Late last year, the Canada Revenue Agency ("CRA")
released a technical interpretation, CRA document no.
2013-0474101E5 -- "NPO wind-up – asset
distribution" (November 20, 2014), pertaining to the
distribution of assets from a tax-exempt 149(1)(l) not-for-profit
organization ("NPO"). The interpretation request
concerned an NPO holding private company shares that had
appreciated significantly in value since the NPO acquired them for
a nominal sum. The NPO wanted to transfer either ownership or
proceeds of disposition of the shares to some of its members either
before or during the NPO's wind-up. The high points of
the CRA's responses to a number of specific questions from the
NPO with respect to the consequences of those transactions are as
When an NPO holds long-term investments to generate property
income, it may be considered to have a profit purpose. As
such, when an NPO holds shares, the facts surrounding that holding
must be examined as holding shares as a long-term investment could
jeopardize an NPO's eligibility for tax-exempt status under
paragraph 149(1)(l) of the Income Tax Act (Canada)
("Tax Act") where the investment is made for a profit
An NPO can distribute both the taxable and non-taxable portion
of a capital gain to its members without affecting its tax-exempt
status under paragraph 149(1)(l) since the definition of
"income" in section 3 of the Tax Act does not include
either of those capital gain portions.
The bar on an NPO making income payable to or otherwise
available for the benefit of a proprietor, member or shareholder
applies whether the proprietor, member or shareholder is tax-exempt
or not. As such, regardless of whether the proprietor, member
or shareholder is itself, for instance, an NPO or a registered
charity, an NPO will not be able to distribute any of its income to
that proprietor, member or shareholder without risking its
tax-exempt status. This is the case even if the income is
distributed on the condition that the proprietor, member or
shareholder use the income for a purpose consistent with the
distributing NPO's purposes.
If an NPO ceases to qualify for tax-exempt status under
paragraph 149(1)(l), it will, among other things, have a deemed
disposition of all of its assets at fair market value. If
shares held as capital property by the NPO are included in this
deemed disposition, any amounts that would have been added to the
NPO's capital dividend account as a result of that deemed
disposition will not be available to the NPO as its capital
dividend account will be reduced to nil where it ceases to be
Where an entity transfers any part of its income to a
proprietor, member or shareholder by gift, it will no longer be
eligible for tax exemption under paragraph 149(1)(l) –
regardless of the fact that the distribution was by gift.
In addition to the foregoing guidance, this technical
interpretation also provides a somewhat helpful refresher on the
CRA's administrative position regarding the distribution of an
NPO's assets both within and outside of the winding-up
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