Being a Good Sport - Lessons for the Sporting Not for Profit

By: Arthur Drache

We have heard from a number of sources that the CRA has started to audit some non-profit golf courses to determine whether they have become taxable because of commercial activity. In one case we know of, the issue was whether green fees paid by non-members threatened the non-profit status. The answer to the question is always fact based but it seems distinctly possible that if non-member green fees are substantial, it can be argued that there is a profit making motive which might cost the golf club its non-profit, tax-exempt status.

We recently read a CRA letter[1] which dealt with a different issue but also one where a non-profit might have tax liability for at least a part of its income.

The statutory basis is this.

Generally, paragraph 149(1)(l) of the Act provides an exemption from Part I tax for a club, society or association that is not a charity and that is organized and operated exclusively for social welfare, civic improvement, pleasure or recreation, or any other purpose except profit.  However, when the main purpose of an organization is to provide dining, recreational or sporting facilities for its members, subsection 149(5) of the Act applies and an inter vivos trust is deemed to have been created.  The property of the organization is deemed to be the property of the trust, and in accordance with paragraph 149(5)(e) of the Act, tax is payable by the trust on its property income and certain capital gains.  There is a general deduction of $2,000 available in computing the taxable income of the trust.

Income from property generally includes interest, dividends, rents and royalties.  Interest income earned by an organization to which subsection 149(5) of the Act applies (a "club"), from the investment of surplus funds, is income from property for the purpose of subsection 149(5), regardless of whether the surplus funds result from temporary operating surpluses or an accumulation of funds for a long-term project.

In this case, the issue was whether interest earned on overdue accounts was taxable under subsection 149(5) of the Act when earned by a golf course that is exempt from tax pursuant to paragraph 149(1)(l) of the Act.  In the letter the CRA cited two quotes from the Federal Court of Appeal.

"[15] Parliament has taken care to ensure that clubs ... unlike other non-profit organizations, are taxed on all their income from property and therefore, it is plain, on all their interest income...

"[16] ... There is no reason to believe that Parliament used the words "income from property" in any non-traditional sense. Nor is there any reason to believe that Parliament, in enacting legislation of such general scope with regard to clubs which it knows cannot carry on activities primarily aimed at making a profit, was concerned with the manner in which the income would be produced. Interest income is taxable regardless of the activities of the clubs that give rise to its production..."

The CRA, based on those quotes said:

"In our opinion, the jurisprudence supports the view that, for the purpose of subsection 149(5) of the Act, interest income of a club generally cannot be divided into property income and business income.  The difference between the rental income described in IT-83R3 and the interest income on an overdue account is that the rental income is derived directly from one of the main activities of a club (i.e., providing certain facilities), while the interest income is not.  In our view, consistent with the scheme of the Act and the related jurisprudence, interest income earned by a club, irrespective of source, is income from property for the purpose of subsection 149(5)."

Those who are involved in operating non-profit golf courses should be aware that there seems to be renewed interest by the CRA in these operations.with a view to either finding that they are either taxable or that some of the income may be subject to the special tax regime. We'd be interested in hearing from any readers who have had recent contact with the CRA with regard to the taxation of golf courses or other sporting clubs which would include, for example, curling and tennis clubs which operate as non-profits.