2007 Ruling 2007-0248041R3 - Application of Paragraph 149(1)(l)

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: Whether the proposed purchase of a building subject to a lease will preclude the Association from being an organization described in paragraph 149(1)(l) of the Income Tax Act.

Position: No.

Reasons: The facts in this case show that the Association is undertaking this transaction in support of its non-profit objectives. However, whether the Association is operated for a purpose other than profit as required by paragraph 149(1)(l) of the Act is a question of fact each year.

XXXXXXXXXX 2007-024804

XXXXXXXXXX , 2007

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling XXXXXXXXXX

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 receipt of your emails of XXXXXXXXXX containing further information, documentation and comments in support of your submission.

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

(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

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

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:

1. The XXXXXXXXXX ("the Association") is a corporation without share capital that was incorporated in XXXXXXXXXX (the "Current Act").

2. The Association's mailing address is XXXXXXXXXX and it's business number is XXXXXXXXXX. The Association's Tax Services Office is the XXXXXXXXXX Tax Services Office and it's Tax Center is the XXXXXXXXXX Tax Centre.

3. XXXXXXXXXX.

4. XXXXXXXXXX.

5. The Association is operated on a non-profit basis without any monetary gain accruing to its members. Any profits or other accretions are used to fund the expenses incurred by the Association in undertaking its purposes as set out in its incorporating legislation. In accordance with XXXXXXXXXX the Current Act, if any person ceases to be a member of the Association, neither that person nor his representatives have an interest in or a claim against the funds or property of the Association.

6. The Association files T2 corporate tax returns, as well as T1044 information returns as required by subsection 149(12) of the Act. The total assets of the Association exceed $200,000, the threshold referred to in paragraph 149(12)(b) for filing a T1044.

7. Due to rising rent and property values in the XXXXXXXXXX area, the Association decided to purchase a property to house its XXXXXXXXXX office as opposed to continuing to rent its current premises. Currently, the Association occupies XXXXXXXXXX locations in XXXXXXXXXX. The Association rents office space consisting of XXXXXXXXXX of a building in XXXXXXXXXX at a cost of $XXXXXXXXXX per square foot annually. It also rents approximately XXXXXXXXXX square feet of warehouse space XXXXXXXXXX at a cost of $XXXXXXXXXX per square foot annually.

8. The lease on the Association's current office space expires on XXXXXXXXXX . The current office space is too small for the current needs of the Association. In addition, the Association wishes to move its XXXXXXXXXX office to XXXXXXXXXX.

9. The Association made an offer to purchase a building located at XXXXXXXXXX ("the property"). The building has XXXXXXXXXX square feet of space. The estimated taxes and operating costs for the building for XXXXXXXXXX is $XXXXXXXXXX per square foot.

10. A term of the offer to purchase was that the Association accept a tenant, XXXXXXXXXX, that would occupy approximately XXXXXXXXXX % of the building. XXXXXXXXXX ("the current owner") had previously accepted an offer to lease from XXXXXXXXXX. A lease was signed between the current owner and XXXXXXXXXX, the sole shareholder of XXXXXXXXXX. ("the tenant") on XXXXXXXXXX ("the lease"). The tenant's lease begins on XXXXXXXXXX . The tenant will occupy XXXXXXXXXX square feet of the building. The lease is for a term of XXXXXXXXXX years and the tenant has an option to renew the lease for a XXXXXXXXXX-year term. The Association will use the remaining XXXXXXXXXX % of the property to house its offices and for storage space.

11. The rent per annum under the lease for the leased portion is $XXXXXXXXXX per square foot for the first XXXXXXXXXX years and $XXXXXXXXXX per square foot for the last XXXXXXXXXX years of the lease term. Based on a square footage of XXXXXXXXXX sq. ft., the annual rent for the leased portion that the Association will receive is $XXXXXXXXXX for each of the first XXXXXXXXXX years and $XXXXXXXXXX for each of the last XXXXXXXXXX years of the lease term.

12. The Association deals at arm's length with the current owner of the property and with the tenant. The Association is not purchasing the property for the purposes of carrying on a business of leasing real property.

13. The Association is unable to use the leased portion of the building while the lease, described in 10 above, is in force and effect. For the reasons described in 8 above, there is a reasonable likelihood that that once the lease is terminated, the Association will have need of the leased space for its own use, and will occupy the entire building.

Proposed Transaction

14. On XXXXXXXXXX, the Association will complete the purchase of the property and assume the current owner's obligations as landlord under the lease.

15. The Association will incorporate a wholly owned XXXXXXXXXX incorporated subsidiary to be the registered owner of the property as the bare legal trustee for and on behalf of the Association.

16. The Association anticipates that its revenue related to the rented portion of the building will exceed its expenses. Should this occur, any profits that arise from the leased portion of the building will be used by the Association to further its not-for-profit objectives.

Purpose of Proposed Transactions

17. The purpose of the proposed transaction is for the Association to purchase a property that will house its XXXXXXXXXX office and provide needed storage space as opposed to continuing to rent their current premises.

18. The Association will be holding title to the property through an incorporated subsidiary in order to facilitate conveyancing under XXXXXXXXXX property transfer legislation.

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, our ruling is as follows:

The proposed purchase of the property and the assumption of the current owner's obligations under the lease will not, in and of itself, preclude the Association from being an organization described in paragraph 149(1)(l) of the Act.

Comments:

Nothing in this Advance Income Tax Ruling should be construed as implying that we are confirming that the Association is, or has been, exempt from tax under Part I of the Act pursuant to paragraph 149(1)(l) at any particular time. In this regard, we note that the question of whether the Association 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.

For greater clarity, the above Advance Income Tax Ruling shall not be binding on the Canada Revenue Agency in respect of any particular time that:

(i) there is a leasing arrangement in place with terms, other than the terms described in 10 above;

(ii) the term of the lease has been completed;

(iii) the lease is no longer in force and effect, for whatever cause; or

(iv) there has been material change to the terms of the lease from that described in 10 above. A material change to the terms of the lease specifically includes a change to the length of the term of the lease, the length of time to which the tenant may exercise the option to extend the lease, or the length of time contained in the option.

The above Advance Income Tax Ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and is binding on the Canada Revenue Agency provided that the proposed transaction is completed by XXXXXXXXXX.

This letter is based solely on the facts and proposed transactions described above. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

Yours truly,

XXXXXXXXXX
Manager
Non-Profit Organizations and
Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch