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: Will the charitable organization be considered to be carrying on a business that is not a related business as a consequence of the organization renting excess parking capacity in a parkade being built to provide low-cost parking to members
Position: No
Reasons: Based on the facts contained in the ruling, the provision of a parkade of the size proposed, for use by members, is integral to the furtherance of the charitable objects of the organization.
XXXXXXXXXX 2005-016048
XXXXXXXXXX, 2006
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request - XXXXXXXXXX
XXXXXXXXXX ("Association A") -BN/Registration Number XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, and follow-up submission of XXXXXXXXXX, in which you request an Advance Income Tax Ruling on behalf of the above named taxpayer. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).
We understand that, to the best of your knowledge and that of the taxpayer referred to above, none of the issues involved in the Ruling request is:
(i) in an earlier return of the taxpayer or a related person;
(ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer 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; or
(v) the subject of a Ruling previously issued by the Directorate.
In this letter, unless otherwise indicated, all statutory references are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act").
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Facts
1. Association A is a registered charitable organization pursuant to section 149.1, XXXXXXXXXX
2. Association A has various "XXXXXXXXXX" in XXXXXXXXXX ("City A") area including:
a) XXXXXXXXXX ("Centre 1");
b) XXXXXXXXXX ("Centre 2");
c) XXXXXXXXXX ("Centre 3"); and
d) XXXXXXXXXX ("Centre 4").
The above facilities are collectively referred to as the "Existing Facilities".
3. Each of Centre 1, Centre 2 and Centre 3:
a) Is XXXXXXXXXX square feet in size and has an approximate membership capacity of XXXXXXXXXX per facility;
b) Has swim facilities for both lap swimming and instructional use;
c) Has gymnasium space and an Individual Conditioning Centre;
d) Has XXXXXXXXXX locker rooms (XXXXXXXXXX);
e) Group Fitness Studios; and
f) Childcare Facilities.
4. Centre 4:
a) Is located in the downtown area of City A;
b) Has a total size of approximately XXXXXXXXXX square feet, XXXXXXXXXX square feet XXXXXXXXXX;
c) Has a current membership of XXXXXXXXXX for its health, fitness and recreational activities, which utilize the remaining XXXXXXXXXX square feet of space;
d) Has swim facilities for both lap swimming and instructional use;
e) Has gymnasium space and an Individual Conditioning Centre;
f) Has XXXXXXXXXX locker rooms; and
g) Group Fitness Studios.
5. Typically the "peak periods" for utilization by the membership, of the Existing Facilities that are located outside of the city centre, are during the mid-morning and evening.
6. The Existing Facilities also experience some seasonality in usage, with membership usage peaking from January through to April/May and "drop-in" or non-member usage peaking in the summer months (largely due to children's sports camps and other summer activities).
7. The respective parking capacities and membership volumes at the existing facilities are as follows:
Existing Association A Available Non- Total Available Membership
Facility Provided Association A Parking Volume
Parking Parking
Centre 1 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Centre 2 XXXXXXXXXX XXXXXXXXXXX XXXXXXXXX XXXXXXXXXX
Centre 3 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Centre 4 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXX1
8. It is estimated that XXXXXXXXXX% of users at Existing Facilities (other than Centre 4) drive themselves, with the remaining XXXXXXXXXX % either walking or relying on public transit.
9. All available parking stalls at the Existing Facilities, including the available non-Association A stalls, are typically fully utilized during the Existing Facilities' respective "peak periods" each day. Thus, the Association A provided parking is insufficient to meet membership demands on a daily basis. This parking shortage is often the subject of complaints received from the members of the Existing Facilities and is believed to be a primary limiting factor on membership growth at these facilities.
10. XXXXXXXXXX ("Association B's") facility located at XXXXXXXXXX ("Centre 5"), is very comparable to the New Facility (as defined in paragraph 17 below) in terms of relative location and membership. Therefore, Association B's experiences at Centre 5 are very relevant to the New Facility being constructed by Association A in downtown City A.
11. Centre 5 is approximately XXXXXXXXXX square feet in size XXXXXXXXXX. Thus, its membership capacity is in excess of the Existing Facilities, including Centre 4.
12. When Centre 5 was initially constructed, ample low cost parking was available in the area adjacent to the facility during the XXXXXXXXXX. As such, the Board of Directors of Association B decided to construct Centre 5 without a parkade.
13. Centre 5's membership peaked at approximately XXXXXXXXXX members during XXXXXXXXXX, when this low-cost parking was still available.
14. As downtown XXXXXXXXXX ("City B") developed and the land surrounding Centre 5 was purchased and developed, parking increasingly became an issue for its members. In fact, virtually all low-cost parking facilities were gradually eliminated. As such, the only parking that is now available to Centre 5 members is prohibitively expensive, if any is available at all.
15. The Centre 5 membership demographic has also shifted dramatically away from families to those who live and work in downtown City B. Accordingly, the programming and services at Centre 5 have been adapted to significantly reduce or eliminate family-oriented programs. In other words, Centre 5 has become much more adult-oriented and much less family-oriented, which is believed to be largely due to the reduction in viable parking alternatives.
16. It is also believed that the reduction in parking availability has contributed to the significant drop in membership numbers at Centre 5 from XXXXXXXXXX to XXXXXXXXXX, notwithstanding an increase in the "downtown" population of City B.
The Proposed New Facility in Downtown City A
17. In furthering its charitable objects, Association A is constructing a new facility in downtown City A (the "New Facility").
18. XXXXXXXXXX.
19. The New Facility will be of a similar size to the Existing Facilities and will therefore have a maximum membership capacity of approximately XXXXXXXXXX, subject to limiting factors such as inadequate parking availability. The New Facility is also being constructed with the ability to add a further two stories at some point in the future, which would obviously increase its membership capacity significantly.
20. It is expected that the New Facility, similar to the Existing Facilities and other Canadian XXXXXXXXXX facilities ("Canadian Centres"), will draw XXXXXXXXXX% of its membership from persons who live or work within a XXXXXXXXXX kilometre radius of the New Facility.
21. Based on very conservative assumptions, it is anticipated that the New Facility will have a membership of approximately XXXXXXXXXX individuals within the first XXXXXXXXXX years of operation. Due to the conservative nature of the assumptions relied on, there is significant potential for membership to meet or exceed this target in a much shorter time frame. This would be consistent with membership numbers in Canadian Centres located in other city centres, some of which are as follows:
a) Centre 5: XXXXXXXXXX members;
b) Downtown XXXXXXXXXX ("Centre 6"): XXXXXXXXXX members; and
c) XXXXXXXXXX ("Centre 7"): XXXXXXXXXX members.
Each of these facilities identifies a lack of parking capacity as a barrier to membership acquisition, growth and retention.
22. It is expected that the New Facility will experience seasonality similar to that of the Existing Facilities. However, the "peak periods" for the New Facility will likely be during the early morning, noon hour and at the end of the typical downtown workday.
23. Studies conducted by Association A have concluded that people who live within a XXXXXXXXXX kilometre radius of the New Facility, will not use a downtown facility unless low or no cost parking is available. This is consistent with Association B's experiences at Centre 5.
24. The New Facility is expected to be a physical education hub for approximately XXXXXXXXXX schools in the City A area. To encourage use of the New Facility by families, Association A determined that it must provide sufficient parking for its members and program participants. In other words, Association A is seeking to avoid the experiences that Association B has had at Centre 5.
25. Association A was unable to secure a long-term parking commitment with any of the large parking operators in downtown City A due to lack of capacity. This lack of parking capacity will likely worsen in the coming years as the downtown core continues to redevelop.
26. This lack of supply led Association A to include an underground parkade with approximately XXXXXXXXXX parking stalls in the plans for the New Facility.
27. A professional parkade management company will manage the parkade at the New Facility.
28. The estimated additional $XXXXXXXXXX cost of the parkade at the New Facility is to be financed exclusively through bank loans, without any government or philanthropic funding, or drawing on currently existing resources of Association A.
29. Market research indicates that XXXXXXXXXX% of the New Facility members will use their own vehicles to access the New Facility, with the remaining members of the New Facility arriving by public transit or by foot due to its central location. It is expected that a significant portion of the New Facility members and program participants who will use the parkade at the New Facility will be mothers and families with children who travel downtown specifically to make use of the New Facility. Thus, having a parkade at the New Facility will significantly enhance Association A's ability to further its charitable objects by permitting it to maintain a significant portfolio of family-oriented programs and services.
30. The XXXXXXXXXX stall capacity was selected in order to mirror the depth of the building and parkade structure immediately south of the New Facility site. This mirroring simplified the construction process. Further, as it is not possible to increase the depth or capacity of a parkade once construction has been completed, the XXXXXXXXXX stall capacity is intended to reflect the projected parking requirements of the New Facility members in the future.
31. Based on the above data and the projected membership at the New Facility, the number of available parking stalls per member that would drive to utilize each of the Existing Facilities, as compared to the New Facility are as follows:
Total Estimated Number of
Available Number of Parking Stalls
Contiguous Membership Driving per Driving
Facility Parking Volume Members Member
Centre 1 XXXXXXXX XXXXXXX XXXXXXXXX XXXXXXXXX
Centre 2 XXXXXXXX XXXXXXX XXXXXXXXX XXXXXXXXX
Centre 3 XXXXXXXX XXXXXXX XXXXXXXXX XXXXXXXXX
Centre 4 XXXXXXXX XXXXXXX XXXXXXXXX XXXXXXXXX
New Facility XXXXXXXX XXXXXXXX XXXXXXXX XXXXXXXXX
This illustrates that, based upon Association A's conservative membership projections, the New Facility will have a comparable number of parking stalls available per member driving to utilize the facilities as at any of the Existing Facilities.
Proposed transactions
32. It is anticipated that the New Facility members will require approximately XXXXXXXXXX transitional parking stalls following completion of construction. Accordingly, there will be some excess parking capacity in the parkade below the New Facility. Association A will rent out the parking stalls on the following basis in order to make optimum use of the New Facility in the short term:
a) Members of the New Facility will be charged a nominal fee for short-term parking, with certain stalls being reserved for such purposes. While the details have not been finalized, it is anticipated that members will be charged $XXXXXXXXXX to $XXXXXXXXXX for the first XXXXXXXXXX hours and will be charged market rates for any parking time in excess; and
b) Non-members will be charged market rates for day and/or monthly parking privileges.
33. The parkade operator expects that once membership reaches XXXXXXXXXX, the approximately XXXXXXXXXX stalls initially reserved for member use will be fully utilized during peak periods of usage of the New Facility. As such, and due to the uncertainty involved with parking usage by members, parking agreements will strictly be offered on a month-to-month basis, to ensure that the parkade operator has the flexibility to increase parking availability for members as the membership of the New Facility grows.
34. The parkade operator will manage the number of stalls that are made available for non-member and transient parking during off-peak hours in order to minimize unused parking capacity.
35. As membership grows and usage patterns become more certain, the parkade operator will manage the transition of monthly leased parking back to transitional parking. It is anticipated that when the membership level of the New Facility reaches XXXXXXXXXX, which is conservatively expected to be in the first XXXXXXXXXX years of operations, there will only be capacity for member parking during peak hours of operation of the New Facility.
36. It is intended that any cash in excess of debt servicing payments and payments to the parkade operator that may be generated by the parkade will be used primarily for the maintenance and upkeep of the New Facility and secondly, to repay the loan principal which is to be amortized over XXXXXXXXXX years.
37. Based on various forecasting models, the parkade is not expected to generate a positive cash flow for some years.
38. The lenders have agreed that only interest on the debt will be payable during the first XXXXXXXXXX years that the debt is outstanding.
39. To the extent the parking revenues are insufficient in any year(s) to cover the debt repayment, parkade management fees, and parkade operation and maintenance expenses, the short-fall will be covered from membership revenues generated by the New Facility and additional debt financing, if necessary.
40. Once the debt associated with the parkade facility has been fully retired, any cash flow generated by the parkade facility in excess of maintenance and upkeep expenses will be used exclusively to further Association A's charitable objects.
Purpose of the proposed transactions
41. The purpose of the proposed transaction is to provide adequate parking capacity at the New Facility to meet the anticipated needs of members and program participants in the short and long term. In order to do this, the parking capacity at the New Facility must necessarily exceed anticipated short-term demand, as underground parkade capacity cannot be increased after construction has been completed.
Ruling 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 provided further that the proposed transactions are carried out as described above, our ruling is as follows:
Provided that the parkade is constructed and operated in a manner consistent with the information provided in this ruling letter, Association A will not be considered to be carrying on a business that is not a related business of Association A for the purposes of paragraph 149.1(2)(a).
The Ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and is binding on the Canada Revenue Agency provided that the parkade is substantially completed by XXXXXXXXXX .
Yours truly,
XXXXXXXXXX
Manager
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES
1 These XXXXXXXXXX members are predominantly adults, XXXXXXXXXX of whom are income-assisted.
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