13 May 2014 Internal T.I. 2013-0499041I7 - Subparagraph 149(5)(e)(ii)

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: Was the capital gain realized by the Club on the sale of vacant land taxable?

Position: Yes

Reasons: The land was not used exclusively for and directly in the course of providing the sporting facilities to its members.

May 13, 2014

Compliance Programs Branch HEADQUARTERS
Specialty Audit Section Income Tax Rulings Directorate
112 Kent Street Ann Townsend
Ottawa, ON K1A 0L5 905-721-5096

Attention: Julie Racette 2013-049904

XXXXXXXXXX (the "Club")

We are writing in response to your request for our views as to whether the Club was taxable on the capital gain arising from the disposition of land during the XXXXXXXXXX taxation year. The Club is of the opinion that the land is exempt from tax pursuant to subparagraph 149(5)(ii) of the Income Tax Act (the "Act").

FACTS

Based on the information you provided to us, our understanding of the facts is as follows:

• The Club has been operating as a private member golf club since XXXXXXXXXX and claims the exemption from income tax provided pursuant to paragraph 149(1)(l) of the Act.
• The Club purchased its current facilities in XXXXXXXXXX.
• The Club disposed of the land in XXXXXXXXXX for $XXXXXXXXXX and reported a capital gain of $XXXXXXXXXX on its XXXXXXXXXX financial statements. The gain was not reported for income tax purposes.
• You have determined that the total area of the land is XXXXXXXXXX square meters, or XXXXXXXXXX acres. You have also determined that the pump house that was located on the land occupied XXXXXXXXXX square feet, or approximately XXXXXXXXXX% of the land.
• The Club's representative has advised you that the pump house was used for the golf course's irrigation system until it was replaced in XXXXXXXXXX with a new irrigation system located directly on the golf course. When operational, the pump house used the water from a river that ran adjacent to the land.
• The Club did not report the gain for income tax purposes because it contends that the land and pumping station were a backup water source and it was only after it received an unsolicited offer for the land that it was determined that the primary water source had become so reliable that it no longer required the backup source.

OUR COMMENTS

Although an organization described in paragraph 149(1)(l) of the Act is generally not taxable under Part I of the Act on its taxable income, there is a special rule in subsection 149(5) of the Act that applies to such an organization if its main purpose is to provide dining, recreational or sporting facilities to its members. Under subsection 149(5), an inter vivos trust is deemed to exist throughout the period during which the main purpose of the organization is to provide dining, recreational, or sporting facilities. Very generally, the following rules apply:

• the property of the 149(1)(l) organization is deemed to be the property of the trust;
• tax is payable by the trust on its taxable income for each taxation year;
• the taxable income of the trust is calculated on the assumption that there is no income or loss other than
  • income and losses from property; and
  • taxable capital gains, and taxable capital losses from the dispositions of property, other than property used exclusively for and directly in the course of providing the dining, recreational or sporting facilities provided by it to its members;
• $2,000 may be deducted in computing the taxable income of the trust, in addition to any other permitted deductions.

You have determined that the Club qualified for a tax exemption pursuant to paragraph 149(1)(l) of the Act for the XXXXXXXXXX taxation year. Since the Club's main purpose in XXXXXXXXXX was the provision of sporting facilities to its members, we agree with your view that subsection 149(5) of the Act applied to the Club for that year.

Where subsection 149(5) applies, subparagraph 149(5)(e)(ii) will tax the capital gains arising from the disposition of property, other than property that was used exclusively for and directly in the course of providing the dining, recreation and sporting facilities for its members. Thus, while an organization may own several assets, in our view, it is only the capital gain arising on the disposition of those which are required and used to ensure that the organization's objects are met that are not to be taxed.

You have determined that the land was located across the street from the Club's main entrance and the pump house occupied a small percentage of the land (XXXXXXXXXX%), the rest of the land was always vacant. It is the CRA's opinion, as expressed in paragraph 7 of IT-83R3 – Non-Profit Organizations – Taxation of Income from Property, that vacant land does not qualify as being used "exclusively for and directly in the course of providing dining, recreational or sporting facilities" and as a result the sale of vacant land by an 149(1)(l) organization is taxable regardless of the reason that the land was vacant.

The Club has not provided an explanation on why it required XXXXXXXXXX acres as a backup water source or any evidence to show how the pump house was maintained or used as a backup water source over the last XXXXXXXXXX years. Therefore, we agree with your position that the land that was sold was vacant land that was not used exclusively and directly in providing the sporting and recreational facilities by the Club to its members.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 952-1361. In such cases, a copy will be sent to you for delivery to the taxpayer.

Yours truly,

R. Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues Section
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch