Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Whether the leasing of excess property by a corporation that is an NPO where the property was formerly used in carrying out its non-profit objectives will cause us to conclude that the corporation is no longer an NPO.
Position: No not in this particular case.
Reasons: The property was not obtained with the intention to rent it out and there were extenuating circumstances as to why the property could not be sold. Each situation must be determined based on the particular facts.
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XXXXXXXXXX 980163
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Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Dear Sirs:
Re: XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, and your subsequent correspondence requesting an advance income tax ruling on behalf of XXXXXXXXXX. You have advised that to the best of your knowledge, and that of all the taxpayers involved, none of the issues raised in this letter are being considered by any Tax Service Office ("TSO") and/or Taxation Centre in connection with any tax return already filed by the taxpayers, or any person related to the taxpayers, nor are any of these issues under objection, appeal, or before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has not expired.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (Canada), R.S.C. 1985 (5th Suppl.) c.1, as amended from time to time and consolidated to the date of this letter (herein referred to as the "Act") and unless otherwise expressly stated:
(a) “taxable Canadian corporation” has the meaning assigned by subsection 89(1);
(b) “non-profit organization” has the meaning assigned by paragraph 149(1)(l);
(c) “charitable organization” and “charity” have the meanings assigned by subsection 149.1(1); and
(d) “registered charity” has the meaning assigned by subsection 248(1).
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is set out as follows:
FACTS
1. XXXXXXXXXX is a corporation without share capital that was created under the laws of XXXXXXXXXX.
2. The current owners of XXXXXXXXXX. You advise each Member XXXXXXXXXX is currently considered to be a charitable organization and a registered charity XXXXXXXXXX
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3. You advise that in your opinion XXXXXXXXXX is currently considered to be a non-profit organization,
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4.
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5. You advise that the Board of Directors of XXXXXXXXXX has the power to determine the charges for the services used by its Members. These charges are fixed with reference to a budget that is prepared annually and you advise that pursuant to the current Members Agreement between XXXXXXXXXX and its Members XXXXXXXXXX charges for any services it provides to a Member based on a cost recovery basis.
6. In addition to the charges referred to in 5, each Member must contribute to XXXXXXXXXX purchase of physical assets such as XXXXXXXXXX. You advise that the $XXXXXXXXXX of retained earnings that is reflected on XXXXXXXXXX draft balance sheet for the period ending XXXXXXXXXX generally represents the total of such Members’ contributions in respect of XXXXXXXXXX physical assets and XXXXXXXXXX inventory and not operational surpluses. You advise that since XXXXXXXXXX was created in XXXXXXXXXX, it has lost approximately $XXXXXXXXXX and that it has no build-up, excess or otherwise, of investment assets or other surplus assets but for the XXXXXXXXXX property and equipment as described below.
7. You advise that pursuant to XXXXXXXXXX Letters Patent XXXXXXXXXX no property, assets or income earned by XXXXXXXXXX will be distributed or otherwise made available to or for the personal benefit of any of its Members, either at any time during XXXXXXXXXX corporate existence or on a winding up or dissolution of XXXXXXXXXX. You also indicate that on a winding-up of XXXXXXXXXX all its remaining property, assets or accumulated income must be distributed to registered charities that are located and operated within the Province of XXXXXXXXXX (other than Members of XXXXXXXXXX) and that if any Member withdraws from membership in XXXXXXXXXX, such Member will not be entitled to any return of property or assets that may have been contributed by them to XXXXXXXXXX or any amounts representing contributions to XXXXXXXXXX that XXXXXXXXXX may have used to purchase such property or assets.
8.
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14. The machinery and equipment that was used for operations at theXXXXXXXXXX are not needed for the XXXXXXXXXX operations. A sale of this specialized equipment other than as part of an ongoing business to a third party is not considered by XXXXXXXXXX Directors, or its Members, to be a commercially viable alternative at this time as well since there is a limited market for such XXXXXXXXXX equipment.
15. The Directors of XXXXXXXXXX do believe that all the assets comprising theXXXXXXXXXX operations may be of interest to a purchaser if such assets were comprised as part of an operating XXXXXXXXXX business using the specialized processes that were designed to XXXXXXXXXX.
16. Although some operational cost savings have been achieved by the consolidation of XXXXXXXXXX operations at the XXXXXXXXXX, certain fixed costs incurred by XXXXXXXXXX cannot be materially reduced any further. Some of these fixed costs relate to the management of XXXXXXXXXX operations and the costs of maintaining the XXXXXXXXXX. The existing management team is capable of assuming much more responsibility. To that end, XXXXXXXXXX proposes that a portion of the existing management team be "shared" with another entity. The splitting of management costs will occur through the proposed transactions described below, wherein theXXXXXXXXXX and its excess management capacity will be used to establish a XXXXXXXXXX enterprise in a separate taxable entity.
PROPOSED TRANSACTIONS
17. It is proposed that one or more Members of XXXXXXXXXX will settle a trust for the benefit of the Members of XXXXXXXXXX for $XXXXXXXXXX. This trust will be known as XXXXXXXXXX and will be evidenced by a written Trust Indenture.
18.
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19. You advise that the beneficiaries of XXXXXXXXXX (“Beneficiaries”) will be the Members of XXXXXXXXXX from time to time such that if any Beneficiary ceases to be a Member of XXXXXXXXXX, such Member would no longer qualify as a Beneficiary of XXXXXXXXXX.
20. The XXXXXXXXXX will hold all the voting common shares of a new corporation that will be incorporated on behalf of the Members under the Business Corporations Act XXXXXXXXXX. This new corporation will be called XXXXXXXXXX.
21. XXXXXXXXXX will be a taxable Canadian corporation with its capacity to carry on business restricted to providing XXXXXXXXXX services for XXXXXXXXXX and related operations.
22. The authorized share capital of XXXXXXXXXX will be restricted to a fixed number of preference shares and XXXXXXXXXX voting common shares. The preference shares of XXXXXXXXXXwill have the following terms and conditions:
(a) will be entitled to cumulative dividends at the rate of XXXXXXXXXX% per annum;
(b) will be non-voting, except as described below, and in paragraphs (e), (g) and (h):
(i) where the XXXXXXXXXX specifies that such shares have the right to vote separately as a class on certain extraordinary corporate matters; and
(ii) in the circumstances where dividends have not been paid for three consecutive years and for so long as the cumulative dividend remains unpaid thereafter. In such a case, the preference shares will be entitled to vote under all circumstances;
(c) will be redeemable and retractable at any time at an amount equal to the redemption price (the issuance price plus any dividends which have accrued and not been declared and any dividends which have been declared but remain unpaid);
(d) that no senior shares may be created and no distributions on any other shares will be permitted which would prevent redemption or retraction of the preference shares at their redemption price;
(e) will have the right to elect two member of the Board of Directors;
(f) will have the right to consent to any corporate action to increase the Board of Directors;
(g) will be entitled to vote separately as a class on any corporate action whereby the nature of the business would change; and
(h) will have the right to vote separately as a class in respect of any corporate action to create or issue any shares.
23. The Trustees of XXXXXXXXXX will subscribe for and own all of the XXXXXXXXXX common shares to be issued by XXXXXXXXXX. The Trustees of XXXXXXXXXX will exercise all legal rights and voting power associated with the common share ownership of XXXXXXXXXX.
24. The Trustees of XXXXXXXXXX will have no discretion as to the proportions in which the Beneficiaries share the trust income and capital gains. That sharing will essentially be determined in accordance with a formula based on
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25.
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26. Therefore, XXXXXXXXXX will lease the land and buildings XXXXXXXXXX from XXXXXXXXXX. The lease will have the following attributes:
(a) an initial term of XXXXXXXXXX years;
(b) an option to renew for an additional term of a further XXXXXXXXXX years on the same terms and conditions, except the base rent, which shall be the fair market value rent for similar premises;
(c) the lease would be a net lease;
(d) minimum or base rent of $XXXXXXXXXX per annum during the initial lease term; and
(e) an option to purchase the land and buildings at any time during the lease term (or any renewal term) at their respective fair market value (including such allowance for any remediation costs).
The fair market value of the rent to be paid under the terms of the lease and the option price fair market value will be determined by a qualified independent appraiser.
27. XXXXXXXXXX also proposes to sell the machinery and equipment that is physically situate and that was formerly used in the XXXXXXXXXX operations to XXXXXXXXXX. The purchase price for such machinery and equipment will be $XXXXXXXXXX which is the fair market value as determined by a qualified independent appraiser. The consideration to be paid for the machinery and equipment will be satisfied by XXXXXXXXXX by the issuance of XXXXXXXXXX preference shares of $XXXXXXXXXX each to XXXXXXXXXX.
28. XXXXXXXXXX will use the XXXXXXXXXX land and building leased from XXXXXXXXXX and the XXXXXXXXXX equipment purchased from XXXXXXXXXX to carry on a business of XXXXXXXXXX on a for profit basis to XXXXXXXXXX which are not Members of XXXXXXXXXX. XXXXXXXXXX will be responsible for all income taxes, GST and provincial sales tax since it will be a taxable Canadian corporation.
29. There will be XXXXXXXXXX directors of XXXXXXXXXX of whom will be nominated by XXXXXXXXXX Board of Directors. XXXXXXXXXX directors will oversee the business operations of the company but the actual day-to-day business operations of XXXXXXXXXX will be effected by a management team.
30. Several but not all, of XXXXXXXXXX current management team members will resign from XXXXXXXXXX and commence employment with XXXXXXXXXX.
31. XXXXXXXXXX will enter into a management services agreement (“Management Agreement”) with the following general terms and conditions:
(a) An initial term of XXXXXXXXXX years;
(b) Automatically renewed after the initial XXXXXXXXXX year term on an annual basis; and
(c) Terminable after any renewal period on XXXXXXXXXX written notice.
Pursuant to this Management Agreement XXXXXXXXXX will administer and manage all aspects of the day-to-day operations of XXXXXXXXXX (except such matters as are performed by the management personnel who will remain with XXXXXXXXXX) and will also provide budgetary, accounting, payroll and financial services, (including assisting XXXXXXXXXX in its financial planning). XXXXXXXXXX will also be responsible for submitting annual business and operating plans, annual business operating and capital budgets and monthly financial reports. XXXXXXXXXX will also provide for the management of the human resource activity of XXXXXXXXXX and any engineering services relating to the operation of the XXXXXXXXXX.
32. The management fee to be charged by XXXXXXXXXX will be based on the fair market value of such services provided by XXXXXXXXXX personnel on XXXXXXXXXX activities. XXXXXXXXXX management personnel shall keep time docket entries to record such items describing the time expended by personnel in rendering management services and detailing actual services provided.
33. XXXXXXXXXX requires start-up capital of approximately $XXXXXXXXXX which will be provided by a line of credit up to approximately $XXXXXXXXXX and which will be secured exclusively by the accounts receivable of XXXXXXXXXX. There will be no requirement of XXXXXXXXXX to provide any financial support either by way of guarantee or loan to XXXXXXXXXX.
34. XXXXXXXXXX will have completely separate employees (with the exception of the management group) and each entity will pay its own employees. XXXXXXXXXX will purchase supplies and XXXXXXXXXX inventory on a separate or stand alone basis.
35. Since the employees of XXXXXXXXXX will be engaged in different industry sectors, they will be subject to different collective bargaining agreements and there will be no transfer of non-management employees between XXXXXXXXXX.
36. As noted in 26 above, XXXXXXXXXX fully intends to produce an after-tax profit but may incur losses during a start-up period. The funds generated by these after-tax profits, subject to a reasonable reserve for business purposes, will be used by XXXXXXXXXX to pay dividends on its XXXXXXXXXX preference shares issued to XXXXXXXXXX and/or used to redeem all or a portion of the XXXXXXXXXX preference shares, or any remaining part then outstanding. Dividends may also be paid on the XXXXXXXXXX common shares owned by XXXXXXXXXX from time to time as determined by the Board of Directors of XXXXXXXXXX.
37. The funds received by XXXXXXXXXX from XXXXXXXXXX, if any, in respect of dividends on the preferred shares or redemptions of such shares and net revenue from the lease of the XXXXXXXXXX will be used by XXXXXXXXXX to repay XXXXXXXXXX existing bank debt, $XXXXXXXXXX.
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Once the above bank debt is fully repaid, any additional funds generated from the preferred shares or from the lease of the XXXXXXXXXX, as described above, will only be used by XXXXXXXXXX in fulfilling their non-profit objectives. In this regard you advise that there will be no build up of surplus in XXXXXXXXXX. It is anticipated that all of XXXXXXXXXX existing bank debt will shortly be consolidated into one term loan.
PURPOSE OF PROPOSED TRANSACTIONS
38. The purpose of the proposed transactions is to facilitate the ultimate sale of the shares of XXXXXXXXXX or the assets thereof in a manner which maximizes their value and does not subject XXXXXXXXXX to prohibitive environmental indemnities.
SIGNIFICANT TRANSACTIONS COMPLETED
39. Except as detailed below, XXXXXXXXXX has not undertaken any significant transactions in furtherance of the above proposed transactions, except to prepare certain draft documents.
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41. The Directors of XXXXXXXXXX have obtained a ruling from the XXXXXXXXXX with respect to the proposed transaction to determine whether or not retail sales tax would be payable on the transfer of certain of the machinery and equipment assets from XXXXXXXXXX to XXXXXXXXXX.
42. The management of XXXXXXXXXX has conducted preliminary investigations as to whether or not a market would exist for the new business to be carried on by XXXXXXXXXX in order to prepare the pro-forma financial statements and five year projections. At this time there is no identified purchaser of either the common shares of XXXXXXXXXX that will be issued or the assets that will be owned by it as a result of the proposed transactions.
RULINGS GIVEN
Provided the foregoing statements constitute a complete and accurate disclosure of all the relevant facts and proposed transactions we confirm the following:
A. The implementation of the proposed transactions, as described above, including the lease arrangement between XXXXXXXXXX, as described in 26, and the sale of the machinery by XXXXXXXXXX to XXXXXXXXXX in consideration for preferred shares of XXXXXXXXXX, as described in 27, will not in and of themselves cause us to conclude for the purposes of paragraph 149(1)(l) that XXXXXXXXXX is organized and operated exclusively for profit;
B. For the purposes of paragraph 149.1(2)(a) Members will not be considered to be carrying on an unrelated business solely by virtue of the fact that they will be Beneficiaries as described in 19; and
C. As a result of the proposed transactions, in and by themselves, subsections 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given.
The above Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 31, 1996 and are binding on Revenue Canada provided that the proposed transactions are completed by XXXXXXXXXX.
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.
COMMENTS
Nothing in this ruling should be construed as implying that we have agreed to or have reviewed that:
(a) XXXXXXXXXX has met or will continue to meet all the requirements of paragraph 149(1)(l); and
(b) The Members have met or will continue to meet all the requirements of section 149.1, section 168 and the definition of registered charity;
(c) the tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
