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: General information on a number of provisions in section 149. In particular, paragraphs (d)-(d.6), and (l). Also general information on implications of asset transfers between tax exempt entities and other exempt entities or non-exempt entities and on the implications of ceasing to be exempt under subsection 149(10).
Position: General information provided.
Reasons: The Act and IT-496
Mike Baker
Transport Canada
25th Floor, Tower C 2001-008157
Place de Ville, Area B Alison Campbell
330 Sparks Street Senior Rulings Officer
Ottawa ON K1A 0N5
July 6, 2001
Dear Mr. Baker:
Re: XXXXXXXXXX
This is in your reply to your letter of April 20, 2001, wherein you request information on the applicability of the Income Tax Act (the "Act") with respect to the XXXXXXXXXX (the "Short-term Corporation") and a longer term corporation ("Long-term Corporation") that will take over from the Short-term Corporation in the near future.
Whether any corporation is taxable under Part I of the Income Tax Act (the "Act") or is a tax-exempt entity subject to section 149 of the Act is a question of fact that may be determined only after a review of pertinent documents and activities relating to a particular corporation. This letter will provide general information on the exemptions from Part I tax in paragraphs 149(1)(d) to (d.6) of the Act which may apply to corporations owned by the crown. It will also provide general information regarding non-profit organizations subject to 149(1)(l) of the Act. Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4 (copy attached). In addition, due to the complexity of the tax statutes relating to this matter, we would recommend strongly that you consult a tax advisor. The following comments are, therefore, of a general nature only, are not binding on the Department and may not be appropriate in a particular circumstance.
Corporations Owned by the Crown
In general, the exemption from taxation under Part I for Crown corporations is determined with reference to the ownership of the shares or capital of the corporation. It is our view that where a corporation has share capital, its ownership is determined with reference to the corporation's shares and where it is a non-share corporation its ownership is determined with reference to the capital of the corporation.
Pursuant to paragraph 149(1)(d), where all of the shares or the capital of a corporation are owned by Her Majesty in right of Canada or a province, the corporation will be exempt from taxation under Part I. Paragraph 149(1)(d.1) provides that where not less than 90% of the shares or capital of the corporation are owned by Her Majesty in right of Canada or a province, the corporation will be exempt from taxation under Part I.
While an entity that is exempt under paragraph 149(1)(d) would also clearly satisfy the conditions to be exempt under paragraph 149(1)(d.1), the distinction between 100% owned entities and 90% owned entities is relevant when considering the tax status of subsidiaries of these corporations. A wholly-owned subsidiary corporation of corporation exempt under paragraph 149(1)(d) will also be exempt from Part I tax by virtue of paragraph 149(1)(d.2).
Subparagraph 149(1)(d.3)(i) will exempt a corporation from Part I tax, where not less than 90% of its shares or capital are owned by Her Majesty in right of Canada or a province or a person exempt under paragraph (d) or (d.2) (i.e. corporation 100% owned by Her Majesty in right of Canada or a province, or a 100% owned subsidiary of such a corporation).
Subparagraph 149(1)(d.3)(ii) exempts a corporation from Part I tax where not less than 90% of the shares or the capital of the corporation are owned by one or more municipalities in Canada in combination with one or more persons each of which is Her Majesty in Right of Canada or a province, or a corporation to which paragraph 149(1)(d) or paragraph 149(1)(d.2) applies.
Paragraph 149(1)(d.4) provides an exemption from Part I tax for corporations, all of the shares or capital of which are owned by corporations that are exempt under paragraphs 149(1)(d) to (d.3).
Paragraph 149(1)(d.5) deals with exemptions from Part I tax where the capital of a corporation, commission or association is owned by one or more municipalities. Paragraph 149(1)(d.6) deals with exemptions from Part I tax for a subsidiary of a paragraph (d.5) corporation. Municipal corporations that qualify for exemption under paragraphs (d.5) and (d.6) have income and geographical boundary tests that must be satisfied to be exempt from tax.
Proposed technical amendments to paragraphs 149(1)(d) to (d.4) and (d.6), if passed, will clarify that the ownership tests referred to in those paragraphs can be met through combined ownership by several levels of government. For example, where the federal government and a provincial government each own 50% of the shares of a corporation, the taxable income of the corporation will be exempt by virtue of paragraph 149(1)(d). The amendments when passed by parliament will be effective for taxation years beginning after 1998.
Subsection 149(1.1) requires that no person other than a government or Canadian municipality may have a right to acquire shares or capital of an otherwise eligible corporation, for the corporation to be exempt under one of paragraphs 149(1)(d) to (d.6). There is currently a proposed technical amendment to subsection 149(1.1) which will provide that for the purposes of determining the 100% and 90% ownership tests in paragraphs (d) to (d.6) any right to acquire shares or capital of a corporation should be considered as though the right had been exercised. For example, assume that a province currently owned 100% of the outstanding shares of a corporation but a person who was not Her Majesty in right of Canada, a province or a Canadian municipality had a right under which they could obtain 20% of the outstanding shares of the corporation from the province. For the purposes of determining whether the 90% or 100% test is met, the non-government person would be considered to own 20% of the shares. This means that the government would own less than 90% and the corporation would not be exempt from taxation.
Subsection 149(1.3) provides that 90% of the capital of a corporation is to be considered to be owned by one or more municipalities only if the municipalities are entitled to at least 90% of the votes associated with the shares of the corporation.
Whether any particular share capital corporation would be exempt from taxation under any of paragraphs 149(1)(d) to (d.6) would be determined with reference to the ownership of the shares of the corporation and the existence of any right by a person other than Her Majesty in right of Canada, a province or a Canadian municipality to acquire shares of the corporation. It is a question of fact who owns the capital of a non-share capital corporation. The word "capital" is not defined in the Act for this purpose, and we would therefore look at factors such as the identity of the members, the structure of the corporation, who has the right to elect the board of directors, details regarding asset distribution on winding-up or dissolution, and whether a person other than Her Majesty in right of Canada, a province or a Canadian municipality has any right to acquire any capital of the corporation. To make such a determination it would be necessary to review of all the relevant documents such as articles of incorporation, bylaws, and agreements relating to control of the corporation and its assets. If a corporation is not exempt from taxation under Part I by virtue of one of paragraphs 149(1)(d) to (d.6), because of share or capital ownership or a right to acquire share or capital ownership held by a person that is not Her Majesty in right of Canada, a province or a Canadian municipality, it may qualify for an exemption from Part I tax under paragraph 149(1)(l) as a non-profit organization.
Non-profit organizations
The Department's positions on non-profit organizations are outlined in Interpretation Bulletin IT-496, a revised version of which (IT-496R) will be released in the near future. Generally, in order to qualify for exempt status under paragraph 149(1)(l) of the Act, a corporation would have to comply with the following conditions throughout the period for which it seeks to be exempt:
a) it is not a charity;
b) it is organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit;
c) it is in fact operated exclusively for the same purpose for which it was organized or for any of the other purposes mentioned in (b); and
d) it does not distribute, or otherwise make available for the personal benefit of a member, any of its income unless the member is an association which has as its primary purpose and function the promotion of amateur athletics in Canada.
Whether any particular corporation meets all of the above criteria and qualifies for exemption from Part I tax under paragraph 149(1)(l) is a question of fact that can only be determined after we review the purposes for which the corporation was organized and the actual activities being carried on by the corporation.
To determine the purpose for which a corporation is organized, reference will normally be made to the instruments by which it was created such as letters patent, articles of incorporation, memoranda of agreement, by-laws and so on. If a review of these documents reveals that, the corporation was created for other than one or more of the accepted purposes (i.e. social welfare, civic improvement, pleasure or recreation, and any other purpose except profit), the corporation would not qualify for exemption.
It will be a question of fact to be determined with regard to the particular circumstances as to whether a corporation will be considered to be carrying on a trade or business and if it is, whether these activities will cause the corporation to be considered to not be operated exclusively for non-profit purposes. Some indicators that an activity is a trade or business are:
a) the activity is carried on in a normal commercial manner;
b) the goods or services of the corporation are not restricted to members and their guests;
c) the corporation is operated on a profit basis rather than a cost recovery basis; or
d) the activities of the corporation are in competition with taxable entities that carry on the same trade or business.
However, where a corporation carries on a trade or business that is directly attributable to, or connected with, pursuing its non-profit goals and activities, the fact that it carries on the trade or business will generally not cause it to be considered to be operated for profit purposes.
In assessing whether a corporation is being operated on a for-profit basis, in addition to looking at the nature of the activities being carried on, we will consider whether the corporation is earning income in excess of its expenditures. The realization of a profit in any particular year is not necessarily indicative of a for-profit motive, however, if a material part of the excess is accumulated each year and the balance of accumulated excess at any time is greater than the corporation's reasonable needs to carry on its non-profit activities, profit will be considered to be one of the purposes for which the corporation is operated. This will be particularly so where assets representing the accumulated excess are used for purposes unrelated to its objects such as the enlarging or expanding of facilities used for normal commercial operations, making of loans to members, shareholders or non-exempt persons, or investing in long-term assets for the purposes of earning property income. Where the facts of a situation indicate that the purposes for which a corporation are operated are two-fold: to earn profits and to carry out its non-profit purposes, it is our view that the "operated exclusively for a purpose other than profit" will not be met.
A determination of whether a corporation was, in fact, operated exclusively for and in accordance with its non-profit purposes in a particular taxation year must be based on the facts of each case, and can only be done by reviewing all of the corporations activities for that year. Such a determination cannot be made in advance of or during a particular year, but only after the end of the year.
There are no rules regarding the persons who may own the shares or capital of a corporation for exemption under paragraph 149(1)(l). However, to qualify for exemption under 149(1)(l) no part of the income, whether current or accumulated from prior years, may be payable to or available for the personal benefit of any proprietor, shareholder or member of the organization. For example, this requirement would likely not be met if the corporation has the power at any time in the current or future years to declare and pay dividends out of income or, the corporation is not prohibited from distributing income to its shareholders or members on its winding-up, dissolution or amalgamation. It should be noted that while dividends would be a common manner to make income of a corporation available to its shareholders or members, there are other situations where a corporation may be considered to have personally benefited a shareholder or member without the distribution of dividends. An example of this would be the payment of an unreasonably high amount to a member or shareholder for goods or services provided to the organization by the member or shareholder.
Another condition for an organization to qualify for exemption from tax under paragraph 149(1)(l), is that the organization not be a charity as defined by section 149.1. In general, this means that if the organization is one that could be registered as a charity, but has not registered as a charity, it will be denied the exemption from taxation under paragraph 149(1)(l). Generally, where a corporation or other type of organization has very broad objectives and carries on a number of activities, some of which would be considered charitable and some of which would not be considered charitable in nature, the organization would not qualify for registration under the Act. If there is a desire for the long-term corporation to qualify as a registered charity, you may wish to discuss your proposed structures and activities with the Charities Directorate of the Canada Customs and Revenue Agency.
Change in Tax Status
Generally, there are no tax consequences when an entity changes from being exempt from taxation under one provision of the Act to being exempt under another provision. For example, where a corporation that is for a period of time exempt under paragraph 149(1)(d) becomes 30% owned by a person other than Her Majesty in right of Canada, a province or a Canadian municipality, such that it no longer qualifies for exemption under any of paragraphs 149(1)(d) to (d.6), but does meet the conditions for exemption under paragraph 149(1)(l), there will be no tax income implications. However, where a corporation is initially exempt from taxation and then loses its exempt status, paragraph 149(10) will apply. In general terms, when subsection 149(10) applies, the corporation will be deemed to have its taxation year end immediately before the time of the event that caused it to cease to be exempt. The corporation will also be deemed to have disposed of all its assets for amounts equal to their fair market values immediately prior to the deemed year-end, and to have immediately reacquired the assets for a cost equal to their fair market value. The effect of the deemed year-end and disposition rule is that any gains that accrued on the assets of the organization while it was exempt from tax will not be subject to tax. Any gains accruing on the assets after that time, will be subject to tax.
Disposition of Assets by Tax-Exempt Entities
In general, a corporation that is exempt from taxation by virtue of one of paragraphs 149(1)(d) to (d.6), 149(1)(l) or as a registered charity under paragraph 149(1)(f), will not pay tax on any gains arising from the disposition of assets.
As indicated in paragraph 22 of Information Circular 70-6R4 dated January 29, 2001, the above comments do not constitute an advance income tax ruling and are not binding on the Department. We trust the above comments will be of assistance to you. If you have any other questions, do not hesitate to contact us.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Section
Income Tax Rulings Directorate
Policy and Legislation Brach
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