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 payment of a capital dividend to members jeopardizes the Club's status under 149(1)(l).
Position: Not in this situation.
Reasons: See below.
XXXXXXXXXX
2015-059384
XXXXXXXXXX, 2016
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, in which you request an advance income tax ruling on behalf of the above-named taxpayer. We acknowledge your additional submissions of XXXXXXXXXX.
To the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request are:
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 expired; or
v) the subject of a ruling previously issued by this Directorate to the taxpayer or a related person.
In this letter, unless otherwise expressly stated, all statutory references are to the Income Tax Act (Canada), R.S.C. 1985, 5th Supplement, c.1, 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 and facts is as follows:
DEFINITIONS
“Buildings” means, collectively, the XXXXXXXXXX and other buildings structures, erections, improvements and appurtenances located on, in or under the Lands.
“Club” means XXXXXXXXXX.
“Final Sale” means the sale of the Property.
“XXXXXXXXXX” is the portion of the Property as defined in the Sales Agreement.
“Land(s)” means the XXXXXXXXXX acres of land and premises described in the Sales Agreement.
“Land-sale-related activity” is defined to be:
a. The use of the land under lease to operate the XXXXXXXXXX;
b. The terms and conditions of XXXXXXXXXX mortgage; and
c. The evaluation of the potential relocation of the Club.
“Property” means the Land(s) and Buildings.
“Sales Agreement” means the sales agreement between the Club and the purchaser whereby the Club will sell the Property to the purchaser.
FACTS
1. The mailing address of the club is XXXXXXXXXX. The Club is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre.
2. The Club was incorporated on XXXXXXXXXX under the XXXXXXXXXX. Its fiscal year end is XXXXXXXXXX.
3. The Club files an annual T2 return as a tax-exempt corporation under paragraph 149(1)(l) for each taxation year.
4. The Club’s objects, as indicated in its Letters Patent, are “XXXXXXXXXX”
5. The Club has the following share capital structure as of XXXXXXXXXX:
a. XXXXXXXXXX non-voting Class A shares, par value of $XXXXXXXXXX each;
b. XXXXXXXXXX voting Class B shares, par value of $XXXXXXXXXX each, convertible into Class A shares on a share-for-share basis;
c. XXXXXXXXXX common shares XXXXXXXXXX par value.
6. XXXXXXXXXX. Both Class A and Class B shares are entitled to receive dividends. However, the Club’s letters patent restrict the Club’s ability to pay dividends to the extent that no part of the income, as determined under subsection 149(2), of the Club may be made payable to any shareholder.
7. In XXXXXXXXXX, the Club acquired XXXXXXXXXX acres of land in XXXXXXXXXX. The majority of the land is used in providing recreational facilities for the enjoyment of members.
8. On XXXXXXXXXX, the Club’s members approved the sale (the “Initial Sale”) of XXXXXXXXXX acres of the land to an arm’s length third party for approximately $XXXXXXXXXX. That sale closed in XXXXXXXXXX. The Club determined that XXXXXXXXXX acres of the land sold was used exclusively and directly for the XXXXXXXXXX while XXXXXXXXXX acres were not.
9. Pursuant to 149(5), the Club reported a taxable capital gain on the sale related to the XXXXXXXXXX acres not used exclusively for and directly in the course of providing the dining, recreational or sporting facilities provided by it to its members. The proceeds from the sale, net of tax, were earmarked for capital improvements and renovations.
10. In XXXXXXXXXX, the Club received an unsolicited offer to purchase the entire Property for $XXXXXXXXXX and to relocate the Club to a new XXXXXXXXXX to be entirely constructed by the prospective purchaser at a location relatively close to the present location. The Club’s board believed the offer deserved consideration since it offered an attractive solution to save the Club the considerable expense of renovating its aging facilities and would provide it with the additional capital surplus to maintain a XXXXXXXXXX in the future.
11. The offer was presented to the members in accordance with the Club’s policies and procedures. The members expressed a preference for a competitive bid process.
12. XXXXXXXXXX bids were received; some of the bids included relocation while others provided solely for the sale of the Property with relocation to be carried out independently.
13. The Club has not incurred any material capital losses since XXXXXXXXXX.
14. The Club has not resolved to wind-up, dissolve or otherwise terminate its operations in a manner that would result in any income being distributed to, or otherwise available to, any proprietor, member or shareholder.
PROPOSED TRANSACTIONS
15. The Club will sell the Property to an arm’s length third party for $XXXXXXXXXX pursuant to the Sales Agreement. The purchase price payment schedule is as follows:
a. A deposit of $XXXXXXXXXX within XXXXXXXXXX business days after approval of the offer by the Club’s membership;
b. XXXXXXXXXX% on the closing date; and,
c. The remainder by acceptance of a XXXXXXXXXX mortgage for XXXXXXXXXX years, bearing interest at XXXXXXXXXX per annum XXXXXXXXXX.
16. The Club will lease the XXXXXXXXXX from the purchaser and continue to operate the XXXXXXXXXX club in its present location for a period of at least XXXXXXXXXX years after the closing date.
17. The Club will report a taxable capital gain from the disposition of the Property on the Final Sale related to the portion of the Property that was not used exclusively for and directly in the course of providing the dining, recreation and sporting facilities for its members.
18. Within XXXXXXXXXX days of the date of this ruling, the Board of Directors of the Club will declare and make payable a series of capital dividends pursuant to subsection 83(2) to the holders of the outstanding Class A and Class B shares in equal amounts per share. The total dividends will be approximately $XXXXXXXXXX.
19. The Club will continue to operate the XXXXXXXXXX club on the XXXXXXXXXX pursuant to its objects for the term of the lease. During this time, the members of the Club will evaluate potential relocation of the Club and the XXXXXXXXXX.
PURPOSE OF THE PROPOSED TRANSACTIONS
The purpose of the Proposed Transactions is to allow the Club to disburse proceeds, from capital gains realized on the Initial Sale and the Final Sale, that are in excess of future operating and capital requirements of the Club, including the potential acquisition of a new property for the Club.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant Facts, Proposed Transactions, and the Purpose of the Proposed Transactions, and provided further that the Proposed Transactions are completed in the manner described above, and provided the Club continues to meet the requirements described in paragraph 149(1)(l), we rule as follows:
A. The disposal of the Property and the ongoing land-sale-related activity subsequent to the sale of the Property will not, in and of itself, cause the Club to cease to be an entity as described in paragraph 149(1)(l).
B. There will be added to the Club’s capital dividend account the amount by which the capital gain on the disposition of the Property exceeds the taxable capital gain resulting from the sale of the Property notwithstanding that a portion of the taxable capital gain will be exempt from income tax by virtue of subparagraph 149(5)(e)(ii).
C. The distribution of the capital gain by payment of the capital dividends as proposed in paragraph 18 will not cause, in and of itself, the taxpayer to no longer be an entity described in paragraph 149(1)(l).
The Club may cease to qualify for the exemption provided by paragraph 149(1)(l) if at any time a determination is made that, upon winding-up, an amount of income will become payable to, or otherwise available for the benefit of, a proprietor, member or shareholder of the entity. Should the Club cease to be exempt from tax, subsection 89(1.2) applies to reduce the corporation’s capital dividend account to nil.
CAVEATS
Unless otherwise expressly confirmed, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:
(a) whether the Club is, or has been for any particular period, exempt from income tax under Part I pursuant to paragraph 149(1)(l). In this regard, we note that the determination 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 for any particular period remains a question of fact that must be determined on an on-going basis;
(b) the balance of the capital dividend account.
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 or future amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R6 “Advance Income Tax Rulings and Technical Interpretations”, dated August 29, 2014, and is binding on the Canada Revenue Agency provided that the proposed capital dividends are declared and payable by a date no later than XXXXXXXXXX days from the date of this letter.
This letter is based solely on the facts described above. The documentation submitted with your request does not form part of the facts, except as expressly referred to herein, and any references thereto are provided solely for the convenience of the reader.
Yours truly,
XXXXXXXXXX
Manager
Non-Profit Organizations and Aboriginal Issues Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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