9 June 1998 External T.I. 9733735 - RELATED BUSINESS

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:

Whether the test in the definition of related business in subsection 149.1(1) of the Act is limited to employees or can it be expanded to include independent contractors?

Position:

Expanded to include independent contractors.

Reasons:

The Department has traditionally taken a broad interpretation of the phrase "persons employed by the charity in carrying on that business" to include more than individuals hired under an employee/employer relationship. While there may be voluntary supervision, planning and other activities provided by members of the church, generally the Department would not overlook the fact that other labour and expertise has been utilized in the business in the form of independent contractors.

		973373
XXXXXXXXXX 	A.M. Brake

Attention: XXXXXXXXXX

June 9, 1998

Dear Sirs:

Re: Registered Charity - Related Business

This is in reply to your letter of December 19, 1997 wherein you outlined the scenario set out below and asked whether the proposed activity would qualify as a "related business" as defined in subsection 149.1(1) of the Income Tax Act (the "Act") for purposes of paragraph 149.1(2)(a) of the Act.

A local church acquired a parcel of land on which it intends to build a church. The land acquired is larger than the area required for the church building and parking lot.

The church plans to subdivide the excess land into fully serviced building lots and sell these lots to raise money to build the church building. In order to make lots suitable for sale, the church will engage independent contractors to survey the lots, build roads, sewers, etc. None of the members of the church who will supervise any of these activities and participate in the sale of the lots will be paid by the church for their time.

You have asked for our comments on the meaning of "related business" on the premise that the church would be considered to be carrying on an unrelated business if not for the exception described in the definition of "related business" in subsection 149.1(1) of the Act.

Our Comments

The term "related business", in relation to a charity, is defined to include a business that is unrelated to the objects of the charity if substantially all persons employed by the charity in the carrying on of that business are not remunerated for that employment.

On the understanding that the excess land was initially held as capital property, it is at some stage in the process between the time the excess land is severed from the church building lot and the time that the sale of the individual lots are sold that the use of the land converts from being a capital property to inventory and it is at that point in time that a business will have commenced. In this regard, we refer you to the comments contained in paragraph 12 of Interpretation Bulletin IT-218R which reads as follows:

12. Vacant land that is capital property used by its owner for the purpose of gaining or producing income will be considered to have been converted to inventory at the earlier of

(a) the time when the owner commences or causes the commencement of improvements thereto with a view to selling it, and

(b) the time of making application to the relevant authority for approval of a plan to subdivide the land into lots for sale, provided that the taxpayer proceeds with the development of the subdivision.

Provided the church carries out its intention to develop a subdivision and sell the developed lots, we agree with you that the church will be considered to be carrying on a business that is unrelated to its objects. In this regard, a business activity must continue to bear some relationship to the accomplishment of a given charity’s purposes. This is not the case here: there is no relationship between the sale of serviced lots and the advancement of religion. The question to be answered then is whether "substantially all persons employed by the charity in the carrying on of that business are not remunerated for that employment". In this regard, it is our view that this condition will not have been met in the circumstances described above. The Department has traditionally taken a broad interpretation of the phrase "persons employed by the charity in the carrying on of that business" to include more than individuals engaged under an employee/employer relationship. While there may be voluntary supervision, planning and other activities provided by members of the church, generally the Department would not overlook the fact that other labour and expertise has been utilized in the business in the form of independent contractors.

We trust our comments will be of assistance to you.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch