5 March 1998 External T.I. 9703865 - RENTAL INCOME EARNED BY A PRIVATE FOUNDATION

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) Whether rental income can be earned by a private foundation
b) Whether rental income earned through a trust can be earned by a private foundation

Position:

a) Depends on the facts. See IT-434R for guidelines

b) Income earned from trust is trust income, not business income.

Reasons:

a) See IT-434 R; b) see 108(5) ITA

970386

XXXXXXXXXX N. Mondou, M.Fisc.

Attention: XXXXXXXXXX

March 5, 1998

Dear Madam:

Re: Income earned by a private foundation

This is in reply to your letter dated January 31, 1997, in which you requested our comments with respect to income earned by a charitable foundation which is a "private foundation" as defined in subsection 149.1(1) of the Income Tax Act (the "Act"). We apologize for the delay in responding to your request.

In your letter, you indicated that a private foundation is to invest in real property and earn rental income therefrom. The foundation will not be a tenant of the building, nor is there any intent to use the real property in the charitable activities of the foundation in the future. The property is to be held as an investment in order to realize a favourable return on the assets of the foundation through rental income and capital appreciation.

You also indicated that the rental property could be held by a trust, the sole beneficiary of which is the private foundation. All rental income would be allocated to the charity. The property management or administration would be performed by the employees or agents of the trust. The foundation would not have any involvement in the management or administration of the rental property.

For the purpose of this letter, we assume that the private foundation will not purchase the property for resale.

Our comments

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 70-6R3 dated December 30, 1996, issued by Revenue Canada.

Whether a private foundation will be considered to carry on a business is a question that requires an examination of all the relevant facts and that is to be determined by the appropriate Tax Services Office. However, we offer the following general comments.

As stated in paragraph 4 of Interpretation Bulletin IT-434R ("Rental of real property by individual"), the renting of real property is not in itself indicative of a business operation. It will be regarded as a business operation only when the landlord supplies or makes available to tenants services of one kind or another to such an extent that the rental operation has gone beyond the mere rental of real property. Accordingly, where the nature of a particular rental operation must be determined, it is the number and kinds of services supplied that will have to be ascertained. Further details are provided in paragraphs 5 and 6 of this Interpretation Bulletin.

To the extent that only the basic services referred to in paragraph 5 of the Interpretation Bulletin mentioned above are rendered to the tenants, the private foundation should not be considered as carrying on a business for the purposes of paragraph 149.1(4)(a) of the Act.

With respect to the income earned by a trust and distributed to the private foundation, you did not indicate who the settlor of the trust would be. For the purpose of this letter, we assumed that the settlor will be a person other than the private foundation.

Subsection 108 (5) of the Act provides that, except as otherwise provided in Part I of the Act, an amount included in computing the income for a taxation year of a beneficiary of a trust under subsection 104(13) or (14) or section 105 of the Act shall be deemed to be income of the beneficiary for the year from a property that is an interest in the trust and not from any other source. As a result, the income earned by the beneficiary should not be considered as income from a rental business. Moreover, if the beneficiary is not involved in the operation of the rental activity, the beneficiary should not be considered as carrying on this rental business.

We trust that these comments are of assistance but caution you that they do not constitute an advance income tax ruling and, accordingly, are not binding on the Department with respect to any particular transactions.

Yours truly,

P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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