CRA recently released a letter dealing with whether an organization under section 149(1)(l) of the Income Tax Act can pay surplus out to its members. In this case, a non-profit organization was providing internet services to its members.
The CRA explained:
“A system was created through a buy-in fee paid by each member and then monthly user fees thereafter. The Organization has surplus funds from these member fees, which were accumulated for maintenance, repairs and upgrades. The surplus is no longer required for the internet service since that service will no longer be provided, however, the Organization itself is not being wound-up and other services will continue to be provided.”
Ultimately, the CRA found that the distribution of surplus funds to members would result in prohibited personal benefits being provided to members. Since the income from the user or internet fees was earned and accumulated by the entity, it is considered income and cannot be distributed to members without losing its tax-exempt status.
Here is a link to the letter:
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Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.