CRA Releases View on Conversion of Share-Capital to Non-Share Capital Corporations

By Theresa L.M. Man

Nov 2023 Charity & NFP Law Update
Published on November 30, 2023



The Canada Revenue Agency (“CRA”) provided comments on the tax-exempt status under the paragraph 149(1)(l) of the Income Tax Act (“ITA”) as a non-profit organization (“NPO”) of a share capital corporation (“DLCC”) that was converted to a non-profit corporation in CRA View 2021-0921101E5, released on September 22, 2023.

The DLCC was incorporated as a share-capital corporation under special act to operate a club, and was later continued under general corporate legislation as a non-share capital corporation. Its shares were exchanged for membership interests. Shareholders and members did not take any profits from the DLCC, and all amounts earned are invested into maintaining the DLCC’s club. Pursuant to the DLCC’s articles of amendment and by-laws, the DLCC is restricted from operating the club for the purpose of profit of its members, directors, or officers.

The CRA indicated that for purposes of paragraph 149(1)(l), an organization may be a share capital or non-share capital corporation. However, no part of the corporation’s income may be payable to or available for the personal benefit of any shareholder or member of the corporation.

The CRA was of the view that the conversion, in and by itself, does not impact qualification as an NPO under paragraph 149(1)(l). Rather, it is a question of fact whether DLCC qualifies as an NPO, and that an organization could meet the requirements of not-for-profit corporate legislation while not qualifying as an NPO.

The CRA indicated that in circumstances where, as a matter of law, a corporation’s shares are converted to membership interests without being redeemed, acquired or cancelled, those shareholders would not be considered to have disposed of their shares, provided the rights and privileges of the shareholders have not been modified in a substantive way. If there has been a disposition where shares are disposed of by shareholders in consideration for membership interests in a non-share capital corporation, section 51 of the ITA would apply, but only if a membership interest qualified as a “share of the capital stock” of the corporation. Otherwise, where a share is converted to a membership interest in a non-share capital corporation, the CRA stated that section 51 “does not appear to have any application.”

If the DLCC meets the requirements in paragraph 149(1)(l) of the ITA, then it would be required to file a T1044 Non-profit Organization (NPO) Information Return.

Finally, the CRA was of the view that it is a question of fact whether the continuance of the DLCC under the Canada Business Corporations Act (the “CBCA”) or the Canada Not-for-Profit Corporations Act (the “CNCA”) would impact its qualification as an NPO. In this regard, the CRA noted that the criteria to be a not-for-profit in the CNCA is not the same as the criteria required for NPOs under paragraph 149(1)(l). The CRA pointed out that since the CNCA provides that “no part of a corporation’s profits or of its property or accretions to the value of the property may be distributed, directly or indirectly, to a member... except in furtherance of its activities...”, it means that CNCA corporations can operate with a profit purpose, provided that profit is used to support the organization’s objectives. As such, any profit purpose in a CNCA corporation would prevents it from qualifying as an NPO.


Read the November 2023 Charity & NFP Law Update