26 February 1992 Income Tax Severed Letter 9125055 - Condominium Corporation

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: CONDOMINIUM CORPORATION Section(s): 9]

912505
H. Woolley
(613) 957-2139

XXX

February 26, 1992

Dear Sirs:

Re: Condominium Corporations

This is in reply to your letter of September 11, 1991 in which you requested our comments on the income tax consequences where a condominium corporation leases to non-members, on a 99 year lease, common elements that it has renovated into residential suites. Under the terms of each such lease the lessee would be required to make a substantial up-front payment and only nominal annual lease payments.

Our Comments

It is our view that there are two main issues to be determined. First, what is the nature of the arrangement between the condominium corporation and the lessee, and secondly, in what capacity does the condominium corporation receive such payments.

Sale of Long-term Lease

In our opinion, a 99 year lease of a residential unit which requires a substantial up-front payment and nominal annual payments would result in a disposition to the lessor. It is our view that the lessee would acquire substantially all the benefits and risks of ownership of the property upon purchasing a 99 year lease and that any nominal, annual rent would be akin to maintenance payments. In Olympia & York Developments Ltd v The Queen [[1980] C.T.C. 265] 80 DTC 6184, Mr. Justice Addy of the Trial Division of the Federal Court found that the term "disposition" was broader than a sale and, following the Supreme Court of Canada's views in The Queen v Compagnie Immobiliere BCN Ltee [[1979] C.T.C. 71] 79 DTC 5068, he confirmed that it should be given its broadest possible meaning. He concluded, in the particular circumstances of the case, that while there was not a "sale" of the property under the laws of the province of Quebec, there was a disposition of the property for the purposes of section 13 of the Income Tax Act because the taxpayer "...completely divested itself of all of the duties, responsibilities and charges of ownership and also all of the profits, benefits and incidents of ownership, except the legal title."

Proceeds of Disposition

In Ontario, condominium corporations are incorporated without share capital under the Ontario Condominium Act (the "OCA"). The condominium corporation derives its powers from the OCA, which differentiates itself from ordinary corporate law in several ways including holding members responsible for the payment of any judgment against the corporation. All unit owners own their unit in fee simple and are members of the condominium corporation and entitled to one vote per unit held. The OCA requires that each member's interest in the common elements be stated as a percentage and outlined in the declaration. Also the OCA provides that the members are tenants in common of the common elements based on their proportionate interest and that an undivided interest in the common elements is appurtenant to each unit and inseparable from such unit. Unit owners are entitled to share in proceeds from the sale of common elements in the same proportion as their common interests. Accordingly, it is our opinion, that with respect to common elements, a condominium corporation is merely a conduit for its members. In essence it provides a legally binding forum for its members to decide how the common elements should be administered and then acts as agent for the tenants-in-common in carrying-out such decisions.

The Department's position regarding the taxation of condominium corporations, as outlined in Information Circular 79-7, dated July 30, 1979, represents an administrative concession by the Department to allow condominium corporations to function with a minimum of tax consequences if certain conditions are met. If the specific conditions outlined in this circular are not met, the administrative relief is unavailable. Accordingly, the corporation becomes taxable on its income (interest on bank deposits, coin laundry, etc.), and the tenants in common are taxable on any income relating to their undivided interest in the common elements (rental income, gains on disposition of common elements, etc.).

The income tax consequences to a unit owner of any income earned as a result of his undivided interest in the common elements, is a question of fact to be determined based on the particular circumstances of each unit owner. However, development by the condominium corporation of common elements into residential suites for the purpose of disposing of such suites would likely be viewed as an adventure in the nature of trade, with the result being income treatment to each tenant-in-common with respect to the gain realized.

It is also our opinion that:

• (i) the criteria for determining whether a condominium corporation is eligible for the administrative relief, outlined in Information Circular 79-7, must be reviewed on an annual basis,
• (ii) rental payments received by the condominium corporation from non-members, even if they are calculated in the same manner as maintenance fees of members, are not considered, for the purposes of the administrative relief outlined in Information Circular 79-7, to be received from members. However paragraph 7 of the circular provides additional comments on this matter.
• (iii) where capital improvements are made to common elements on behalf of the tenants-in-common,the capital cost of the interest of each tenant-in-common in the common elements would be increased (see the comments in paragraphs 4 and 8 of Interpretation Bulletin IT-304R, dated May 13, 1991).

As stated in Information Circular 70-6R2, dated September 28, 1990, the opinions expressed in this letter are not rulings and consequently are not binding on the Department.

We trust our comments are of assistance.

Yours truly,

E. Wheeler
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch