Here is a redacted Advanced Income Tax Ruling Request response from CRA, dealing with the amalgamation of a registered charity and a non-profit. Registered charities and non-profits can amalgamate and as with all mergers or amalgamations there are a number of complexities and one should obtain legal advice.
In this lengthy letter CRA did not deal with the issue of whether or not the new entity could remain a registered charity, using the same objects, and charitable registration number of the amalgamating registered charity. There are a number of matters that will need to be determined by CRA including whether the BN number can be continued to be used and whether the charitable objects are appropriate. The letter confirmed that when there is such an amalgamation of a non-profit and registered charity "there is no disposition of assets since the new society will be the continuity of the previous societies". Also they noted "It is not the mandate of the Income Tax Rulings Directorate to confirm the registration of a charity nor to issue a business or charity number."
We have written a number of pieces on the non-profit merger process that you might find helpful including:
Mergers and Amalgamations within the Canadian Non-Profit and Charity Sector (The Philanthropist 2009)
20 Questions Directors of Not-for-Profit Organizations Should Ask about Mergers (CPA Canada 2016)
The full text of the letter is below:
LANGIND E DOCNUM 2018-0750471R3
AUTHOR XXXXXXXXXX DESCKEY 30 RATEKEY 2
SUBJECT Non-qualifying amalgamation of NPO & public foundation
SECTION 15(1), 56(2), 87, 149, 149.1, 188(1), 246(1), 248(1) "shareholder"
SECTION SECTION SECTION
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
PRINCIPAL ISSUES: (1) Whether two societies, a public foundation that is a registered charity and a non-profit organization, both established under the XXXXXXXXXX, be considered to have disposed of their assets on their amalgamation to create a new society? (2) Whether members of the amalgamating societies will be considered to have realized income or capital gain or to have received a benefit pursuant to subsections 15(1), 56(2) or 246(1)? (3) Whether the new society will be a registered charity and could have the same business number and charity number as the previous one?
POSITION: (1) No. (2) No. (3) Administrative issue.
REASONS: (1) There is no disposition of assets since the new society will be the continuity of the previous societies under the XXXXXXXXXX and the cost and cost amounts will be transferred to the new society. (2) The new society is the continuity of the previous ones and the members are not allowed to receive dividends or property from both the previous societies and the new one. (3) It is not the mandate of the Income Tax Rulings Directorate to confirm the registration of a charity nor to issue a business or charity number.
Re: Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX, as amended by your letter of XXXXXXXXXX, in which you request an advance income tax ruling on behalf of the above‑named taxpayers. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).
This letter amends the original advance income tax ruling letter dated XXXXXXXXXX, by amending paragraphs 16 and 38(b) and the “OTHER COMMENTS” section of this document to change the reference to “charitable organization” / “registered organization” to “public foundation” with respect to Entity 4/Amalco.
We understand that, to the best of your knowledge and of the knowledge of the taxpayers involved in the Proposed Transactions, none of the issues described in the ruling is:
(i) in an earlier return of a taxpayer involved or a related person;
(ii) being considered by a tax services office or taxation center in connection with any tax return previously filed by a taxpayer involved or a related person;
(iii) under objection or appeal by a taxpayer involved or a related person;
(iv) before the courts in any Canadian jurisdiction and no judgment has been issued which may be under appeal; or
(v) the subject of a ruling previously issued to a taxpayer involved or a related person.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (thereafter “Act”) and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.
In this letter, unless otherwise noted, the following terms have the meaning specified herein. All references in the singular include the plural.
“Amalco” means the society to be formed on the amalgamation of Entity3 and Entity4, as more particularly described in Paragraph 36;
“CAct” means XXXXXXXXXX;
“Campus” has the meaning assigned in Paragraph 14;
“Centre” has the meaning assigned in Paragraph 8;
“Centre Lands” lands situated at XXXXXXXXXX, as more particularly described in Paragraph 4;
“CGroup” means Entity1, Entity4 and Entity3;
“CRA” means the Canada Revenue Agency and any previous designation;
“Entity1” (formerly Entity2) means XXXXXXXXXX, a corporation continued under the XXXXXXXXXX;
“Entity2” means XXXXXXXXXX, as more particularly described in Paragraph 9;
“Entity3” means XXXXXXXXXX, as more particularly described in Paragraph 1;
“Entity3 By-laws” has the meaning assigned in Paragraph 18;
“Entity4” means XXXXXXXXXX, as more particularly described in Paragraph 16;
“Facts” means the factual information described in Paragraphs 1 through 35;
“FMV” means fair market value;
“Lands” has the meaning assigned in Paragraph 14;
“Paragraph” means a numbered paragraph in this advance income tax ruling;
“Property 1” means XXXXXXXXXX and has the meaning assigned in Paragraph 6;
“Property 2” means XXXXXXXXXX and has the meaning assigned in Paragraph 13;
“Proposed Transactions” means those proposed transactions and events described in Paragraphs 36 through 38;
“Related Assets” has the meaning assigned in Paragraph 29(b);
“Transfer Parcels” has the meaning assigned in Paragraph 30.
1. In XXXXXXXXXX, Entity3 was incorporated as a society without share capital under the XXXXXXXXXX. At all times, Entity3 has been organized and operated exclusively for social welfare and civic improvement purposes and has not been operated for the purpose of earning a profit. At no time has Entity3 ever been a registered charity under the Act. Entity3 files, and always has filed, its tax returns as a not‑for-profit entity which is exempt from income tax under paragraph 149(1)(l). Entity3’s fiscal year-end is XXXXXXXXXX.
2. Entity3’s activities in its early years included conducting an annual fund‑raising campaign within the XXXXXXXXXX. XXXXXXXXXX was not a separate organization but a duly constituted fundraising committee of Entity3.
3. In XXXXXXXXXX, Entity3 registered the fund-raising activities of XXXXXXXXXX with the CRA under the name of XXXXXXXXXX to issue charitable tax receipts. XXXXXXXXXX registration number under the Act was XXXXXXXXXX. It appears XXXXXXXXXX was granted registered charity status by the CRA on the basis XXXXXXXXXX was a trust.
4. In the XXXXXXXXXX, Entity3 raised money and bought the Centre Lands. The land title to the Centre Lands was issued in the name of Entity3 on XXXXXXXXXX.
5. Entity3 ran XXXXXXXXXX for the XXXXXXXXXX. Later in the XXXXXXXXXX, such programs became known as XXXXXXXXXX programs and they were overseen by the XXXXXXXXXX committee of Entity3.
6. In XXXXXXXXXX, Entity3 leased a portion of the Centre Lands (“Property 1”) to the Province of XXXXXXXXXX for the construction by the Province of a XXXXXXXXXX, now called the XXXXXXXXXX. The lease is for nominal consideration and has a term ending in XXXXXXXXXX, although the Province has renewal rights to extend the term until XXXXXXXXXX.
7. The XXXXXXXXXX currently is occupied by XXXXXXXXXX and is managed by an executive director and an independent board of directors, all of whom report to the Province of XXXXXXXXXX.
8. In XXXXXXXXXX, Entity3 opened a newly constructed building called XXXXXXXXXX (“Centre”) which was a XXXXXXXXXX constructed on the Centre Lands.
9. In XXXXXXXXXX, the XXXXXXXXXX enacted the CAct. Pursuant to the CAct, Entity2 was incorporated. The CAct XXXXXXXXXX, Entity2 from XXXXXXXXXX for the Centre Lands.
10. With the passage of the CAct, Entity3 transferred ownership of a portion of the Centre Lands (which included the Centre located thereon) to Entity2. Entity3 retained ownership of the Property 1.
11. Since the date of the land transfer from Entity3 to Entity2 described in Paragraph 10, the Centre and all of its programs have been run by Entity2.
12. Entity2 was registered by the CRA as a charitable organization. Entity2’s charity registration number under the Act is XXXXXXXXXX.
13. In XXXXXXXXXX, Entity3 purchased XXXXXXXXXX of vacant land adjacent to the Centre Lands (“Property 2”).
14. Entity3’s intention at the time of purchase of the Property 2 was to eventually build expanded facilities for the XXXXXXXXXX (“Campus”) on the aggregate of the Property 2 and the Centre Lands (“Lands”). The Campus was envisioned to comprise a XXXXXXXXXX.
CRA Charity Audit and Creation of Entity4
15. On XXXXXXXXXX, the CRA Charities Directorate commenced an audit (a) of the charitable status of XXXXXXXXXX, and (b) of Entity3. Part of the concern was that XXXXXXXXXX was a committee of Entity3, not a separate legal entity.
16. As a result of this CRA audit and on the recommendation of the CRA, on XXXXXXXXXX, Entity4 was formed as a society without share capital under the XXXXXXXXXX, and the CRA registered Entity4 as a public foundation effective XXXXXXXXXX. Entity4 files, and always has filed, its tax returns as a registered charity which is exempt from income tax under paragraph 149(1)(f). Entity4’s fiscal year-end is XXXXXXXXXX. Prior to changing its name to XXXXXXXXXX, Entity4 originally was named XXXXXXXXXX.
17. The registered charity status of XXXXXXXXXX was annulled effective XXXXXXXXXX, notification of which was provided in a Notice of Annulment of Registration letter dated XXXXXXXXXX from the CRA Charities Directorate to XXXXXXXXXX.
Amended Objects and Current Activities
18. On XXXXXXXXXX, the members of Entity3 passed a special resolution repealing the then existing by-laws and replacing them with amended and restated by-laws (“Entity3 By-laws”), and a certified copy of that special resolution was filed with the XXXXXXXXXX on XXXXXXXXXX.
19. Paragraph XXXXXXXXXX of Entity3’s By-laws regarding dissolution provides as follows (note that Entity3 is referred to in the Entity3 By-laws as XXXXXXXXXX):
XXXXXXXXXX In the event of the dissolution of XXXXXXXXXX and after the payment of all just debts, obligations and liabilities, the Board shall distribute any remaining assets of XXXXXXXXXX to either one or more recognized XXXXXXXXXX organization (sic) in XXXXXXXXXX or to one or more Canadian charities registered under the Income Tax Act (Canada) which furthers the Objects of XXXXXXXXXX. Qualifying organizations in the XXXXXXXXXX shall be considered first.
20. On XXXXXXXXXX, Entity3 filed with the XXXXXXXXXX the duly passed new objects of Entity3 which continue to be in effect and read as follows:
To hold or use lands and assets acquired for the purpose of housing institutions serving the XXXXXXXXXX.
To raise and obtain funds for carrying out the objects of XXXXXXXXXX.
To promote harmony and understanding between the XXXXXXXXXX and the citizens at large residing in XXXXXXXXXX.
To promote and enhance the relationships between XXXXXXXXXX and the people of XXXXXXXXXX and to promote increased understanding between the peoples of Canada and XXXXXXXXXX.
To support and conduct formal and informal educational and outreach programs aimed at developing, enhancing and strengthening XXXXXXXXXX identity and participation in XXXXXXXXXX life.
To distribute funds to any registered charity for purposes which the Board deems to be fit.
21. At no time has (a) any of the income of Entity3 been payable or paid to, or otherwise available for the personal use of, any member of Entity3 or any other person or entity, or (b) any of the assets of Entity3 been distributed in any manner to, or otherwise available for the personal use of, any member of Entity3 or any other person or entity. At all times any and all income and assets of Entity3 have been used exclusively to pursue the social welfare and civic improvement objects of Entity3.
22. After Entity4 took over most of the charitable activities previously conducted by Entity3 as XXXXXXXXXX, the only remaining activities of Entity3 were (a) XXXXXXXXXX, (b) XXXXXXXXXX, and (c) some advocacy activities related to the position of the XXXXXXXXXX on various issues. The remaining activities of Entity3 are incidental, from an administration and resources perspective, in relation to the activities of the entire CGroup.
23. Entity4 filed amended objects with the XXXXXXXXXX on XXXXXXXXXX. The amended charitable objects of Entity4 were approved by the CRA Charities Directorate prior to proceeding with the amendment and they read as follows:
(1) To receive and maintain a fund or funds and to apply all or part of the principal and income therefrom, from time to time, to qualified donees as defined in subsection 149.1(1) of the Income Tax Act (Canada) for the benefit of the XXXXXXXXXX of XXXXXXXXXX and area;
(2) To foster XXXXXXXXXX through the provision of XXXXXXXXXX;
(3) To advance XXXXXXXXXX education and public understanding of XXXXXXXXXX for the benefit of the XXXXXXXXXX and XXXXXXXXXX communities;
(4) To advance education by providing religious, cultural and educational programs and services to the public, including students and staff at secondary and post-secondary institutions, and providing formal and informal educational programs for the public;
(5) To advance religion by providing programs for individuals of the XXXXXXXXXX faith attending secondary and post-secondary institutions, aimed at developing, enhancing and strengthening XXXXXXXXXX identity and grounded in XXXXXXXXXX values;
(6) To advance religion by providing mission trips, courses, seminars and workshops about XXXXXXXXXX and XXXXXXXXXX values such as XXXXXXXXXX for members of the XXXXXXXXXX and XXXXXXXXXX communities;
(7) To advance education by conducting leadership development, training and other programs aimed at equipping members of the XXXXXXXXXX and XXXXXXXXXX communities to serve their communities in XXXXXXXXXX, Canada, XXXXXXXXXX and elsewhere;
(8) To advance religion by manifesting, promoting, sustaining or increasing belief in and discussion of doctrines, observances and practices associated with the XXXXXXXXXX religion and its values and in particular those religious doctrines, practices and values associated with the role of the XXXXXXXXXX;
(9) To relieve poverty by providing bursary programs to the general public, specifically the XXXXXXXXXX, for school tuition, overnight and day camp experiences and other programs essential to a full XXXXXXXXXX lifestyle; and
(10) To do all such other things as are incidental and ancillary to the attainment of the above purposes.
24. Paragraph XXXXXXXXXX of the current by-laws of Entity4 regarding dissolution provides as follows (note that Entity4 is referred to in its by-laws as “Society” and the Act is referred to as the “ITA”):
XXXXXXXXXX In the event of the dissolution of the Society and after the payment of all just debts, obligations and liabilities, the Board shall distribute any remaining assets of the Society to one or more Canadian charitable organizations registered under the ITA, which further the Objects of the Society. Qualifying charities in the XXXXXXXXXX shall be considered first.
25. The CAct was recently amended by virtue of XXXXXXXXXX which received Royal Assent on XXXXXXXXXX. Pursuant to the amendments, Entity2 was continued and renamed Entity1. Entity2/Entity1 files, and always has filed, its tax returns as a registered charity which is exempt from income tax under paragraph 149(1)(f). The fiscal year-end of Entity1 is XXXXXXXXXX.
26. The charitable objects of Entity1 also were expanded as part of the legislative amendments described in Paragraph 25. The expanded charitable objects of Entity1 were approved by the CRA Charities Directorate prior to proceeding with the amendments and they read as follows:
(a) to promote health by encouraging and facilitating general physical fitness by operating and maintaining recreational facilities for fitness and health and wellness programs for the general public,
(b) to advance education by operating and maintaining a daycare facility, as well as providing early literacy programs, and afterschool programs for youth of both XXXXXXXXXX and XXXXXXXXXX communities of XXXXXXXXXX,
(c) to advance education and culture by providing educational programs on XXXXXXXXXX history and culture, as well as XXXXXXXXXX and XXXXXXXXXX studies, for the benefit of both XXXXXXXXXX and XXXXXXXXXX communities of XXXXXXXXXX,
(d) to relieve poverty by providing free or subsidized educational, cultural and recreational programs to individuals in need,
(e) to relieve conditions attributable to aging by providing specially adapted residential accommodation, incidental facilities, personal care, housekeeping, meals, nursing care, counselling and other support services to XXXXXXXXXX and XXXXXXXXXX seniors,
(f) to advance education and religion by establishing, operating and maintaining a XXXXXXXXXX day school or schools of instruction by providing educational and cultural programs on XXXXXXXXXX history and culture, as well as XXXXXXXXXX and XXXXXXXXXX studies, for the benefit of the general public,
(g) to promote the efficiency and effectiveness of charitable programs for the benefit of the XXXXXXXXXX by providing and maintaining facilities to house the operations of qualified donees as defined in section 149.1(1) of the Income Tax Act (Canada),
(h) to receive and maintain a fund or funds and to apply all or part of the principal and income therefrom, from time to time, to qualified donees as defined in section 149.1(1) of the Income Tax Act (Canada), and
(i) to do all such other acts and things as are incidental and ancillary to the attainment of the objects in a way that the Income Tax Act (Canada) regards as charitable.
27. The CGroup has pursued the goal of the XXXXXXXXXX to develop the Campus. In XXXXXXXXXX enacted a by-law which has the effect of re-zoning the Lands for the development of the Campus which, as noted above, can include a recreational and cultural centre, a seniors care facility, seniors housing, an expanded daycare facility and a XXXXXXXXXX day school building.
28. To proceed with development of the Campus, a development permit will be required from the City of XXXXXXXXXX. A condition for obtaining the development permit is, essentially, that all of the Lands be owned by one entity.
29. It is the general intent of the CGroup to:
(a) cause the Property 2 and the Property 1 to be owned by Entity1 so that all of the Lands are owned by one entity which is a registered charity;
(b) cause the cash and near cash assets related to Property 2 and Property 1, and the plans for the Campus, to be owned by Entity1 (“Related Assets”); and
(c) eliminate Entity3.
30. Each of the XXXXXXXXXX land parcels which comprise the Property 2 (XXXXXXXXXX) and the Property 1 (XXXXXXXXXX) (collectively the “Transfer Parcels”) currently has a substantial inherent capital gain because the current FMV of the particular parcel exceeds Entity3’s adjusted cost base thereof for purposes of the Act.
31. The CGroup’s intent is to undertake a number of capital projects on the Centre Lands. Most of the projects (XXXXXXXXXX) will relate to the Centre and its operations and activities.
32. The intent also is to build a XXXXXXXXXX centre and possibly XXXXXXXXXX.
33. Each member of each of Entity3 and Entity4 only has a non-transferable right to one vote in the election of the directors of the particular society, and otherwise has no other rights. In particular, no such member has any right to receive any property of the particular society. Consequently, the FMV of each member’s non‑transferable voting right as a member of the particular society is nil.
34. All members of Entity3 also are members of Entity4.
35. No significant transactions were completed by the CGroup prior to the time of submission of the Ruling Request, or may be undertaken after the completion of the Proposed Transactions, which may be part of the series of transactions.
36. On XXXXXXXXXX, pursuant to an amalgamation agreement, under XXXXXXXXXX, Entity3 and Entity4 will amalgamate to form Amalco whereunder the:
(a) name of the amalgamated society will be that of Entity4;
(b) charitable objects of the amalgamated society will be the charitable objects of Entity4;
(c) proposed members of the amalgamated society will be the members of Entity4 and Entity3 immediately prior to the amalgamation;
(d) proposed directors of the amalgamated society will be the directors of Entity4 immediately prior to the amalgamation;
(e) by-laws of the amalgamated society will be the same as the by-laws of Entity4 in all material respects;
(f) fiscal year-end of the amalgamated society will be XXXXXXXXXX; and
(g) property of each of Entity4 and Entity3 will continue to be the property of the amalgamated society.
37. Amalco will transfer all of its ownership interest in the Transfer Parcels and the Related Assets to Entity1, pursuant to a deed of gift.
38. Amalco will:
(a) continue to carry on exclusively charitable activities within the scope of its charitable objects; and
(b) request to be a public foundation registered under the Act with the same BN/charity registration number as Entity4.
PURPOSES OF THE PROPOSED TRANSACTIONS
39. The CGroup believes it is in the best interests of its members and the XXXXXXXXXX to enter into the Proposed Transactions for the following reasons:
(a) The Proposed Transactions will simplify and streamline the current structure of the CGroup, reducing the administrative burden within the CGroup. Entity3 carries on very few remaining activities and its existence is redundant.
(b) The Proposed Transactions will result in all of the Lands being held within one entity, which essentially is a condition XXXXXXXXXX for the development of the Campus.
(c) The Proposed Transactions will permit Amalco and Entity1 to carry on their existing and proposed expanded charitable activities within the scope of their charitable objects.
40. The information related to the taxpayers follows:
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purposes of the Proposed Transactions, and provided further that the Proposed Transactions are completed in the manner described above, our rulings are as follows:
A. Provided that the amalgamation of Entity3 or Entity4 will be an amalgamation for the purposes of the XXXXXXXXXX such that Amalco will be the continuation of each of Entity3 and Entity4, the amalgamation of Entity 3 and Entity4 will not result in a disposition, by either Entity3 or Entity4, of any of their assets or an acquisition by Amalco of any of these assets of Entity3 or Entity4 for purposes of the Act.
B. The cost and cost amounts of the assets of Amalco immediately following the amalgamation will be equal to the costs and cost amounts to Entity3 and Entity4 of the assets immediately prior to the amalgamation.
C. None of the members of Entity3 and Entity4 will be considered to have realized a capital gain as a result of the amalgamation of Entity3 and Entity4, as the case may be.
D. None of the members of Entity3 or Entity4 will be considered to have received a benefit for purposes of subsections 15(1), 56(2) or 246(1) as a result of the amalgamation of Entity3 and Entity4.
Nothing in this letter should be construed as confirming or implying that the CRA has reviewed or is making a determination in respect of:
(i) whether Entity3, Entity4 or Amalco is or has been exempt from tax under Part I of the Act pursuant to paragraph 149(1)(l) or 149(1)(f) respectively at any particular time;
(ii) the FMV or adjusted cost base of the members’ interest in Entity3, Entity4 or Amalco;
(iii) the income tax consequences relating to the transfer of the ownership interest in the Transfer Parcels and to the transfer of Related Assets described in paragraphs 29 and 37; and
(iv) the legal effect of the proposed continuance and amalgamation as a matter of corporate law.
Neither are we confirming that Amalco will be registered under the Act as a public foundation with the same business number and charity registration number as that of Entity4. The CRA Charities Directorate has the mandate to determine if an entity should be registered under the Act and to provide the business number and charity registration number. It is a question of fact to determine if an entity should be registered under the Act.
The Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R7, Advance Income Tax Rulings and Technical Interpretations, and are binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX, unless otherwise specified.
for Division Director
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
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.