25 June 2010 External T.I. 2010-0357831E5 - Condominium Corporations and 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: Can a condominium corporation qualify for a 149(1)(l) tax exemption while intentionally earning excess rental income to fund future capital projects?

Position: Likely no.

Reasons: Paragraph 149(1)(l) requires that an organization be organized and operated exclusively with a purpose other than profit in order to be exempt from tax.

XXXXXXXXXX 
									2010-035783
									L. Zannese
									(613) 957-2747
June 25, 2010

Dear XXXXXXXXXX :

Re: Condominium Corporations and Paragraph 149(1)(l) of the Income Tax Act

This is in response to your letter dated January 21, 2010, in which you ask additional questions with respect to our December 15, 2009 letter regarding the application of paragraph 149(1)(l) of the Income Tax Act (the "Act") to condominium corporations. You request clarification as to whether a condominium corporation can use surplus rental income to fund future capital projects and still qualify for the tax exemption provided by paragraph 149(1)(l). You contrast this with using such income to directly reduce condominium fees for members.

We understand the facts outlined in your previous letter to be as follows:

* The condominium corporation owns a "guest suite", which is generally available to condominium owners (members) for the use of their guests. We assume that this arrangement is usually at cost.

* The condominium corporation was asked to rent out the guest suite, on the occasion of the 2010 Winter Olympics, for an amount significantly in excess of cost, to a third party.

* The condominium corporation expected to use the profit from this rental arrangement either to reduce member fees directly, or to pay for current or capital expenses of the condominium corporation following the rental without direct consequences to member fees.

In your previous letter, you commented that using the rental profits to directly reduce member fees would likely jeopardize the status of the condominium corporation as a
tax-exempt entity, since income of the corporation would be directly available for the benefit of the members. You asked whether using the rental profits to defray the current and capital expenses of the condominium corporation, without a direct reference to members' fees, would allow the corporation to retain its tax-exempt status. We responded that it was likely that the corporation would cease to be a 149(1)(l) entity by virtue of entering into the rental arrangement, regardless of how the rental profits were used. However, this is a determination that could only be made by the appropriate Tax Services Office, since it is a question of fact whether an organization is operating with a profit purpose and whether income has been made available to members.

A condominium corporation is not exempt from tax simply by virtue of being a condominium corporation. It will only qualify for the exemption from tax provided by paragraph 149(1)(l) of the Act if it is operating exclusively for any purpose other than profit (among other criteria). This means that, generally, the condominium corporation cannot undertake activities that are intended to produce a profit, especially from transactions with third parties, and continue to meet the requirements of paragraph 149(1)(l). A 149(1)(l) entity should budget and charge fees for services so as to operate at cost, however, the Canada Revenue Agency ("CRA") accepts that a condominium corporation may charge fees to its members that include a portion to be allocated toward an identified capital project (such as a new roof).

In limited circumstances, it is possible for a 149(1)(l) entity to earn a profit and still qualify for the tax exemption found in paragraph 149(1)(l) of the Act. Apart from earning certain investment income as described below, a 149(1)(l) entity may earn a profit that is incidental to the entity's exclusively not-for-profit purposes. However, earning a profit that is incidental to an entity's not-for-profit purposes is not the same thing as earning a profit in support of the entity's not-for-profit purposes. The "destination of funds" argument has been rejected by Canadian courts with respect to the funding activities of both charities (as defined under common law and in section 149.1 of the Act), and 149(1)(l) entities.

Paragraph 149(1)(l) of the Act precludes a 149(1)(l) entity from making income "available for the personal benefit of ... any member". The CRA is particularly concerned about income being available for the benefit of members in situations where income is derived from outside (non-member) sources, other than basic investment income earned on (1) contributed amounts (or fees) from members that are earmarked for a particular capital project, or (2) reasonable operating reserves derived from member fees or incidental, generally unanticipated, income. Reasonable operating reserves generally refer to reserves maintained to meet existing, but conditional liabilities.

In the situation described in your previous letter, it appears that members of the condominium corporation will benefit, either directly or indirectly, from income earned by the corporation from an outside source. We note that condominium owners are
already in an advantageous situation, compared to home-owners, with respect to the taxation of investment income on savings toward capital projects.

In summary, while the CRA recognizes that a 149(1)(l) entity may have several purposes, none of these purposes can be to earn a profit, even if that profit is intended to be used to meet the not-for-profit purposes of the entity. The condominium corporation you described to us in your original letter intended to charge rent to a third party at a rate significantly in excess of cost. The surplus generated was not incidental to the corporation's exclusively not-for profit purposes. Consequently, the condominium corporation did not appear to meet the requirements of paragraph 149(1)(l) of the Act during the period of the rental arrangement. However, whether or not a profit is incidental to the not-for-profit purposes of a particular entity is a question of fact that can only be determined upon a review of all the facts by the entity's Tax Services Office.

In your letter, you ask whether our answer would be different if the rental profit generated was set aside in a reserve fund intended to support future capital projects of the corporation. As explained above, and in our previous letter, intentionally undertaking a profitable activity will generally cause an entity to cease to meet the requirements of paragraph 149(1)(l) of the Act, regardless of how the profits are used after the fact. Profit-earning activities that may jeopardize the tax-exempt status of a 149(1)(l) entity should be carried out through a separate, taxable entity. Alternately, separate tax returns may be required for time periods during which a condominium corporation is not a tax-exempt entity, as paragraph 149(1)(l) applies for "a period" during which certain conditions are met. In this regard, you may wish to consider the application of subsection 149(10) of the Act.

We trust that these additional comments will be of assistance.

Yours truly,

Eliza Erskine
Manager
Non-Profit Organizations and
Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate