13 May 2002 External T.I. 2001-0114125 - MUNICIPAL CORPORATIONS

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Is the reference to "income" in paragraph 149(1)(d.5) a reference to "net income"?

Position: Yes

Reasons: Previous position which is supported at law

XXXXXXXXXX
									2001-011412
May 13, 2002

Dear XXXXXXXXXX:

Re: Municipal Corporations

This is in reply to your letter of November 13, 2001 requesting our views on the application of paragraph 149(1)(d.5) of the Income Tax Act ("Act").

Subject to subsections 149(1.2) and (1.3) of the Act, paragraph 149(1)(d.5) of the Act exempts a corporation from Part I tax on its taxable income for a particular period if not less than 90% of its capital is owned by one or more municipalities in Canada and the income of the corporation from activities carried on outside the geographical boundaries of the municipalities does not exceed 10% of its income for the period. Whether or not the requirements of paragraph 149(1)(d.5) of the Act are satisfied in a particular situation is a determination that can only be made having regard to the facts of the particular situation.

Subsection 149(1.2) of the Act provides for purposes of paragraph 149(1)(d.5) of the Act that income from specified activities will not be considered to be income that is derived from activities carried on outside the geographical boundaries of the municipality or municipalities that own the corporation.

For the purposes of paragraph 149(1)(d.5) and subsection 149(1.2) of the Act, subsection 149(1.3) of the Act provides that 90% of the capital of a corporation that has issued share capital will not be considered to be owned by one or more municipalities unless the municipalities are also entitled to at least 90% of the votes that would be cast under all circumstances at an annual meeting of shareholders of the corporation.

We continue to be of the view that in determining whether more than 10% of the "income" of the corporation is derived from activities carried on outside the geographical boundaries of the municipality that owns the corporation, the reference to "income" means the net income or profit of the corporation. Subsection 9(1) of the Act provides that income from a business or property is the taxpayer's profit therefrom and there is no suggestion in paragraph 149(1)(d.5) of the Act that a different meaning is intended. In this regard costs would be allocated to activities carried on outside the municipal boundaries only if there is a reasonable basis for doing so.

We also note that for purposes of paragraph 149(1)(d.6) of the Act in the CCH Canadian Income Tax Act with Regulations, 73rd edition, 2001 the reference to the phrase "does not exceed 10% of its income for the period" does not form part of subparagraph 149(1)(d.6)(ii) as found in other editions as you pointed out in your letter. It is shown as a separate postamble to that paragraph which is consistent with the intent of the legislator.

We trust that the above will be of assistance.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch