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 subparagraph 149(5)(e)(ii) will apply to the entire gain from the disposition of certain property of the Club.
Position: Subparagraph 149(5)(e)(ii) will apply.
Reasons: The property was used exclusively and directly in providing recreation facilities to its members.
XXXXXXXXXX
2011-040074
XXXXXXXXXX
XXXXXXXXXX, 2011
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX, in which you request an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge your submissions of XXXXXXXXXX.
We understand that, to the best of your knowledge and that of the taxpayer, 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 yet expired; or
(v) the subject of a ruling previously issued to the taxpayer by this Directorate.
In this letter, unless otherwise expressly stated, all statutory references are to the provisions of 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 relevant definitions, the facts, the proposed transactions and their purpose is as follows:
DEFINITIONS
"Board" means the Board of Directors of the Club.
"Club" means the XXXXXXXXXX, incorporated under the laws of XXXXXXXXXX on XXXXXXXXXX .
"Clubhouse" means the primary building of the Club, XXXXXXXXXX
"XXXXXXXXXX Facility" means XXXXXXXXXX portion of the Clubhouse.
"Property" means the Clubhouse and the land under and adjacent to the Clubhouse to be sold in the proposed transaction (this does not include XXXXXXXXXX).
"Sales Agreement" means the sales agreement between the Club and the purchaser whereby the Club will sell the Property to the purchaser.
FACTS
1. XXXXXXXXXX.
2. The Club files an annual T2 return as a tax-exempt corporation under paragraph 149(1)(l) for each taxation year.
3. The objects of the Club as provided in its Letters Patent are as follows:
XXXXXXXXXX
4. The Club's facilities are used and maintained for the benefit of its members as follows:
XXXXXXXXXX
5. The current Clubhouse was built in XXXXXXXXXX. In XXXXXXXXXX, the Club expanded the Clubhouse XXXXXXXXXX Facility, which it operated XXXXXXXXXX.
6. During the summer months the XXXXXXXXXX Facility is used as XXXXXXXXXX. The XXXXXXXXXX Facility also houses XXXXXXXXXX that is needed to support the XXXXXXXXXX requirements for the Club's facilities. XXXXXXXXXX also runs through the XXXXXXXXXX Facility. After the sale of the Property, XXXXXXXXXX will need to be relocated to another area of the Club's facilities.
7. Since XXXXXXXXXX, the Club has been unable to continue to use the XXXXXXXXXX Facility for XXXXXXXXXX because of the lack of financial resources required to maintain the XXXXXXXXXX Facility as such. As a result, in XXXXXXXXXX, the Club began allowing members, or friends or relatives of members, to pay a fee XXXXXXXXXX Facility between the months of XXXXXXXXXX. During these months, approximately XXXXXXXXXX % of the XXXXXXXXXX Facility was used XXXXXXXXXX in the Club's XXXXXXXXXX
8. The income from XXXXXXXXXX represents approximately XXXXXXXXXX % of the Club's gross revenue. This income was intended to cover the costs of utilities, taxes and the upkeep required to maintain the XXXXXXXXXX Facility during the period where the Board had to decide on the future of the XXXXXXXXXX and the Club as a whole.
9. The Club did not actively pursue this rental income and the decision as to whether or not to permit winter XXXXXXXXXX in the XXXXXXXXXX Facility was made on a year-to-year basis. However, as a result of a fire inspection that was conducted in XXXXXXXXXX, it was determined that unless significant costs were incurred, the Club could no longer continue to provide rental XXXXXXXXXX in the future.
10. The Club has considered other alternative uses for the XXXXXXXXXX Facility such as:
XXXXXXXXXX
Unfortunately, in each of these cases, the cost to reconfigure the XXXXXXXXXX Facility for any of these uses was prohibitive; the Club did not have the funds to proceed.
PROPOSED TRANSACTIONS
11. The Club will sell the Property to an arm's-length party in exchange for $XXXXXXXXXX pursuant to the Sales Agreement. The sale price is to be paid as follows: $XXXXXXXXXX will be paid directly to the Club and the remaining $XXXXXXXXXX will be held in trust for the Club until the completion of the XXXXXXXXXX referred to immediately below.
12. After the sale, the arm's length party will XXXXXXXXXX on the Property. As a condition of the Sales Agreement, XXXXXXXXXX will include a XXXXXXXXXX clubhouse facility.
13. Upon completion of the complex, the Club will purchase the XXXXXXXXXX clubhouse facility (an equivalent of XXXXXXXXXX ) for $XXXXXXXXXX plus the cost of any leasehold improvements that may be required to convert XXXXXXXXXX into XXXXXXXXXX clubhouse facility (approximately $XXXXXXXXXX ).
PURPOSE OF THE PROPOSED TRANSACTIONS
14. The purpose of the proposed transactions is to upgrade the Club's facilities in an affordable manner. Also, it is anticipated that the Club will become more financially stable as some of the operational costs currently borne by the Club will be shared with XXXXXXXXXX within the XXXXXXXXXX .
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, we rule as follows:
A. As long as the Club meets the conditions described in paragraph 149(1)(l), then, pursuant to subparagraph 149(5)(e)(ii), the taxable income of the deemed inter vivos trust created by operation of subsection 149(5) will not include the capital gain resulting from the disposition of the Property.
Nothing in this letter should be construed as confirming or implying that the CRA has reviewed or is making a determination in respect of:
a) Whether the Club is exempt from tax for any particular period under Part I of the Act pursuant to paragraph 149(1)(l). In this regard, we note that the question of whether the Club 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 the determination of which can only be made retrospectively for each taxation year. Such determinations fall within the responsibility of the CRA's Compliance Programs Branch.
b) Any tax consequences in relation to any facts or proposed transactions referred to herein other than those specifically described in the rulings given.
The above advance income tax ruling, which is based on the Act and Regulations in their 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 described in 11, above, is completed before 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 Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2011
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2011
Email this Content