2005 Ruling 2004-0103121R3 - Amalgamation of non-profit organizations

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.

Principal Issues: Rulings requested that: 1. the cost bases for the assets of the amalgamated club will be a continuation from the cost bases of the amalgamating clubs; 2. 149(5) will not apply solely as a result of the amalgamation; and 3. the members of the amalgamating clubs will not have a gain on the disposition of their memberships.

Position: Rulings given

Reasons: 1. Based on corporate law; 2. Property transferred to the amalgamated club used exclusively and directly in the course of providing dining, recreational and sporting facilities provided by the amalgamating clubs for its members; and 3. Members have same rights in the new club.

XXXXXXXXXX 2004-010312

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("Club 1") BN XXXXXXXXXX
XXXXXXXXXX ("Club 2") XXXXXXXXXX

We are writing in response to your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of Club 1 and Club 2 (collectively the "Taxpayers"). We also acknowledge receipt of your correspondence dated XXXXXXXXXX, as well as the information provided during our various telephone conversations (XXXXXXXXXX).

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 one of the Taxpayers or a related person;

(ii) being considered by a tax services office or a tax centre in connection with a tax return already filed by one of the Taxpayers or a related person;

(iii) under objection by one of the Taxpayers or a related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and

(v) the subject of a ruling previously issued by the Directorate to one of the Taxpayers or a related person.

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 definitions unless otherwise indicated.

Facts

1. Club 1 is a corporation without share capital incorporated in XXXXXXXXXX. Its address is XXXXXXXXXX. Club 1 is served by the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre.

2. The objects of Club 1 include:

a. to promote a bond between the members of the club who XXXXXXXXXX;

b. to unite the members in bonds of friendship, good fellowship and mutual understanding;

c. to promote the theory and practice of the principles of good government and good citizenship;

d. to take an active interest in the civic, social and moral welfare of the members of the community;

e. to provide a forum for the full and free discussion of all matters of public interest except partisan politics and sectarian matters;

f. to promote, encourage and aid charitable, social, educational, cultural and recreational activities conducive to the welfare of the members of the community;

g. XXXXXXXXXX; and

h. subject to The Mortmain and Charitable Uses Act and The Charitable Gifts Act, to accept dues, donations, gifts, legacies and bequests for use in carrying out its aims.

3. Club 1 is not a charity within the meaning assigned by subsection 149.1(1) of the Act. It has operated exclusively in accordance with its objects listed above and is a non-profit organization which is exempt from Part I tax of the Act by virtue of paragraph 149(1)(l) thereof.

4. Club 1 owns lands and premises that it acquired and constructed in various stages between XXXXXXXXXX, and which have been used throughout these times, up until the present, exclusively for and directly in the course providing dining, recreational and sporting facilities.

5. Club 1 charges initiation fees and annual dues to its members for the purpose of maintaining its facilities.

6. Club 2 is a corporation without share capital incorporated in XXXXXXXXXX. Its address is XXXXXXXXXX. Club 2 is served by the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre.

7. The objects of Club 2 include:

a. to provide and operate housing accommodation, with or without any public space, recreational facilities and commercial space in buildings appropriate thereto, primarily for persons of low or modest income;

b. to establish and maintain a recreational centre, the purpose of which is to promote the good health and well-being of all members of the community, and to include in that centre facilities for the promotion of recreation, health and fitness as well as the promotion of cultural and theatrical activities provided that access to the facilities be granted to all members of the community;

c. to accumulate from time to time all or part of its funds and/or the income therefrom and to invest and reinvest the same in such manner as may from time to time be determined by the board of directors, and in making such investments the board of directors shall not be limited to investments authorized by law for trustees, provided such investments are reasonable, prudent and sagacious under the circumstances and do not constitute, either directly or indirectly, a conflict of interest;

d. to acquire, accept, solicit or receive by purchase, lease, contract, donation, legacy, gift, grant, bequest or otherwise, any kind of real or personal property and to enter into and carry out agreements, contracts and undertakings incidental thereto;

e. to hold, manage, sell or convert any of the real or personal property from time to time owned by the Corporation, and to invest and reinvest any principal in such manner as may from time to time be determined and the Corporation, in making such investments, shall be limited to investments authorized by law for trustees;

f. to acquire, accept, solicit or receive any gift of real or personal property, either as an annual or other contribution or as an addition to the funds of the Corporation; and

g. to carry on its activities without the purpose of gain for its members and to use any profits or other accretions to it in promoting its objects.

8. Club 2 is not a charity within the meaning of subsection 149.1(1) of the Act and has filed an annual Non-Profit Information Return pursuant to subsection 149(12) of the Act.

9. On XXXXXXXXXX (in trust for an entity to be designated later as Club 2) purchased a vacant parcel of land (the "Land") located at XXXXXXXXXX. As consideration for the purchase of the Land, Club 2 borrowed $XXXXXXXXXX from Club 1. In addition, Club 2 borrowed $XXXXXXXXXX by way of a mortgage held by XXXXXXXXXX individuals, each holding a XXXXXXXXXX% undivided interest in the mortgage and each being a member of Club 2.

10. In XXXXXXXXXX, an application was filed with the Province of XXXXXXXXXX to build a residential complex for seniors on the Land. Various provincial incentives were in place to encourage this type of project and this application was given high priority by the provincial authorities. However, these incentives were later revoked by XXXXXXXXXX and this project was aborted.

11. During the years from XXXXXXXXXX, the Land remained vacant. Club 2 incurred various costs such as interest with respect to the mortgage debt, property taxes and other incidentals that were capitalized to the cost of the Land for financial statement purposes.

12. The amounts required to service the debt and to pay the annual costs associated with the Land were provided by Club 1.

13. In XXXXXXXXXX granted Club 1 the right to build a XXXXXXXXXX long-term care facility on the Land. In order to facilitate income tax effective fundraising from the private sector, it was determined that the long-term care facility should be held by an entity which would apply for registered charity status. Consideration was given to seeking registered charity status for Club 2. However, in order to avoid any exposure to possible legal issues that may have transpired unbeknownst to Club 2 since its inception in XXXXXXXXXX, and to avoid any potential confusion to the public, a new company without share capital, XXXXXXXXXX ("the Charity"), was incorporated in XXXXXXXXXX for this purpose. It received registered charity status with the CRA under Registered Charity Number XXXXXXXXXX, effective XXXXXXXXXX.

14. In XXXXXXXXXX Club 2 disposed of the Land to the Charity for approximately $XXXXXXXXXX. This amount was determined by taking the median value for comparable parcels of vacant land in the XXXXXXXXXX area (on a per bed basis) and multiplying this amount by the number of beds to be housed in the long-term facility (i.e., XXXXXXXXXX beds). In this regard, a median value of $XXXXXXXXXX was used based on values for comparable parcels of vacant land in the range of $XXXXXXXXXX to $XXXXXXXXXX per bed.

15. Club 1 and Club 2 provide for classes of membership, both voting and non-voting, and are comprised of the same members (the "Members").

16. XXXXXXXXXX, in conjunction with section 113 of that act, provides that two or more corporations without share capital may apply to amalgamate and form one corporation without share capital by filing special resolutions of the members approving the amalgamation and certain other documents, including a new constitution and by- laws. Certain other statutory requirements, including obtaining the consent of the XXXXXXXXXX, must be met. The XXXXXXXXXX provides that after the letters patent in respect of an amalgamation are issued, the predecessor corporations are amalgamated and are continued as one corporation and that the amalgamated corporation possesses all the property and is subject to all of the debts and liabilities of each of the predecessor corporations.

Proposed Transactions

17. Club 1 and Club 2 propose to effect a statutory amalgamation XXXXXXXXXX to form one corporation without share capital (the "Amalgamated Club") with a combined membership and combined assets and liabilities with a view to creating a dining and recreational club with long-term financial stability.

18. The Amalgamated Club will use one facility for the benefit of its membership, being the lands and premises presently owned and occupied by Club 1.

19. No member of either Club 1 or Club 2 will receive any amount or property on the amalgamation of the two clubs.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to improve the economic prospects of the Taxpayers by consolidating their operations and permitting them to make the best use of their combined capital assets to achieve long-term economic stability for the Amalgamated Club.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, and purpose of the proposed transactions:

A. For purposes of the Act, the amalgamation of Club 1 and Club 2 pursuant to the governing corporate law will not result in the disposition of any of the assets of Club 1 and Club 2 and,

i. the cost and cost amounts (within the meaning of subsection 248(1) of the Act) of the assets of the Amalgamated Club immediately after the amalgamation will be equal to costs and cost amounts of the assets to Club 1 and Club 2, as the case may be, immediately before the amalgamation; and

ii. for greater certainty, in computing the income of any trust deemed to have been created in respect of the property of Club 1 by virtue of subsection 149(5) of the Act, no amount will be included pursuant to paragraph 149(5)(e) of the Act solely as a result of the amalgamation of Club 1 and Club 2.

B. None of the members of Club 1 and Club 2 will be considered to have received a gain on the disposition of his or her membership in Club 1 or Club 2 or to have received a benefit pursuant to subsections 15(1), 56(2) or 246(1) of the Act as a result of the amalgamation of Club 1 and Club 2.

Caveat

The above advance income tax rulings, which are based on the Act in its present form and does not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R5, dated May 17, 2002, and is binding on the Canada Revenue Agency provided the proposed transactions are implemented before XXXXXXXXXX.

Nothing in this letter should be construed as confirming or implying that the CRA has reviewed or is making a determination in respect of:

(i) the non-profit status of Club 1, Club 2 or the Amalgamated Club;

(ii) the fair market value or adjusted cost base of any particular asset.

Further, given Club 2's apparent lack of activity since its incorporation, the issue of whether Club 2 qualified as an NPO in XXXXXXXXXX when it earned a capital gain on the disposition of vacant land will be referred to the XXXXXXXXXX Tax Services Office.

Yours truly,

XXXXXXXXXX
Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch

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