September has brought with it the release of two new technical interpretations regarding not-for-profit organizations from the Canada Revenue Agency ("CRA").
In CRA document no. 2012-0454251E5 – "149(1)(l) – Donations to capital fund – Section 149(1)(l), 248(31)", a not-for-profit organization ("NFP") providing athletic and social activities for its members asked whether it could fund the improvement and expansion of its existing facilities vis-à-vis a "multi-year, multi-million dollar capital improvement project" with donations from its members and businesses affiliated with its members. Perhaps unsurprisingly, given the CRA's position in recent years that the most appropriate way for an NFP to fund a capital project is through grants, donations and member contributions, the CRA confirmed that it could. The NFP further inquired as to whether it could recognize contributions from members for its capital project with a "wall of honour" or naming rights in connection with capital assets. The CRA responded that recognizing member contributions with a "wall of honour" or naming rights should not jeopardize an NFP's tax-exempt status where such recognition has only a nominal value. However, and perhaps even more surprisingly, the CRA cautioned that if the amounts received by an NFP in exchange for such recognition provide an economic benefit to a donor business and those received amounts are "not incidental", the NFP could be considered to have a profit purpose and thereby jeopardize its status.
The CRA was given another opportunity to comment on what NFP condo corporations can do in CRA document no. 2012-0468581E5 – "Condo corp sale or rental of caretaker suite – Section 149(1)(l); 15(1); 248(1)". In this document, the CRA commented on four scenarios involving the sale, rental and conversion of a caretaker suite in a condo, stating as follows:
- a condo corporation can sell its caretaker suite at fair market value without jeopardizing its tax-exempt status;
- the CRA will likely consider a condo corporation renting out its caretaker suite at fair market value to have a profit purpose, which would jeopardize the condo corporation's tax-exempt status (this is consistent with previous statements made by the CRA on the issue);
- a condo corporation can convert its caretaker suite into a guest suite and rent it out to condo guests without jeopardizing its status as long as the rental income is "not material". Conversely, if the suite is rented out at fair market value, the condo corporation's tax-exempt status could be at risk as it may be considered to have a profit purpose. The CRA went on to note that rental of the guest suite out to members at cost or for an amount less than fair market value could result in a taxable shareholder benefit to members, which are considered to be shareholders for the purposes of the shareholder benefit provisions in the Income Tax Act;
- a condo corporation can convert its caretaker suite into a facility to be used for other purposes, such as a fitness centre and charge a fee for access to the facility. However, if this is done in a manner that allows the corporation to make a profit, this could jeopardize the corporation's tax-exempt status.
These two new interpretations are in keeping with the more restrictive position the CRA has been taking over the past few years with respect to what NFPs can do to generate revenue. While they do not offer much in the way of something new or surprising with respect to the CRA's stance on NFPs, additional clarification and guidance for the sector is always welcome.
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