17 June 2002 External T.I. 2002-0118485 - MUNICIPAL CORPORATION

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:

Whether a municipal corporation would qualify for the tax exemption under paragraph 149(1)(d.5).

Position: Factual determination.

Reasons: Legislation

XXXXXXXXXX 								2002-011848

June 17, 2002

Dear XXXXXXXXXX:

Re: Municipal Corporations

This is in reply to your letters of January 2 and April 15, 2002 in which you requested our views concerning a proposal by a municipality to form a holding corporation to hold real property and to rent it to another corporation owned by the municipality. In particular, you asked whether the holding corporation would qualify for the tax exemption under paragraph 149(1)(d.5) of the Income Tax Act (the "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.

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.

Based on the limited information provided, we are unable to conclude whether the operation of the holding corporation would be considered to be carried on within the boundaries of the municipality. In order for us to make such a determination, we would require full details of the operations and all proposed agreements. In this regard, confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5 dated May 17, 2002 (a copy of which is enclosed for your information).

We would note that based on the information provided, it appears that the sole reason for setting up the holding corporation is to avoid paying Part I tax. Where it can reasonably be considered that a transaction has not been undertaken primarily for bona fide purposes other than to obtain the tax benefit, the general anti-avoidance rule in subsection 245(2) of the Act may apply to redetermine the tax consequences to deny the tax benefit. Accordingly, should you decide to request a ruling, you should also include a specific ruling dealing with subsection 245(2) of the Act.

Our comments are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the Agency in respect of any particular situation.

Yours truly,

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

Enclosure