23 May 2012 External T.I. 2011-0418691E5 - 149(1)(l) - Lease or Sale of Lockers to Members

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: 1. Whether a condominium corporation would lose its 149(1)(l) status if it sells locker space to its members. 2. Whether a condominium corporation would lose its 149(1)(l) status if it leases locker space to its members.

Position: 1. Likely not. 2. Likely not if incidental.

Reasons: Fact specific. Depends on provincial law.

XXXXXXXXXX
2011-041869
Lori Merrigan
(613) 957-8979

May 23, 2012

Dear XXXXXXXXXX:

Re: Paragraph 149(1)(l) – Lease or Sale of Storage Lockers to Members

We are writing in response to your letter of August 15, 2011, regarding the tax implications to an entity described in paragraph 149(1)(l) of the Income Tax Act (the “Act”) with respect to the sale or leasing of storage locker space to members at fair market value (“FMV”). In this letter, unless otherwise expressly stated, all statutory references are to the provisions of the Act.

FACTS

The facts that we have received from you, and have assumed to be correct for purposes of our response are as follows:

• The condominium complex (the “NPO”) currently has XXXXXXXXXX rooms available for XXXXXXXXXX storage by its members; however, these rooms are not being fully utilized.
• The NPO is contemplating building approximately XXXXXXXXXX storage lockers in XXXXXXXXXX rooms at a cost of approximately $XXXXXXXXXX.

The funds required to pay for the construction of the storage lockers will come from the NPO’s contingency reserve fund.

• The NPO is then considering either selling or renting these storage lockers to members at FMV:
  • i. The lockers will be sold to members at FMV. The sale will occur by converting the common property to limited common property and attaching it to a specific condominium unit. The revenue from the sales will first be used to repay the contingency reserve fund and the excess will be used to pay for general expenses or renovations of the building.
  • ii. The lockers will be rented on a monthly basis at FMV. This option is anticipated to result in rental revenue of about $XXXXXXXXXX to $XXXXXXXXXX per year (or XXXXXXXXXX to XXXXXXXXXX percent of the NPO’s gross revenue for the year). The revenue from the sales will be first used to repay the contingency reserve fund and the excess will be used to pay for general expenses of the building or renovations to the building.

COMMENTS

You have asked us the following:

1. Whether the capital gain arising from the sale of the storage lockers would affect the NPO’s status as a 149(1)(l) entity.

2. Whether the income from the leasing of the storage lockers would affect the NPO’s status as a 149(1)(l) entity.

The situation outlined in your letter relates to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, “Advance Income Tax Rulings”. This Information Circular and other Canada Revenue Agency (“CRA”) publications can be accessed on the internet at http://www.cra-arc.gc.ca. Although we cannot comment on your specific situation, we are able to provide the following general comments, which may be of assistance.

The CRA’s general views regarding 149(1)(l) entities are contained in Interpretation Bulletins IT-496R, “Non-profit Organizations” and IT-83R3, “Non-profit organizations – Taxation of Income From Property”, which may be viewed at http://www.cra-arc.gc.ca. To qualify as a tax exempt entity described in paragraph 149(1)(l) of the Act, an organization must be both organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit. Our comments below are premised upon the existence of a properly constituted and operated 149(1)(l) entity. However, we cannot confirm whether or not the NPO is such an entity.

Question 1 - Disposition

Interpretation Bulletin IT-304R2, “Condominiums” (“IT-304”) states that:

“A condominium corporation created under Canadian provincial or territorial legislation is a corporation without share capital whose members are the owners. The objects of such a corporation include, among other things, the management of the real property and any other assets of the corporation. The corporation also has a duty to control, manage and administer the common elements and assets of the corporation, and to ensure that the unit owners comply with the corporation’s registered condominium documents, its by-laws and the provisions of the relevant condominium legislation.

“Generally, the expenditures of such a corporation are met by its members on a proportionate basis. Any excess of the members’ condominium fees and contributions over the corporation’s expenditures for the year is not considered to be income of the corporation. Income from other sources or activities, such as interest earned on the corporation’s operating or reserve funds or rental and other incidental income is income of the corporation. If a condominium corporation carries on a business, any profits from that business must be included in its income and it will not be considered a non-profit corporation.”

With respect to the common area of a condominium corporation (the storage locker area in your situation), it is not clear to us whether a capital gain arising from the type of disposition described would belong to the corporation or to the members (i.e. the unit holders). It depends on the applicable provincial legislation whether the particular common area of the condominium corporation is owned by the owners of the units or is owned by the condominium corporation. In the event that the common area is owned by the unit owners, any transactions involving a change in ownership in the common area could result in a capital gain or capital loss to the unit owners, depending on the particular facts. Such a transaction would not affect the tax status of the condominium corporation.

If, however, the applicable provincial legislation provides that the condominium corporation is the owner of the common area, then provided that subsection 149(5) of the Act does not apply and provided that the condominium corporation is a 149(1)(l) entity, it will not be subject to tax on the taxable capital gain from the sale of real property that it owns and maintains in order to carry out its stated purposes. Generally, subsection 149(5) would not apply to a condominium corporation. Therefore, if the area containing the storage lockers is the property of the NPO then the gain from the sale of the storage lockers would not be taxable.

One of the requirements that must be met in order for an organization to be considered to be a 149(1)(l) entity is that its income is not available for the personal benefit of a member or shareholder. For the purposes of determining whether there is income payable or available to members, income is defined in subsection 149(2) to not include any capital gains realized by the club, society or association. Therefore, a 149(1)(l) entity is able to have amounts available for the benefit of its members if those amounts are realized from the sale of capital property, without jeopardizing its tax-exempt status under paragraph 149(1)(l). However, amounts that are paid out to members would be subject to any applicable tax in the hands of the members.

Question 2 - Rental

An organization claiming a paragraph 149(1)(l) tax exemption can earn a profit, as long as the profit is incidental and arises from activities directly connected to its not-for-profit objectives. For example, maintaining reasonable operating reserves or bank accounts required for ordinary operations will generally be considered to be an activity undertaken to meet the not-for-profit objectives of an organization. Consequently, incidental profits arising from these reserves or accounts will not affect the tax-exempt status of an organization. Other examples of profitable activities that might be undertaken through a 149(1)(l) organization include running a canteen at a rink used for amateur hockey or a cafeteria at a not-for-profit youth hostel, or charging admission above direct cost for a children's concert (where the not-for-profit purpose of the organization was to organize and promote youth participation in music).

In paragraph 3 of IT-304, the CRA sets out its long-standing position with respect to the income of condominium corporations and states, in particular:

“Income from other sources or activities, such as interest earned on the corporation’s operating or reserve funds or rental and other incidental income is income of the corporation (however, see paragraph 4 for comments on the status of a residential condominium corporation as a non-profit corporation).”

We are of the view that incidental income from the rental of common areas may be treated as the income of a residential condominium corporation and generally will not affect the tax-exempt status of that corporation. Incidental, in this context, means both minor and directly related to activities undertaken to meet the corporation’s not-for-profit objectives of managing and maintaining the condominium property and required reserves.

Income that is not incidental will usually be considered to be income of the unit owners, if this is appropriate under the relevant provincial law. Where the relevant provincial law indicates that the (non-incidental) income is the income of the condominium corporation, then that corporation may not qualify to be tax-exempt pursuant to paragraph 149(1)(l).

Whether the income earned from the rental of the storage lockers (common areas) will affect the NPO’s tax status will depend on whether this is incidental income of the NPO. The rental of on-site storage lockers to unit owners (members) of a residential condominium corporation would generally be viewed as an activity undertaken for the purpose of meeting the not-for-profit objectives of the corporation. As long as the profits from the rental activity were not material, the rental income would likely be considered to be incidental income of the corporation and the rental activity would not jeopardize the tax-exempt status of the corporation. Whether or not profits from a particular activity are material is a question of fact.

We trust that these comments will be of assistance.

Yours truly,

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