Income tax issues for pension real estate corporations can arise when investing in LPs or real estate joint ventures

Observations on income tax considerations relevant to s. 149(1)(o.2) corporations include:

  • A s. 149(1)(o.2)(iii) corporation is precluded from issuing “bonds, notes, debentures or similar obligations.” Hudson’s Bay v. OMERS indicates that there is no legal relationship between a limited partner (e.g., an (o.2) corp) and 3rd parties who have contracted with the limited partnership (i.e., the general partner thereof). In any event, comfort is provided by s. 253.1, which indicates that such limited partner is not considered to be carrying on any “activity” of the LP (including presumably its borrowing activities).
  • Where the (o.2)(iii) corp has guaranteed debt of the LP, the guarantee likely would not be considered to be a similar obligation because there is no creditor-debtor relationship under which the guarantor is primarily liable.
  • In order that a s. 149(1)(o.2)(ii) real estate corporation can avoid issues arising out of a CRA position that its activities respecting co-owned real estate should be proportionate to the interest held by it (or other quailed entities), it may headlease its interest to a headlessee which carries on the activities in question.
  • Borrowing to fund a tenant inducement payment should generally satisfy the borrowing restrictions under s. 149(1)(o.2)(ii)(C), since the purpose of the borrowing is to earn rental income from the real property being leased. However, borrowing to lend money to a tenant to fund tenant improvements is not permitted, since any income earned from the loaned money will be interest income earned on the loan, not income earned from real property.

Hersh Joshi and Jack Silverson, “Understanding and Doing Business with Tax-Exempt Entities,” 2018 Conference Report (Canadian Tax Foundation), 29:1 – 35 under s. 149(1)(o.2)(iii)(C), s. 149(1)(o.2)(iii)(B), s. 149(1)(o.2)(ii)(A), s. 149(1)(o.2)(ii)(C) and Reg. 8501(2)(a).