NPOs Investing In Taxable Subsidiaries

The Canada Revenue Agency ("CRA") commented in 2022-0953121E5 dated August 30, 2023 whether an organization ("AbcCo") would continue to qualify as a non-profit organization ("NPO") under paragraph 149(1)(l) of the Income Tax Act ("ITA") if it transferred some assets (primarily intellectual property) to a taxable subsidiary incorporated in Canada ("SubCo").

The CRA was asked to comment on three scenarios involving SubCo – (i) AbcCo has voting control of SubCo (that is, SubCo is a subsidiary of AbcCo), (ii) AbcCo does not have voting control of SubCol; and (iii) AbcCo takes back fixed-value preferred shares of SubCo in exchange for the transfer of Assets.

One of the requirements for NPOs in paragraph 149(1)(l) means that NPOs must be organized and operated exclusively for a purpose other than profit. In this regard, the CRA referred to the decision of the Tax Court of Canada in Tourbec (1979) Inc. v. M.N.R. that "the word exclusively must be given its full effect