2007 Ruling 2007-0225861R3 - Canadian Branch of Foreign NPO (XXXXXXXXXX)

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: (A) Will establishing the new programs, in and of itself, preclude the Entity from being an organization described in paragraph 149(1)(l) of the Act? (B) Is Part XIII tax applicable to rental income received by the non-resident entity from the leasing of real property in Canada, where the rental income is included in the computation of taxable income of the entity from operations in Canada pursuant to Part I of the Act?

Position: (A) No. (B) No.

Reasons: (A) Based on the legislation, organizational documents and other Rulings given in similar situations. However, whether or not the corporation is operated for purpose other than profit as required under 149(1)(l) will be a question of fact each year. (B) To the extent the rental income is included in income of the taxpayer for purposes of Part I of the Act; subsection 805(1) of the Regulations provides that Part XIII will not apply. Is should be noted that subsection 805(2) of the Regulations grants the Minister discretion in this regard.

XXXXXXXXXX 							2007-022586

XXXXXXXXXX , 2007

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Entity")

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge your revised ruling request of XXXXXXXXXX, and our telephone conversations of XXXXXXXXXX.

We understand that

(i) the present ruling request is intended to be supplemental to the advance income tax ruling given to the Entity on XXXXXXXXXX, 2006 (our file number 2005-013900) (the "Previous Ruling"), and that

to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:

(ii) in an earlier return of the taxpayer or a related person,

(iii) 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,

(iv) under objection by the taxpayer or a related person, or

(v) before the courts.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

DEFINITIONS

In this letter, the following terms have the following meanings:

(a) "Academic Senate" is the principal academic body of the Entity responsible for advising the Council on all matters relating to teaching, scholarship and research conducted in connection with the Entity;

(b) "AQ" means an Additional Qualification program;

(c) "XXXXXXXXXX degree" means the XXXXXXXXXX degree granted by the Entity to qualifying students, in accordance with the Original Ministerial Consent;

(d) "XXXXXXXXXX Application" means the application to be submitted to the Ministry for permission in the form of the XXXXXXXXXX Ministerial Consent;

(e) "XXXXXXXXXX degree" means the XXXXXXXXXX degree to be granted by the Entity to qualifying students, in accordance with the XXXXXXXXXX Ministerial Consent XXXXXXXXXX, when granted;

(f) "XXXXXXXXXX Ministerial Consent" means the letter of consent to be issued by the Ministry to the Entity XXXXXXXXXX, permitting the Entity to issue XXXXXXXXXX degrees;

(g) "Chancellor" of the Entity is a person elected by the Council, for a term of XXXXXXXXXX years, which can be renewed;

(h) "charity" has the meaning assigned in subsection 149.1(1) of the Act;

(i) "charitable organization" has the meaning assigned by subsection 149.1(1) of the Act;

(j) "College Consent" means the letter of consent dated XXXXXXXXXX , issued to the Entity by XXXXXXXXXX;

(k) "Convocation" means a committee consisting of current and past members of the Council of the Entity, graduate students of the Entity, professors and full-time academic staff of the Entity and other persons, by appointment;

(l) "Council" means the governing authority of the Entity. All appointed members of the Council must have expertise and experience relevant to the functions exercisable by the Council and they must have an appreciation of the object, values, functions and activities of the Entity. The majority of the members of the Council must be external persons (meaning persons who are not currently members of the Entity's academic or general staff or undergraduate or postgraduate students of the Entity) and must consist of at least XXXXXXXXXX members in total, including:

XXXXXXXXXX

(m) "Entity By-Law" means the XXXXXXXXXX;

(n) "Head Lease" means the lease dated XXXXXXXXXX between the Landlord and the Tenant for the Leased Premises;

(o) "Landlord" means XXXXXXXXXX, which purchased the Leased Premises from XXXXXXXXXX after the Sublease was entered into with the Tenant;

(p) "Leased Premises" means XXXXXXXXXX;

(q) "XXXXXXXXXX Application" means the application to be submitted to the Ministry for permission in the form of the XXXXXXXXXX Ministerial Consent;

(r) "XXXXXXXXXX degree" means the XXXXXXXXXX degree to be granted by the Entity to qualifying students, in accordance with the XXXXXXXXXX Ministerial Consent XXXXXXXXXX, when granted;

(s) "XXXXXXXXXX Ministerial Consent" means the letter of consent to be issued by the Ministry to the Entity XXXXXXXXXX, permitting the Entity to issue XXXXXXXXXX degrees;

(t) "Ministry" means the XXXXXXXXXX;

(u) "non-profit organization" means an entity described in paragraph 149(1)(l) of the Act;

(v) XXXXXXXXXX;

(w) XXXXXXXXXX;

(x) "Original Ministerial Consent" means the letter of consent dated XXXXXXXXXX, issued by the Ministry to the Entity XXXXXXXXXX;

(y) "registered charity" has the meaning assigned by subsection 248(1) of the Act;

(z) "Regulations" means the regulations under the Act as in force at the date hereof;

(aa) "Special Act" means the XXXXXXXXXX;

(bb) "Sublease" means the Sublease from the Tenant to the Entity, for a part of the Leased Premises;

(cc) "Sublease Premises" means the part of the Leased Premises governed by the Sublease;

(dd) "Tenant" means XXXXXXXXXX;

(ee) "Treaty" means the XXXXXXXXXX.

FACTS

1. The Entity is XXXXXXXXXX as a body corporate without shareholders under the Special Act, and is resident in XXXXXXXXXX. The Entity is not resident in Canada. For purposes of XXXXXXXXXX law, the Entity is considered a not for profit organization and exempt from income tax in XXXXXXXXXX.

2. The Entity's mailing address is XXXXXXXXXX. The address of the Entity in Canada is XXXXXXXXXX. The Entity has been assigned the Canadian business number XXXXXXXXXX.

3. The Entity consists of its Council, Convocation, academic teaching staff, graduates and students. The Council acts for, and on behalf of, the Entity in the exercise of the Entity's functions. The Council ultimately controls and manages the affairs and concerns of the Entity and may act in all matters concerning the Entity in such manner as appears to the Council to be best calculated to promote the object and interests of the Entity.

4. The objects of the Entity, as stated in XXXXXXXXXX the Special Act, are the promotion, within the limits of its resources, of scholarship, research, free enquiry, the interaction of research and teaching, and academic excellence. In furthering these objectives, the Entity offers a broad range of educational services and post-secondary academic courses in XXXXXXXXXX through an extensive international distance-learning program.

5. Specifically, XXXXXXXXXX the Special Act lists the following principal functions of the Entity for the promotion of its objects:

XXXXXXXXXX

6. The Entity may, pursuant to XXXXXXXXXX the Special Act, exercise commercial functions comprising commercial exploitation or development, for the Entity's benefit, of any facility, resource or property of the Entity. As such, the Entity does conduct limited commercial activities, XXXXXXXXXX The Entity does not conduct any commercial activities that would subject it to tax in XXXXXXXXXX.

7. The Entity operates as an integrated organization on a not-for-profit basis and without pecuniary gain to any shareholder, proprietor or member, and any profits or other accretions to the Entity are used in promoting its objects. The Entity does not accumulate surplus funds in excess of its reasonable needs to achieve its objectives or otherwise undertake activities inconsistent with its not-for-profit purpose.

8. In the event the Entity is to be wound-up, amalgamated or dissolved, all of its property would be transferred to an organization, which would qualify under paragraph 149(1)(l) of the Act as an non-profit organization at that time, having similar goals or objects as the Entity.

9. The Entity's business will not be carried on principally in Canada.

10. The Entity will not adopt any registered pension plan in Canada for purposes of the Act.

11. The Entity does not currently own any real property in Canada. It may acquire real property in future in which to provide classes or in order to provide accommodation to staff.

12. The Tenant and the Landlord are both residents of Canada for purposes of the Act and the Entity deals at arm's length with the Tenant and the Landlord. Negotiations are currently underway between the Tenant and the Landlord with respect to the terms of the Head Lease. This could ultimately affect the terms of the Sublease. The Entity may decide in future to expand its premises or relocate to other leased space or premises that it purchases.

13. The Sublease was amended in XXXXXXXXXX to provide additional space to the Entity. Presently, the Sublease provides the Entity with approximately XXXXXXXXXX rentable square feet of office space at the Sublease Premises. The Sublease Premises do not include any space that is not reasonably necessary for the purpose of offering the classes and ancillary educational and administrative services (e.g., a library). The amount of space leased or the location of the campus may change as circumstances require.

14. The Entity obtained the Original Ministerial Consent and the College Consent and now offers post-secondary courses in XXXXXXXXXX leading to a XXXXXXXXXX degree to enable its graduates to qualify as XXXXXXXXXX, consistent with the regulatory scheme in XXXXXXXXXX. Graduates of the Entity who obtain a XXXXXXXXXX degree stand on the same footing in XXXXXXXXXX as graduates of other educational institutions in XXXXXXXXXX that grant equivalent degrees.

15. The Entity files a T2 corporate tax return in Canada and remits required withholding of source deductions with respect to all employees working in Canada. The Entity files a T1044 information return as required under subsection 149(12) of the Act. The total assets of the Entity, including those in XXXXXXXXXX, exceed $XXXXXXXXXX, the threshold referred to in paragraph 149(12)(b) for filing a T1044. ($XXXXXXXXXX was equivalent to approximately XXXXXXXXXX in XXXXXXXXXX, and the total assets of the Entity were approximately XXXXXXXXXX in XXXXXXXXXX.)

16. Prior to receiving the Previous Ruling, the CRA confirmed that the Entity is not a charity within the meaning assigned by subsection 149.1(1) of the Act, as contemplated in paragraph 149(1)(l) of the Act.

PROPOSED TRANSACTIONS

17. The Entity will apply in the XXXXXXXXXX Application and the XXXXXXXXXX Application for consents to grant XXXXXXXXXX degrees and XXXXXXXXXX degrees, respectively, and offer post-secondary courses in XXXXXXXXXX leading to those degrees.

18. Graduates of the Entity who obtain XXXXXXXXXX degrees will stand on the same footing in XXXXXXXXXX as graduates of other educational institutions in XXXXXXXXXX that grant equivalent degrees.

19. The XXXXXXXXXX degree is designed for XXXXXXXXXX. The Entity expects to deliver this program by mixed means, utilizing the Entity's expertise in providing distance education together with face-to-face instruction at the premises of the Entity (and perhaps elsewhere) in XXXXXXXXXX. Students enrolled in the XXXXXXXXXX program will study part-time and will normally complete the program in a period of XXXXXXXXXX years, or XXXXXXXXXX semesters. Graduates of the Entity who obtain XXXXXXXXXX degrees will stand on the same footing in XXXXXXXXXX as graduates of other educational institutions in XXXXXXXXXX that grant equivalent degrees.

20. Upon receipt of the XXXXXXXXXX Ministerial Consent, the Entity will begin providing classes for the XXXXXXXXXX degree program at the Leased Premises or other premises (if the Entity relocates as mentioned in paragraph 12, above). The Entity expects the initial enrolment in the XXXXXXXXXX program to be about XXXXXXXXXX students.

21. Upon receipt of the XXXXXXXXXX Ministerial Consent, the Entity will begin providing classes for the XXXXXXXXXX degree program at the Leased Premises or other premises (if the Entity relocates as mentioned in paragraph 12, above). The Entity expects the initial enrolment in the XXXXXXXXXX program to be about XXXXXXXXXX students.

22. Tuition rates for courses taken toward the XXXXXXXXXX and XXXXXXXXXX degree programs will be consistent with the XXXXXXXXXX, the respective Ministerial Consents (and any renewals, variations or amendments thereof), and market conditions. The Entity will comply with all applicable rules and regulations in XXXXXXXXXX for the conduct of the courses it offers to its students.

23. The Entity intends to offer AQs starting in XXXXXXXXXX. AQs will be offered through intensive face-to-face sessions at the XXXXXXXXXX campus (currently the Leased Premises) during the "off-season" and early in the summer break. It is anticipated that the cost of an AQ will be about $XXXXXXXXXX per subject, which the Entity understands is the standard rate for these programs in XXXXXXXXXX at the present time (the amount may change according to market conditions).

AQs do not lead to a degree and do not require Ministerial approval under the XXXXXXXXXX. However, AQs do require accreditation by the XXXXXXXXXX, and the Entity is required to establish that it is providing programs of study that enhance the employment prospects of graduates. An AQ allows a certified XXXXXXXXXX to upgrade his or her qualifications for appointment to XXXXXXXXXX While they are not called AQs in XXXXXXXXXX, similar opportunities are offered by the Entity to its students in XXXXXXXXXX, where students can undertake single specialist subjects individually or as a credit towards a postgraduate degree program.

The Entity intends that students who take AQs will be able to obtain credit toward the XXXXXXXXXX degree or a range of existing graduate programs for XXXXXXXXXX currently offered by distance education from XXXXXXXXXX.

24. The Entity will be carrying on business in Canada for purposes of the Act as a result of the activities that it plans to carry on at the Sublease Premises or other premises (if the Entity relocates as mentioned in paragraph 12, above).

25. The expenses of the Entity incurred in connection with its Canadian activities will include rent under the Sublease (or another lease, if the campus is relocated as mentioned in paragraph 12, above), professional fees for legal and accounting services, the cost of equipment and supplies and salaries or fees paid to its staff, including teaching staff. Some teaching and administrative staff who are resident in XXXXXXXXXX will be seconded from XXXXXXXXXX to the XXXXXXXXXX location and will remain resident in XXXXXXXXXX for XXXXXXXXXX tax purposes. Other staff will be hired locally and will be residents of Canada. Some staff for the XXXXXXXXXX program will be seconded from local school boards. Some staff may be seconded from other sources, in connection with the XXXXXXXXXX and XXXXXXXXXX programs, or the AQ courses. Some staff may be independent contractors. The expenses, including costs of staff, will be deducted in determining the net income from the Canadian operations.

26. The Entity may earn income by using its premises (whether leased or owned) for purposes other than teaching, if all of the premises are not required for use by the Entity in providing classes at a particular time. This could involve making all or part of the Sublease Premises or part of any other premises, whether leased or owned, available to third parties for a rental fee. The Entity does not intend to lease or purchase any space in excess of its own long-term needs. The Entity does not intend or expect to earn rental income on a long-term basis. Such revenue will be incidental to normal teaching activities, and is not expected to be significant to overall revenue. Such revenue will be used toward the objectives of the Entity.

27. The Entity anticipates that the revenues from tuition, the temporary rental of gowns for graduation ceremonies (if any), and rental of space (if any) will exceed the expenses associated with earning those revenues and that therefore it will have "income" for purposes of the Act, attributable to its Canadian operations.

28. Should the Entity's revenue from the Canadian activities (including the new XXXXXXXXXX and XXXXXXXXXX programs) exceed the expenses in any particular year, the excess will be used by the Entity to carry out its not-for-profit objectives.

29. If the Entity has available cash from the Canadian activities in any particular year, the Entity may "transfer" such available cash from Canada to its head office in XXXXXXXXXX to be used by the Entity to further its overall not-for-profit activities. The basic mechanics of the Entity's Canadian/XXXXXXXXXX financial operations are as follows:

XXXXXXXXXX

Since the branch will not be a separate entity, the Taxpayer will not report those payments for tax purposes although, if necessary, it will take them into account in calculating the income derived from its branch operation for purposes of the Act.

30. The Entity will continue to file a T2 corporate tax return and a T1044 information return as required. If the Entity employs employees in Canada, it will open a payroll account and will deduct and remit the applicable federal and provincial income tax withholdings, Canada Pension Plan contributions, health tax premiums, and Employment Insurance premiums for its employees, except to the extent it may be relieved from doing so with respect to any of its employees who are resident in XXXXXXXXXX for whom there are special rules pursuant to the applicable tax and social security treaties between Canada and XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTIONS

31. The purpose of the proposed transactions is to permit the Entity to provide educational courses and grant university degrees in XXXXXXXXXX, through an extension of its XXXXXXXXXX campus, as allowed by the appropriate Ministerial Consents and XXXXXXXXXX approvals, and consistent with the objects in the Special Act.

RULINGS GIVEN

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, and provided further that the proposed transactions are carried out as described above, we rule as follows:

A. Establishing the A.Q. program, and the XXXXXXXXXX and XXXXXXXXXX degree programs, to provide post-secondary education and training to students resident in Canada at the Sublease Premises (or at substituted or expanded premises leased or owned by the Entity), will not, in and of itself, preclude the Entity from being an organization described in paragraph 149(1)(l) of the Act.

B. Any amount paid or credited to the Entity as rent in a taxation year for the use of the Entity's space as described in 26 above, will, pursuant to subsection 805(1) of the Regulations, not be taxable under Part XIII of the Act as all of the rental income will be included in the Entity's income pursuant to Part I of the Act.

COMMENTS

With respect to Ruling A above, we note that the question of whether the Entity does, in fact, operate exclusively for any purpose other than profit with no part of its income payable to or otherwise available for the personal benefit of any member, is a question of fact which must be determined on an ongoing basis.

Also note that Ruling B above does not comment on whether subsection 805(2) of the Regulations will be satisfied in the circumstances. This determination is the responsibility of the local Tax Services Office. Furthermore, as noted in paragraph 14 of Information Circular 75-6R, a request for a waiver in respect of the amount that is required to be withheld under Regulation 105, must also be submitted to the Tax Services Office in the area where the services are provided.

The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch