By Ryan M. Prendergast

The CRA released a technical interpretation, CRA View 2021-0905311E5, on December 13, 2023, in which it addressed capital gains tax implications on the proposed sale of property by a tax-exempt non-profit organization (“NPO”) under s. 149(1)(l) of the Income Tax Act (the “ITA”). In particular, the CRA responded to the question of whether a specific NPO (the “Society”) could be exempt from tax on capital gains realized on the proposed sale of its clubhouse property.

The CRA stated that subsection 149(5) of the ITA sets out rules for property income earned by NPOs that meet all of the paragraph 149(1)(l) conditions and whose main purpose is to provide dining, recreational or sporting facilities for its members. In this regard, during the period that an NPO meets these requirements, an inter vivos trust is deemed to exist, and the NPO’s property is deemed to be the deemed trust’s property. Further to this, the CRA advised that tax is payable by the trust on any income from property (including dividends, interest, rental income, and taxable capital gains), excluding any taxable capital gain realized on the disposition of property used exclusively for, and directly in the course of, providing dining, recreational or sporting facilities for its members.

In this technical interpretation, the CRA considered that the Society appeared to have been organized in conformity with paragraph 149(1)(l), but at some point in time began actively pursuing a profit purpose and ceased to be exempt under paragraph 149(1)(l). Upon ceasing to be exempt, an NPO is subject to the rules in subsection 149(10), which effectively provide that any capital gain accrued by the Society after it ceased to be an NPO would be subject to tax. As such, the Society therefore likely ceased to be an NPO, and ceased to be exempt, meaning that any resulting taxable capital gain on the proposed sale of its real property would not be fully tax-exempt.

The CRA considered that the Society may alternatively qualify for an exemption under paragraph 149(1)(k) of the ITA, which exempts the taxable income of a labour organization or society or a benevolent or fraternal benefit society or order. While the ITA does not define “labour organization or society” or “benevolent or fraternal benefit society or order”, the CRA relied on the common use of those terms as defined in Black’s Law Dictionary and the Canadian Oxford Dictionary. On this basis, however, the CRA considered that the Society did not appear to be a labour organization or society.

The CRA added that, unlike the case for paragraph 149(1)(l) NPOs, paragraph 149(1)(k) does not require an organization to be organized and operated exclusively for any purpose other than profit. However, it stated that profit-generating activities cannot be the principal activity of the 149(1)(k) entity.

It concluded that whether the Society qualifies for the exemptions under paragraphs 149(1)(k) or (l) for a taxation year is a question of fact to be determined at the end of the taxation year after considering all of the organization’s activities during that year. Subsection 149(1) of the ITA contains a number of definitions for various tax-exempt organizations. Given the complexities related to real property held by those claiming exempt status under paragraph 149(1)(l) of the ITA, it would be a good idea for those organizations to review with their advisors whether they are claiming the appropriate exempt status and if they can meet the definition of what may be a more favorable exempt status, such as being a labour organization or society, as opposed to being an NPO. 

​ ​Read the January 2024 Charity & NFP Law Update