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: Will a condominium corporation maintain its exemption in these situations: 1) Sale of caretaker suite at FMV; 2) Rental of caretaker suite at FMV; 3) Conversion of caretaker suite into a guest suite; 4) Appropriation of caretaker suite for other purposes such as, for example, a fitness/health centre
Position: 1) Probably; 2) Probably not; 3) It depends; 4) It depends.
Reasons: In each case, it will depend on the details of the transaction.
XXXXXXXXXX
A. Messore
(613) 948-2227
2012-046858
August 12, 2013
Dear XXXXXXXXXX:
Re: Paragraph 149(1)(l) of the Income Tax Act ("Act") and condominium revenues
This is in response to your letter dated November 1, 2012 in which you asked whether a condominium corporation ("Corporation") can engage in a certain number of activities with respect to its caretaker suite and still maintain the exemption from tax provided by paragraph 149(1)(l) of the Act.
You have informed us that the Corporation is currently claiming an exemption from tax pursuant to paragraph 149(1)(l) of the Act. The Corporation manages a residential complex of XXXXXXXXXX units, one of which is occupied by a resident caretaker. The caretaker is resigning from his position and the corporation would like to explore available options should it decide not to offer this suite to the next caretaker. One possibility is to sell the caretaker suite at fair market value and place the proceeds of disposition in the Corporation's reserve fund. Alternatively, the caretaker suite may be rented out at fair market value. A third option is to convert the caretaker suite into a "guest suite," which would be available to the owners for the use of their guests on a short-term basis. Finally, the Corporation may use the caretaker suite for special purposes such as, for example, a fitness/health centre, or some other purpose, and charge a membership fee for access to the facility.
You would like to know whether, in each of the situations you describe, the Corporation may continue to claim an exemption from tax pursuant to paragraph 149(1)(l) of the Act.
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. Written confirmations of the tax implications inherent in particular transactions are provided by this Directorate 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", dated May 17, 2002. The Canada Revenue Agency's (CRA) general views regarding paragraph 149(1)(l) entities and condominium corporations are contained respectively in Interpretation Bulletin IT-496R, "Non-profit Organizations" and Interpretation Bulletin IT304R2, "Condominiums". This Information Circular, Interpretation Bulletins and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html.
Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year.
A condominium corporation is not exempt from tax because it is a condominium corporation; rather, it will qualify for the exemption from tax only if it satisfies the conditions of paragraph 149(1)(l) of the Act. Whether an entity is exempt from tax under paragraph 149(1)(l) of the Act is a question of fact to be determined on a case-by-case basis according to the particular facts of each situation. Among other criteria, to be tax-exempt under paragraph 149(1)(l) of the Act, an entity must be organized and operated exclusively for any purpose other than profit, and no income of the entity may be available for the personal benefit of a member, shareholder or proprietor. We determine whether an entity meets the criteria in a particular year based on the facts of each case, which can be obtained only by reviewing all of its activities for that year. Notwithstanding the foregoing, we are prepared to provide the following general comments that may be of assistance.
A condominium corporation is generally a corporation without share capital whose members are the condominium unit owners. The objects of such a corporation include, among other things, the management of the condominium 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.
The Corporation is considering selling its caretaker suite at fair market value. Provided all of the conditions of paragraph 149(1)(l) of the Act are otherwise satisfied, a condominium corporation would not necessarily cease to be exempt from tax by selling at fair market value a condominium unit previously owned and used by it in its exempt operations and placing the proceeds of disposition in its reserve fund for future capital repairs and improvements of the condominium property.
The Corporation is considering renting out its caretaker suite at fair market value. 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. In limited circumstances, an organization may earn a profit and continue to claim the exemption under paragraph 149(1)(l) of the Act, as long as the profit is incidental and arises from activities directly connected to the entity's not-for-profit objectives. 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.
The Canada Revenue Agency is of the opinion that a condominium corporation that enters into an arrangement to rent out a condominium unit at fair market value or in excess of costs is generally operating with a profit purpose that cannot be considered incidental to the condominium corporation's non-for-profit objectives. Such rental arrangements would indicate the condominium corporation is no longer pursuing exclusively not-for-profit purposes and may result in the corporation ceasing to qualify for tax exemption pursuant to paragraph 149(1)(l) of the Act.
In addition, if a condominium corporation uses the profits obtained from such rental activities to reduce its members' fees, it will be considered to have made income available for the personal benefit of its members, and would cease to meet the requirements for exemption under paragraph 149(1)(l) of the Act.
The Corporation is considering converting the caretaker suite into a guest suite and making it available to its members for the use of their guests on a short-term basis. It is not clear whether the Corporation intends to supply the guest suite to its members at cost or at fair market value.
If the Corporation rents out a condominium unit at fair market value then, as noted above, it may cease to be exempt unless it can demonstrate that the income generated is incidental income of the Corporation. The short-term rental of a guest suite exclusively to members of a condominium corporation for the sole use of their guests could be viewed as an activity undertaken for the purpose of meeting the not-for-profit objectives of the condominium corporation. As long as the profits from the rental activity are not material, the rental income may be considered incidental income of the condominium corporation and, provided no part of the rental income is made available to the members, the rental activity would likely not jeopardize the condominium corporation's eligibility for tax exemption. The issue of whether or not profits from a particular activity are material is a question of fact.
If the Corporation rents out the guest suite to members at cost or for an amount less than the fair market value, the rental may result in a taxable shareholder benefit to the members by application of subsection 15(1) of the Act. A member of a condominium corporation is generally considered to be a shareholder within the meaning of subsection 248(1) of the Act and therefore would be subject to the application of subsection 15(1) of the Act.
Finally, the Corporation is considering using the caretaker suite for other purposes, such as a fitness/health centre, and charging a fee for access to the facility. It is not clear whether the facility would be restricted to members only or also be accessible to non-members. To the extent the Corporation provides services which are consistent with its not-for-profit objectives, without intention of making a profit, it will continue to be eligible for the tax exemption. But if the Corporation's intention is to make available a facility and associated services in a manner which allows it to make a profit, it may no longer be exempt under paragraph 149(1)(l) of the Act, unless it can demonstrate that such activity is incidental to its not-for-profit objectives.
We trust these comments will be of assistance.
Yours truly,
R. Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues
Business and Employment 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, 2013
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, 2013
Email this Content