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.
Canada Mortgage and Housing Corporation
Winnipeg Branch Office
P.O. Box 964 962846
4th Floor B. Kerr
10 Fort Street
Winnipeg, Manitoba
Attention: Peter Sanderson
September 9, 1996
Dear Sirs:
Re: Limited Dividend Housing Companies
This is in reply to your letter of June 20, 1996, sent to the Ottawa Tax Services Office and further to our recent telephone conversation (Kerr/Sanderson) concerning limited dividend housing companies.
You have stated that the limited dividend program was created by Canada Mortgage and Housing Corporation ("CMHC") about 30 years ago. Its purpose was to encourage the rental of property to low income Canadians. One of the benefits of the program to an owner of a low rental housing project was the eligibility for low interest loans. Eligible participants were allowed a limited return on investment and were required to set up replacement reserves and to put surplus funds into a fund to be used to subsidize future rent increases. We understand that you have received enquiries as to the tax implications that would arise on payout of the mortgage on or the sale of a low-rental housing project.
The situation outlined in your letter involves an actual fact situation. To the extent that it relates to a past transaction you should contact the appropriate Tax Services Office, since the review of such transactions falls within their responsibility and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known. If it relates to a proposed transaction, assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation. However, we can offer the following general comments.
Paragraph 149(1)(n) of the Income Tax Act (the "Act") exempts from Part 1 Tax the taxable income of a person for a period when that person was a limited-dividend housing company (within the meaning of that expression as defined in section 2 of the National Housing Act), all or substantially all of the business of which is the construction, holding, or management of low-rental housing projects.
It is a question of fact whether a particular person meets these two conditions or would continue to as a result of the sale of or the payout of a mortgage on a low-rental housing project.
The following terms are defined in Section 2 of the National Housing Act (the "NHA"):
"limited dividend housing company" means a company incorporated to construct, hold and manage a low-rental housing project, the dividends payable by which are limited by the terms of its charter or instrument of incorporation to five per cent per annum or less.
"low-rental housing project" means a housing project undertaken to provide decent, safe and sanitary housing accommodation, complying with standards approved by the Corporation, to be leased to families of low income or to such other persons as the Corporation,
(a)in its discretion, in the case of a housing project owned by it, or
(b)under agreement with the owner, in the case of a housing project not owned by it.
designates, having regard to the existence of a condition of shortage, overcrowding or congestion of housing.
"Corporation" means the Canada Mortgage and Housing Corporation...
As you know the first condition relates to the interpretation and administration of the NHA which falls within the responsibility of CMHC.
With respect to the second condition, the Department interprets the words "all or substantially all" to mean 90% or more. It proceeds from this that 90% or more of the business of a "limited-dividend housing company" must be demonstrated to be for the construction, holding or management of low-rental housing projects which lease accommodations to low-income families for the relevant years. This is also a question of fact which would require a review of both the activities and the financial statements of a particular company.
A person that was exempt from Part I tax under paragraph 149(1)(n) and ceases to qualify for exemption as a result of failing to meet either of the two conditions of that paragraph, would be subject to the provisions of subsection 149(10) of the Act at that time. Briefly, subsection 149(10) provides for, inter alia, a deemed taxation year, the deemed disposition and reacquisition of property and the expiry of loss carry forwards. This will allow for the recognition of accrued gains or losses including recaptured depreciation before the loss of tax exempt status and prevents losses recognized while exempt from being carried forward and applied to years in which the person is taxable.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 1996
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© Sa Majesté la Reine du Chef du Canada, 1996
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