CRA letter on payment plans for membership fees for dining, recreational or sporting facilities

January 21, 2013 | By: .(JavaScript must be enabled to view this email address) Mark Blumberg
Topics: News

Here is a CRA letter on payment plans in respect of membership fees for dining, recreational or sporting facilities

The CRA provided its view on whether interest income, regardless of source, is considered to be income from property for the purpose of subsection 149(5) of the Income Tax Act. Interest income, regardless of its source, earned by a club is considered income from property for the purpose of subsection 149(5) of the Act. The CRA does not make a distinction between interest income that is earned from the deposit of surplus funds received as a result of prepaid membership dues and interest income earned from overdue membership dues. The CRA stated:

“In this question, a club described in subsection 149(5) is considering various ways in which to structure payment plans to members in respect of its fees. The question seeks CRA’s guidance in respect of the characterization of income earned from various types of possible payment plans in respect of membership fees, monthly dues and fees for the use of club resources. The plans described include discounts for early payments options and surcharges for deferred payment plans options. The basic question is whether any income from these plans will be characterized as income from property and subject to tax under paragraph 149(5)(e).

Subsection 149(5) of the Income Tax Act (Act) is an exception to the general rule that a non-profit organization is not taxable on its taxable income. This exception only applies to a “club” whose main purpose is to provide dining, recreational or sporting facilities for its members. The taxable income in this case is limited by paragraph 149(5)(e) of the Act, to include all of its income from property and certain taxable capital gains.

There may be situations where interest income is not always characterized as income from property for tax purposes. However, in our view, these situations do not apply to a non-profit organization that does not earn business income. This issue was discussed in the case of Elm Ridge Country Club Inc v. The Queen, 99 DTC 5127. The taxpayer was a non-profit organization providing dining, recreational or sporting facilities for its members. In Elm Ridge, interest income on short term deposits was found to be income from property, pursuant to paragraph 149(5)(e) of the Act. In reaching this conclusion, the court felt that generally accepted approaches used to determine whether income was from business or from property, are designed for profit-making organizations and are unsuited to non-profit organizations. The Federal Court of Appeal in paragraph 15 of its decision, felt that: “Parliament has taken care to ensure that clubs such as the appellant, unlike other non-profit organizations, are taxed on all their income from property and therefore, it is plain, on all their interest income…”.

Here is a copy of the letter: .CRA letter on payment plans in respect of membership fees for dining, recreational or sporting facilities

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