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.
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 proposed transactions will, in and of themselves, cause the Association to lose its exempt status under paragraph 149(1)(l) of the Act.
Position: No.
Reasons: All indications are that transactions are not motivated by profit.
XXXXXXXXXX 2000-003633
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
We are writing in response your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling. We also acknowledge receipt of your correspondence dated XXXXXXXXXX, which was further to our request for additional information, as well as our various telephone conversations.
To the best of your knowledge, and that of the taxpayers involved, none of the issues involved in the ruling request is:
i. in an earlier return of the association or a related person;
ii. being considered by a tax services office or a taxation centre in connection with a tax return already filed by the association or a related person;
iii. under objection by the association or a related person;
iv. before the courts or, if a judgment has been issue, the time limit for appeal to a higher court has not expired; and
v. the subject of a ruling previously issued by the Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, the proposed transactions and the purpose of the proposed transactions is as follows:
FACTS
1. XXXXXXXXXX ("the Association") was incorporated under the XXXXXXXXXX.
2. The Association is exempt from Part I tax pursuant to paragraph 149(1)(l) of the Act.
3. Membership in the Association is comprised of individuals who have been members of XXXXXXXXXX.
4. XXXXXXXXXX.
5. XXXXXXXXXX.
6. The Association is a separate entity and is not connected to XXXXXXXXXX. No members of the Association are members of XXXXXXXXXX.
7. The Association conducts few activities.
8. The Association has an annual general meeting each fall which is usually attended by XXXXXXXXXX members. This event is usually located in XXXXXXXXXX and the event usually makes a profit of less than $XXXXXXXXXX.
9. The Association has an annual golf tournament each spring which is usually attended by XXXXXXXXXX members. This event is located at a public golf course. The event usually makes a profit of up to $XXXXXXXXXX.
10. The two events described in 8 and 9 above are intended to be informal reunions. The proceeds are used to cover rental deficiencies on the property described in 11 below, or to make repairs to the said property.
11. The Association owns a property at XXXXXXXXXX.
12. The Association leases the Property to XXXXXXXXXX. The lease agreement is very informal. Usually the annual lease payments total approximately $XXXXXXXXXX, which are usually equal to the property tax, insurance, utilities and other expenses associated with the Property. The deficiency is usually made up by the funds raised at the golf tournament and the annual general meeting dinner.
13. The Old Building is in extremely poor condition. As the rent collected by the Association is not sufficient to pay for any repairs and because the Association has no other sources of income, it is no longer interested in operating a XXXXXXXXXX at the Old Building. However, the Association still wishes to provide a meeting hall for XXXXXXXXXX.
14. For the past several years, the Association has had discussions with XXXXXXXXXX (the "Charity"), a registered charity, which is interested in leasing the Property for the purpose of constructing XXXXXXXXXX.
15. The Association has submitted an application (the "Application") with XXXXXXXXXX to construct a XXXXXXXXXX (the "New Building") on the Property for use by XXXXXXXXXX.
16. The Association has provided the Charity with a copy of the development plans (the "Plans") submitted to XXXXXXXXXX for the development and construction of the New Building, and the Charity acknowledges that it has reviewed the Plans and confirms that the Plans are suitable for its purposes.
17. According to zoning by-laws, the New Building must be built within the same perimeter as the Old Building. However, unlike the Old Building, the New Building will have a basement. Thus, whereas the Old Building has a total area of approximately XXXXXXXXXX square feet, the New Building will have an additional XXXXXXXXXX square feet of useable space.
18. You have informed us that any taxable gains realized by the Association on dispositions of property are not subject to subsection 149(5) of the Act since the Association's main purpose was not to provide dining recreational or sporting facilities for its members.
PROPOSED TRANSACTIONS
19. The Association will enter into a lease (the "Lease") with the Charity for the Property.
20. The Association will enter into a sublease (the "Sublease") with the Charity for a portion of the premises (the "Sublease Portion") to be used as a XXXXXXXXXX.
21. Under the Lease, the Charity will assume responsibility for the construction of the New Building on the Property subject to raising sufficient construction financing and will thereafter operate the Property XXXXXXXXXX.
22. The Lease and Sublease will contain the following terms:
(a) The term of the Lease will be XXXXXXXXXX years with no renewal rights.
(b) The Charity will be solely responsible for all costs and expenses incurred with respect to the construction of the New Building including all architectural fees, engineering fees, development application fees, municipal charges, development permit fees and other costs normally incurred in the development permitting process except that the Charity will not be required to pay any amount to the Association if, on or before XXXXXXXXXX:
i. the Association has not obtained and assigned to the Charity a development permit (the "Permit") for the New Building;
ii. the Association has not received a favourable income tax ruling from the Canada Customs and Revenue Agency that the proposed transactions will not, in and of themselves, affect the tax exempt status of the Association under paragraph 149(1)(l) of the Act; or
iii. the parties have not entered into a Lease on terms and conditions acceptable to both parties.
(c) The Association acknowledges that all profits and losses from the operation of the Property will be for the account of the Charity and the Association will not have any rights whatsoever (other than by way of rent and other amounts payable to or on behalf of the Association under the Lease) to share in any revenue or income earned by the Charity from the operation of the Property, except in respect of the Sublease Portion. Notwithstanding the foregoing, the Association may conduct fund-raising activities in respect of the Property.
(d) The rent for the Property will be $XXXXXXXXXX per year. The Charity will be responsible for all costs and expenses associated with the Property during the term of the Lease including maintenance, capital and structural improvements, utilities, property taxes, governmental levies and other services. The Charity will return the Property to the Association at the end of the Lease in good condition, reasonable wear and tear excepted. The Charity agrees that upon the expiration of the Lease, ownership of any building, structure or other improvements and all fixtures and chattels related thereto will belong to the Association with no payment to the Charity.
(e) The Charity will engage a reputable property manager to be approved by the Association, acting reasonably, to manage and operate the Property, and will be responsible for the cost of such property manager.
(f) The Charity will grant to the Association the Sublease for the Sublease Portion of the New Building for use only as a XXXXXXXXXX. The Sublease will expire upon the expiration of the Lease. The rent for the Sublease will be $XXXXXXXXXX per year plus such reasonable proportion of the maintenance costs. Notwithstanding (c) above, the Association may rent out the Sublease Portion and all revenue and income derived therefrom will be for the account of the Association.
(g) The Charity will have the right to designate certain parking spaces for the exclusive use of tenants living in the Property but will grant the Association a license to use the remaining parking spaces (excluding those designated to tenants) at any time and from time to time. The Charity may from time to time impose such reasonable restriction on the license as it deems necessary.
(h) To the extent that the New Building contains any shared facilities, each of the Charity and the Association will have equal rights to use such shared facilities.
(i) Each party will be required to maintain reasonable insurance on the Property.
(j) The Association may terminate the Lease at any time if:
i. the Charity is in default of any provisions under the Lease and such default is not cured within XXXXXXXXXX days of the written notice thereof to the Charity;
ii. the Charity changes the use of the Property from XXXXXXXXXX;
iii. the Charity encumbers the Lease without the Association's prior written consent to be given at the Association's sole discretion;
iv. the Charity amends or changes its charter or purpose without the Association's prior written consent to be given at the Association's sole discretion;
v. the Association pays to the Charity the depreciated value of the Property or the fair market value of the Property subject to the Lease, whichever is less;
vi. the Sublease is terminated by the Charity for any reason other than a breach of the Sublease by the Association;
vii. the Charity assigns or proposes to assign the Lease without the Association's prior written consent to be given at the Association's sole discretion.
(k) The Charity may terminate the Lease at any time on no less than one year written notice to the Association.
(l) The Association will notify the Charity of the approval of the Permit, and the Charity will have XXXXXXXXXX days to notify the Association whether it intends to proceed with the New Building. If the Charity elects not to proceed with the New Building for any reason, the Charity will pay to the Association the sum of $XXXXXXXXXX as liquidated damages.
PURPOSE OF THE PROPOSED TRANSACTIONS
Entering into the lease/sublease arrangement enables the Association to relieve itself of its obligations associated with the Property, which is in a state of poor repair, and yet continue to provide a meeting facility for XXXXXXXXXX.
RULING REQUESTED AND GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and the proposed transactions are completed as described above, our ruling is as follows:
The proposed transactions will not, in and of themselves, cause the Association to lose its exempt status under paragraph 149(1)(l) of the Act.
CAVEAT
Nothing in this ruling should be construed as implying that Canada Customs and Revenue Agency has agreed to or reviewed:
i. the determination of whether, in any particular period, the Association is exempt from tax pursuant to paragraph 149(1)(l) of the Act;
ii. the tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
The ruling provided herein is subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Business and Publications Division
Income Tax Rulings Directorate
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