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.
Principal Issues:
A charitable organization proposes to purchase a company whose main asset is a medical building for the purposes of providing medical care to a small community. The question is whether a series of transactions involving the payment of a large dividend to the charitable organization and subsequent loaning of a similar amount to the corporation will affect the charitable status of the organization.
Position TAKEN:
This activity may not qualify for charitable purposes if the organization is only acting as a landlord. It is a question of fact whether the organization devotes all its resources to charitable activities. If these conditions are met, the receipt of dividends and the investment in a loan, providing all disbursement quotas are met, should not affect the charitable status.
Reasons FOR POSITION TAKEN:
Subsection 149.1(1) set out the requirements with respect to charitable activities. Paragraph 149.1(2)(a) does not specifically preclude the receipt of dividends or the receipt of interest income, both of which represent income from property.
L. Barrows
XXXXXXXXXX 952062
Attention: XXXXXXXXXX
February 22, 1996
Dear XXXXXXXXXX:
Re: Charitable Organization
This is in reply to your letter of July 20, 1995 wherein you requested our opinion as to whether a series of proposed transactions between a charitable organization and a corporation will jeopardize the charitable status of the organization. We apologize for the delay in our response.
The transactions outlined in your letter may be summarized as follows:
1.A charitable organization, whose purpose is to ensure the continuance of the provision of health care services in a small town and the surrounding community, acquired the shares of a corporation that owned a medical building. The purchase price of the shares was $250,000. The corporation will continue to rent office space in the building to medical practitioners.
2.It is proposed that the corporation will pay a large dividend of approximately $200,000 to the charitable organization. The charitable organization will then loan this amount back to the corporation for use in the operation of the building, on terms and conditions similar to those that would exist between arm's length parties.
3.The stated purpose of these transactions is to ensure that the charitable organization and the corporation are adequately protected from any possible financial liabilities.
We should advise that written confirmation of the tax implications inherent in a particular fact situation such as that outlined above is only given by this Directorate in response to a request for an advance income tax ruling and submitted in a manner set out in Information Circular 70-6R2, dated September 28, 1990, and the Special Release thereto, dated September 30, 1992. However, in response to your request, we can provide the following general comments.
In general, the situation described is of concern and we have not been provided with sufficient details to conclusively resolve our concerns. Assistance in the provision of health care services to a community could be considered a charitable purpose, however, we have not been provided with any information as to what this organization does other than provide a facility for the medical practitioners in the community to use. Issues regarding charitable activities are normally handled by the Charities Division and should you wish to pursue this issue further you should contact them directly by writing to Mr. Ron Davis, Director, Charities Division, Room 5004B, 400 Cumberland Street, Ottawa, Ontario. However, we understand that while an organization which is directly involved in carrying on and promoting health services to a community could be considered charitable, an organization which only acts as a landlord for medical practitioners or health-oriented organizations could not.
In addition to our concerns with respect to the landlord activity of the organization, we have other specific concerns. For instance, you describe the charity as a charitable organization. However, should the organization be, in fact, a public or private foundation, the acquisition of control of the subsidiary could result in the revocation of registration pursuant to paragraphs 149.1(3)(c) or 149.1(4)(c) of the Income Tax Act (the "Act").
In order for an organization to satisfy the definition of "charitable organization" under subsection 149.1(1) of the Act, it must, inter alia, devote all of its resources to charitable activities carried on by the organization itself. It is a question of fact whether an organization would be considered to devote all its resources to charitable activities carried on by itself where it acquires shares of a corporation.
An organization which meets the definition of charitable organization may, by virtue paragraph 149.1(2)(a) of the Act, have its registration revoked where the organization carries on a business that is not a related business of that charity. While, normally, we do not view the holding of shares in a corporation as carrying on a business, we acknowledge that your letter states that the charitable organization is allowed under its objects to purchase companies. It is therefore a question of fact whether such activities constitute a business, a related business or a direct charitable activity of the charitable organization. In any case, the receipt of ancillary dividends would generally constitute "income from property" for which there is no stated preclusion within the provisions of paragraph 149.1(2)(a) of the Act.
Paragraph 149.1(2)(b) of the Act further states that revocation of the charitable status of an organization will occur where the organization fails to expend disbursement quota requirements on charitable activities carried on by it and by way of gifts made by it to qualified donees. The subsequent granting of a loan to the subsidiary results in the investment of funds of the charitable organization in a promissory note or some other form of debt instrument. Again, it is a question of fact whether an organization would be considered to devote all its resources to charitable activities carried on by the organization itself where it loans funds to an organization, presumably in excess of its disbursement quota. Similar to the situation discussed above in respect of dividends, the interest income generated from the investment would normally be considered "income from property" for which there is no stated preclusion.
We trust these comments will be of assistance to you.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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