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. Is the gain on the sale of the Subject Property taxable in the hands of the Club pursuant to subsection 149(5) of the Act?
2. Would the payment of the special assessment to the XXXXXXXXXX Reserve Fund jeopardize the Club’s tax-exempt status under paragraph 149(1)(l) of the Act?
3. Would the distribution of the Excess Amount by the Club to the XXXXXXXXXX Members jeopardize the Club’s status under paragraph 149(1)(l)?
Position: 1. No.
2. No, provided the amount of the special assessment is not greater than the amount prescribed in an Independent XXXXXXXXXX Reserve Fund Study issued by a qualified Reserve Fund Study provider.
3. No.
Reasons: 1. Based on the information provided, the Subject Property was used exclusively for and directly in the course of providing dining, recreational, or sporting facilities to the members of the Club.
2. By-law XXXXXXXXXX adopts reserve fund provision of the XXXXXXXXXX and provides for the establishment and maintenance of the Club Reserve Fund.
3. Subsection 149(2) excludes the amount of any taxable capital gains from the calculation of a 149(1)(l) entity’s income. The non-taxable portion of a capital gain is not included in the definition of “income” at section 3 and therefore payments of such amounts to members would also not affect an entity’s eligibility for exemption under paragraph 149(1)(l).
XXXXXXXXXX 2018-075252
XXXXXXXXXX, 2019
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 also acknowledge the information provided in subsequent correspondence and during our telephone conversations on XXXXXXXXXX, and XXXXXXXXXX, in connection with your request (XXXXXXXXXX).
We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the Ruling request:
i. is in an earlier return of the taxpayer or a related person;
ii. is 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. is under objection by the taxpayer or a related person;
iv. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
v. is the subject of a Ruling previously issued by the Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (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 facts, proposed transactions and the purpose of the proposed transactions is as follows:
DEFINITIONS
“XXXXXXXXXX Agreement” means an agreement dated XXXXXXXXXX, between the Owners and the City.
“XXXXXXXXXX Agreement” means an agreement dated XXXXXXXXXX, between the City and the Owners.
“City” means the City of XXXXXXXXXX.
“Club” means XXXXXXXXXX.
“Clubhouse” includes XXXXXXXXXX located at XXXXXXXXXX, which is also referred to as “Subject Property”.
“Club Property” includes the Clubhouse, XXXXXXXXXX.
“Club Reserve Fund” means a reserve fund established by by-law XXXXXXXXXX of the Club which adopts reserve fund provisions of the XXXXXXXXXX, which is also referred to as “Interim Reserve Fund” as described in paragraph 22.
“XXXXXXXXXX Members” means collectively the XXXXXXXXXX corporation members, being:
XXXXXXXXXX
which are also referred to as XXXXXXXXXX.
“Excess Amount” means an amount by which proceeds on the sale of the Subject Property exceeds transaction costs and the Special Assessment.
XXXXXXXXXX
“Individual XXXXXXXXXX” means each individual XXXXXXXXXX.
“Owners” means XXXXXXXXXX who at the time of the XXXXXXXXXX Agreement owned the lands that would later be transferred to the Club XXXXXXXXXX.
XXXXXXXXXX
“XXXXXXXXXX Reserve Fund” means a reserve fund recommended in the XXXXXXXXXX for the short, medium, and long term requirements for responsible management XXXXXXXXXX of the XXXXXXXXXX.
XXXXXXXXXX
FACTS
1. The Club’s address is XXXXXXXXXX, and its business number is XXXXXXXXXX. The Club is served by the XXXXXXXXXX Tax Services Office and its return is filed with the XXXXXXXXXX Tax Centre.
2. The Club was incorporated on XXXXXXXXXX, as a non-share corporation and social club XXXXXXXXXX.
3. The Clubhouse was built for the purpose of providing recreational facilities for the benefit of XXXXXXXXXX Members XXXXXXXXXX, and it has operated as such since that time.
4. The Club’s operation is funded entirely by member contributions. Each of the XXXXXXXXXX Members makes contributions to the Club XXXXXXXXXX.
5. The Club files tax and information returns on an annual basis, as a non-profit organization within the meaning of paragraph 149(1)(l) of the Act.
6. Each of the XXXXXXXXXX Members has a number of votes XXXXXXXXXX.
7. XXXXXXXXXX
8. XXXXXXXXXX
9. The Club was established pursuant to the XXXXXXXXXX Agreement between the City and the Owners, who at that time owned the lands that were later transferred to the Club XXXXXXXXXX.
10. Under the XXXXXXXXXX Agreement, the Owners agreed to establish an incorporated recreation association to own, operate and maintain the Club Property, and the Club was incorporated in XXXXXXXXXX to fulfill that provision of the XXXXXXXXXX Agreement. The XXXXXXXXXX Agreement is registered on title of the Club lands XXXXXXXXXX.
11. The Owners subsequently developed the Clubhouse and the lands surrounding the XXXXXXXXXX. The recreational facilities were operated by the Club commencing in XXXXXXXXXX.
12. The Owners transferred ownership of the Club Property to the Club on XXXXXXXXXX, for a purchase price of $XXXXXXXXXX.
13. The Club Property consists of XXXXXXXXXX separate components - the Clubhouse (the “Subject Property”), XXXXXXXXXX.
14. XXXXXXXXXX. References to the Clubhouse include XXXXXXXXXX. The Clubhouse property is used exclusively for and directly in the course of providing recreational, sporting and dining facilities for the members. The Clubhouse building comprises multi-purpose rooms XXXXXXXXXX, Club meetings including the annual general meeting and informational sessions, and member events such as XXXXXXXXXX. The Clubhouse also houses XXXXXXXXXX rooms for use of the members while engaged in activities at the Club such as XXXXXXXXXX. The Clubhouse also includes XXXXXXXXXX.
15. XXXXXXXXXX.
16. XXXXXXXXXX. Pursuant to the XXXXXXXXXX Agreement and the XXXXXXXXXX Agreement, the Owners agreed to maintain the XXXXXXXXXX areas and private open space areas to the City’s satisfaction. The XXXXXXXXXX Agreement and the XXXXXXXXXX Agreement were registered against the properties owned by the Club, XXXXXXXXXX. The obligations under the XXXXXXXXXX and XXXXXXXXXX Agreements give rise to ongoing operating costs, as well as major maintenance costs XXXXXXXXXX.
17. By-Law XXXXXXXXXX of the Club adopts reserve fund provisions of the XXXXXXXXXX and provides for the establishment and maintenance of the Club Reserve Fund. By-Law XXXXXXXXXX excludes major XXXXXXXXXX costs from the Club Reserve Fund. These costs have not previously been considered within the scope of the Club’s reserve fund studies. As a result, the XXXXXXXXXX Audited Financial Statements for the Club highlight a potentially large unfunded liability relating to the XXXXXXXXXX.
18. In recent years, the Club initiated internal discussions concerning the future direction of the Club. By XXXXXXXXXX, it had become apparent that the Clubhouse was significantly underutilized by XXXXXXXXXX. A significant portion of the Club contributions were allocated to the annual operating costs of the Clubhouse, which was actively used by a small minority of members and not used at all by the vast majority. At the same time, Club members were becoming increasingly aware of their responsibilities relating to the XXXXXXXXXX and the negative implications of the unfunded liability that the XXXXXXXXXX represent.
19. In XXXXXXXXXX, the active operations of the Clubhouse were discontinued. While the Clubhouse facilities still exist, the Clubhouse is no longer available for XXXXXXXXXX. As a result of the closure of the Clubhouse, Club contributions were reduced to reflect reduced operating costs.
20. Also in XXXXXXXXXX, the Club engaged XXXXXXXXXX, to conduct a reserve fund requirements study relating to the XXXXXXXXXX. In its report dated XXXXXXXXXX, (the “XXXXXXXXXX”), XXXXXXXXXX identified the short, medium and long term requirements for responsible management XXXXXXXXXX. The recommendations of the XXXXXXXXXX have been accepted in principle by the Club board.
21. Subsequently, the Club has engaged XXXXXXXXXX specializing in reserve fund studies, to provide a reserve fund study update of the Club Reserve Fund and to provide a new reserve fund study for the XXXXXXXXXX Reserve Fund that has not yet been established by the Club. The draft “XXXXXXXXXX Reserve Fund Study” contemplates that a special assessment in the amount of $XXXXXXXXXX is required to cover future costs of XXXXXXXXXX management. Upon establishment of the XXXXXXXXXX Reserve Fund, the XXXXXXXXXX Reserve Fund Study will be updated and finalized.
22. As a result of the closure of the Clubhouse in XXXXXXXXXX, XXXXXXXXXX contributions to the Club Reserve Fund were reduced to reflect reduced reserve requirements, and the Club Reserve Fund will be re-named the Interim Reserve Fund.
PROPOSED TRANSACTIONS
23. The Club has applied for re-zoning of the Subject Property. It is anticipated that the Subject Property could be rezoned XXXXXXXXXX. A plausible development concept plan would include XXXXXXXXXX.
24. Upon receipt of re-zoning approval, the Club will apply for severance of the Subject Property from the XXXXXXXXXX.
25. The Club will sell the Subject Property to a developer. Based on the above-noted plausible development plan, the fair market value of the Subject Property is estimated by XXXXXXXXXX to be in the range of $XXXXXXXXXX to $XXXXXXXXXX. The ultimate selling price could be higher or lower depending on the results of the rezoning process and, in particular, XXXXXXXXXX. It is expected that the purchaser of the Subject Property would demolish the Clubhouse and build XXXXXXXXXX on the Subject Property.
26. XXXXXXXXXX
27. The Club will continue to own the XXXXXXXXXX and would continue to be responsible for providing recreational facilities relating to the XXXXXXXXXX and for associated XXXXXXXXXX maintenance XXXXXXXXXX costs.
28. The Club will establish the new XXXXXXXXXX Reserve Fund. The balance (if any) in the Interim Reserve Fund will be transferred to the XXXXXXXXXX Reserve Fund, and the Interim Reserve Fund will be terminated.
29. Upon completion of the sale of the Subject Property, after payment of all costs incurred in connection with the Proposed Transactions, the Club will allocate some or all of the proceeds on the sale of the Subject Property to the XXXXXXXXXX Reserve Fund. The allocation will be in an amount not to exceed the special assessment as prescribed by XXXXXXXXXX in the final XXXXXXXXXX Reserve Fund Study (the “Special Assessment”). For greater certainty, the amount of the Special Assessment shall be the amount prescribed by XXXXXXXXXX to be contributed over and above the balance (if any) transferred from the Interim Reserve Fund.
30. Ongoing maintenance of the XXXXXXXXXX and future XXXXXXXXXX reserve expenses would be funded by member contributions. Each XXXXXXXXXX Member, XXXXXXXXXX, will make contributions to the Club, through assessments XXXXXXXXXX in accordance with the XXXXXXXXXX Reserve Fund Study.
31. In the event that there are sale proceeds remaining after payment of transaction costs and the Special Assessment, the Excess Amount would be distributed by the Club to the XXXXXXXXXX Members proportionately in accordance with XXXXXXXXXX. Transaction costs, including costs incurred to date XXXXXXXXXX, are estimated to be $XXXXXXXXXX. For the Special Assessment, the draft XXXXXXXXXX Reserve Fund Study includes a recommendation in the amount of $XXXXXXXXXX. Based on these estimates, it is possible that the Excess Amount will be Nil. If there is an Excess Amount, it is unlikely to be greater than $XXXXXXXXXX, based on current reasonable estimates of transaction costs, fair market value and Special Assessment. The Excess Amount, if any, will be less than the capital gain resulting from the disposition of the Subject Property.
32. XXXXXXXXXX
33. If proceeds of the sale should exceed transaction costs and the Special Assessment, then the Excess Amount will be distributed to XXXXXXXXXX Members.
34. All amendments to existing documentation would be made to facilitate and authorize the steps noted above, including (but not limited to) amendment to Letters Patent to reflect the discontinuance of Clubhouse facilities and continuance of XXXXXXXXXX facilities, amendment to By-Law XXXXXXXXXX to establish the XXXXXXXXXX Reserve Fund, amendment to By-Law XXXXXXXXXX to update Club membership structure XXXXXXXXXX.
PURPOSES OF THE PROPOSED TRANSACTIONS
35. The purpose of the Proposed Transactions is to dispose of the Subject Property and to use the sale proceeds to reduce the unfunded liability associated with the XXXXXXXXXX and to distribute the Excess Amount, if any, to the XXXXXXXXXX Members to ensure the XXXXXXXXXX Reserve Fund does not exceed the needs of the Club.
36. The sale of the Subject Property would provide the Club with proceeds to be used by the Club to continue to provide for recreational amenities, other than the Clubhouse, being the XXXXXXXXXX, and in so doing, to exercise responsible maintenance XXXXXXXXXX as required by the XXXXXXXXXX Agreement and as contemplated in the XXXXXXXXXX Reserve Fund Study.
37. Proceeds from the sale would be used to cover transaction costs and to reduce or eliminate (depending on ultimate sale proceeds) the amount by which the XXXXXXXXXX Reserve Fund of the Club is underfunded.
RULINGS REQUESTED AND GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions, and Purposes of the Proposed Transactions, and provided further that the Proposed Transactions are carried out as described above and the Club continues to meet the requirements described in paragraph 149(1)(l), our Rulings are as follows:
A. Pursuant to subparagraph 149(5)(e)(ii), the taxable income of the deemed intervivos trust created by operation of subsection 149(5) will not include the capital gain resulting from the disposition of the Subject Property.
B. The disposal of the Subject Property and the use of the proceeds for payment of the Special Assessment to the XXXXXXXXXX Reserve Fund, as prescribed in the XXXXXXXXXX Reserve Fund Study provided by a qualified XXXXXXXXXX Reserve Fund Study provider, will not, in and of itself, cause the Club to cease to be an entity as described in paragraph 149(1)(l).
C. The distribution of the Excess Amount as proposed in paragraphs 31 and 33 by the Club to the XXXXXXXXXX Members will not, in and of itself, cause the Club 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.
The Canada Revenue Agency accepts that an organization that claims the exemption from tax under paragraph 149(1)(l), can earn reasonable investment income with respect to the investment of a reserve fund; however, nothing in this ruling should be construed as implying that we are ruling on the reasonableness of investment income.
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 amount of the taxable capital gain arising from the sale of the Subject Property;
(c) the amount of the XXXXXXXXXX Reserve Fund; or
(d) the reasonableness of any investment income earned by the Club from the XXXXXXXXXX Reserve Fund.
The Rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R9 “Advance Income Tax Rulings and Technical Interpretations”, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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