In the decision, the FCA said that the taxpayer earned the interest income on its tax liability as a result of exercising "its business judgment that it would be preferable to pay the tax than to provide security". Accordingly, it appears there are situations where interest income is not characterized as income from property for tax purposes.
At issue is whether the income from certain types of payment plans will be characterized as income from property and thus subject to tax under paragraph 149(5)(e). The CRA was asked to comment on several example payment plans including plans with discounts for early payments and surcharges for deferred payment plan options.
In its response, the CRA notes that there may be situations where interest income is not always characterized as income from property for tax purposes. However, the CRA's view is that these situations do not apply to an NPO that does not earn business income.
The CRA notes that, in Elm Ridge Country Club Inc, the taxpayer was a nonprofit organization providing dining, recreational or sporting facilities for its members. In Elm Ridge, the FCA found interest income on short term deposits was income from property, under paragraph 149(5)(e). In reaching this conclusion, the FCA felt that generally accepted approaches used to determine whether income was from business or from property are unsuited to non-profit organizations, as they are designed for profit-making organizations. The FCA noted that "Parliament has taken care to ensure that clubs such as the appellant, unlike other non-profit organizations, are taxed on all their income from property and therefore, it is plain, on all their interest income".
The CRA notes that a 2011 TI features its position on when paragraph 149(5)(e) applies. In this TI, the CRA says that interest income earned by a club, regardless of its source, is considered income from property for the
purpose of subsection 149(5). The CRA says it does not make a distinction between interest income that is earned from the deposit of surplus funds received as a result of prepaid membership dues and interest income earned from overdue membership dues.
The CRA further notes that the determination of whether any particular payment plan offered to members includes income from property is a question of fact that can only be determined on a case-by-case basis.
For more information, contact your KPMG adviser.
Information is current to February 12, 2013. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500