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 leasing contract will jeopardize ability to claim exemption under 149(1)(l).
Position: No, as long as the income is the income of the unit owners and not the corporation. Otherwise, it may.
Reasons: Income either belongs to the unit owners or is available for the personal benefit of the members.
August 18, 2014
Re: Condominium Corporation and 149(1)(l)
This is in response to your letter of April 2, 2014 inquiring about the tax consequences of a condominium corporation entering into a leasing agreement with a company for the right to install solar panels on to several roofs within the complex. In particular, you were concerned that the leasing agreement could jeopardize the corporation's ability to claim the tax exemption provided by paragraph 149(1)(l) of the Income Tax Act (the "Act").
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings. Although we cannot comment on your specific situation, we are able to provide the following general comments which may be of assistance.
In general terms, paragraph 149(1)(l) of the Act provides that the taxable income of an organization is exempt from tax under Part I of the Act for a period throughout which the organization meets all of the following conditions:
- It is a club, society or association;
- It is not a charity;
- It is organized and operated exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit; and Its income is not available for the personal benefit of a member or shareholder, unless the member or shareholder is an association which has as its primary purpose and function the promotion of amateur athletics in Canada.
A condominium corporation is not exempt from tax because it is a condominium corporation; rather, it is exempt while it meets the above requirements. If a condominium corporation does not meet these requirements then it will be subject to tax on its taxable income for the period during which it did not qualify for the tax exemption.
In order to qualify for the tax exemption described above, a condominium corporation must be organized and operated exclusively for any purpose other than profit, and none of its income can be available for the personal benefit of its members. The courts have recognized that an organization claiming a paragraph 149(1)(l) 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 profit arising from these reserves or accounts will not affect the tax-exempt status of an organization. Profit that is incidental and connected to the not-for-profit objectives of an organization, and that is used within the organization to support those objectives, generally is not taken into account in determining whether income is available for the personal benefit of a member.
You advised that the condominium corporation (the "Corporation") of which you are a member proposes to enter into a contractual lease agreement with XXXXXXXXXX ("XXXXXXXXXX") under which XXXXXXXXXX would lease several roofs within the complex and install solar panels to be used in the generation of green energy with the output being introduced into the public electrical grid. Under the agreement, XXXXXXXXXX would assume all costs and charges relating to the installation, maintenance, and ongoing servicing and repairs of the solar panels and associated equipment during the term of the contract. In addition, they would assume the costs for the maintenance, repair, and upkeep of the common element roofs leased during the term of the contract. In exchange for allowing them to install the solar panels, the Corporation would receive annual income of approximately $XXXXXXXXXX and/or a percentage of the revenue generated per Kilowatt hour produced during the term of the contract. The income generated from the agreement would be contributed to the Corporation's reserve fund thus potentially offsetting or freezing any annual reserve fund increase, and/or reducing annual reserve fund contributions and/or reducing property owner's monthly maintenance fees.
Generally, we are of the view that incidental income from the rental of common areas may be treated as income of the Corporation and generally will not affect the tax-exempt status of the 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. It is a question of fact whether the leasing income would be incidental or related to the Corporation's not-for-profit objectives.
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. Subsection 11(2) of the Condominium Act of Ontario (S.O. 1998, c.19) provides that "the owners are tenants in common of the common elements and an undivided interest in the common elements is appurtenant to each owner's unit". As such, the space being rented may not belong to the Corporation; rather, the Corporation may be better viewed as acting as an agent for the unit owners in entering into the lease agreement. If this is the case, then such an agreement generally would not jeopardize the tax-exempt status of the Corporation, although the related profit would have to be allocated appropriately to the unit owners and included in their income for tax purposes.
Where the relevant provincial law indicates that the income is the income of the Corporation, then we would agree that the Corporation may not be tax-exempt pursuant to paragraph 149(1)(l) of the Act. In particular, we share your concern that income from the lease agreement would likely be available for the personal benefit of members of the Corporation through a freeze or reduction in members' condominium fees. We are also concerned as to whether the lease agreement would be connected to the Corporation's not-for-profit objectives.
We trust that these comments will be of assistance.
Non-Profit Organizations and Aboriginal Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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