Principal Issues: If a residential condominium corporation does not qualify as a tax-exempt 149(1)(l) organization, will it be taxable on amounts paid by unit owners that are in excess of its current expenses for the year?
Position: In most cases, no
Reasons: The amounts received by a residential condominium corporation from its members are not usually treated as income for purposes of the ITA.
May 13, 2011
Calgary Tax Services Office HEADQUARTERS
Income Tax Rulings
Attention: Betty Lor Directorate
L. Zannese
(613) 957-2747
2011-039192
Residential Condominium Corporations
This is in response to your email correspondence of September 15, 2010, in which you ask whether paragraph 3 of Interpretation Bulletin IT-304R2, "Condominiums" ("IT-304R2"), is still the current view of the Canada Revenue Agency (the "CRA"). That paragraph states that "any excess of the members' condominium fees and contributions over the corporation's expenditures for the year is not considered to be income of the corporation." You advise that you have been asked by a residential condominium corporation whether excess members' fees for a year would be income, and taxable, if the corporation did not qualify for the exemption from tax provided by paragraph 149(1)(l) of the Income Tax Act (the "Act"). We note that our comments below only apply to residential condominium corporations.
Our Comments
In general terms, paragraph 149(1)(l) of the Act provides that the taxable income of an organization is exempt from tax under Part I of the Act for a period throughout which the corporation meets all of the following conditions:
- it is a club, society or association;
- it is not a charity;
- it is organized and operated exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit; and
- its income is not available for the personal benefit of a member or shareholder, unless the member or shareholder is an association which has as its primary purpose and function the promotion of amateur athletics in Canada.
Thus, a condominium corporation is not exempt from tax because it is a condominium corporation; rather, it is exempt while it meets the above requirements. If a condominium corporation does not meet these requirements then it will be subject to tax on its taxable income for the period during which it did not qualify for the tax exemption.
Generally, owners of a unit in a condominium corporation are required by provincial legislation to pay fees to the condominium corporation in order to provide it with the funds necessary to maintain and manage the common areas of the building, as well as to pay for capital projects (for example, see sections 38 and 39 of Alberta's Condominium Property Act). Thus, a portion of the fees received by a condominium corporation will be used in the year received to pay for that year's current expenses and capital projects. Another portion of the fees will be designated for the corporation's capital reserve fund to pay for identified, future capital projects (e.g., replacing a roof). In this letter we refer to any positive difference between the condominium fees received by the corporation in a year and that year's current expenses, capital expenditures and amount designated for the capital reserve fund as an "Overage".
The portion of the fees paid by an owner of a unit to a condominium corporation either toward immediate capital expenditures or toward the capital reserve fund is a contribution of capital and thus is not included in the income of the condominium corporation. The other portion of the fees could be considered to be income. However, based on the unique nature of residential condominium corporations, the CRA is prepared to accept that Overages do not have to be treated as income for income tax purposes, which is consistent with the position described in IT-304R2.
A residential condominium corporation must be consistent on a year-to-year basis with respect to how it treats Overages for income tax purposes. This means that if, in one year, the condominium corporation does not include an Overage in income, it cannot, in a subsequent year, use a shortfall in membership fees to reduce income from other sources such as investments, rentals or businesses. In any event, generally, an expense is not deductible in computing income from a business or property except to the extent that it was incurred for the purpose of earning income from that business or property.
We trust that these comments will be of assistance.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.
Eliza Erskine
Manager
Non-Profit Organizations and Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
