30 November 1997 Ruling 9806313 - MUNICIPAL CORPORATION - 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: Whether the Foundation qualifes for exemption under paragraph 149(1)(d)

Position: yes

Reasons: The shares will only be owned by XXXXXXXXXX Municipalities.

XXXXXXXXXX
XXXXXXXXXX  			980631
XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX - Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above referenced taxpayer. In your letters of XXXXXXXXXX you informed us of additional information in respect of and amendments to the facts and proposed transactions described in your original letter. We also acknowledge the telephone conversationsXXXXXXXXXX which further clarified the facts and proposed transactions described below.

We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling is being considered by a Tax Services Office or a Taxation Centre in connection with any tax return already filed, and none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal.

Definitions

In this letter the following terms have the meanings respectively assigned thereto:

(a) "Act" means the Income Tax Act, R S C 1985, Fifth Supplement, c. 1, as amended from time to time.

(b) "Bill" means Bill C-28, which received first reading in the House of Commons on December 10, 1997.

(c) XXXXXXXXXX.

(d) ) XXXXXXXXXX.

(e) "Lottery" means the XXXXXXXXXX.

(f) "Prize" means a prize to be distributed by the Foundation in conjunction with the XXXXXXXXXX lottery scheme described below.

(g "Regulations" means the Income Tax Regulations, C.R.C. 1979, C. 945, as amended from time to time.

Facts

1. XXXXXXXXXX (the “Subscribers”) arranged for a foundation to be incorporated on XXXXXXXXXX, under the name "XXXXXXXXXX" (the “Foundation”), as a not-for-profit limited company XXXXXXXXXX.

2. The Foundation’s Memorandum of Association states that the Foundation’s objects are, inter alia:

(a) to carry on, without pecuniary gain to its shareholders, objects of a social welfare, civic improvement, pleasure or recreation (XXXXXXXXXX) nature and to establish, develop, maintain, operate, improve, enhance, repair, renovate and support (including by subsidizing costs that may otherwise be incurred) community-owned or community-operated XXXXXXXXXX facilities and programs or services used or useful in connection therewith; and

(b) to raise funds, by means of a XXXXXXXXXX (the "Lottery"), subject to any law enacted by the legislature of the Province of XXXXXXXXXX, and to hold the same and apply the income or part thereof arising therefrom as may be decided by the directors of the Foundation to:

(i) perform and provide services respecting the conduct, administration and management of the Lottery;

(ii) pay Prizes in connection with the administration of the Lottery; and

(iii) to the extent that the Foundation’s income exceeds its administrative costs and the amount required to pay Prizes, to apply the excess to support XXXXXXXXXX by payment of or making contributions toward the establishment, development, maintenance, improvement, enhancement, repair, renovation and other operating and capital costs, of whatsoever nature and kind, of or associated with community-owned XXXXXXXXXX facilities in XXXXXXXXXX, which are used by XXXXXXXXXX.

3. The Foundation’s Memorandum of Association also states, inter alia:

(a) The liability of the shareholders of the Foundation is limited.

(b) The income and property of the Foundation wheresoever derived shall be applied solely towards the promotion of the objects of the Foundation as described in the memorandum of association and no portion thereof shall be paid or transferred to, or be available directly or indirectly, by way of dividend, bonus or otherwise howsoever for the benefit of, any shareholder or shareholders of the Foundation, provided that nothing herein shall prevent the repayment of any loan from, or indebtedness of the Foundation to, any shareholder or director or the payment in good faith of reasonable remuneration to any employee of the Foundation, including a shareholder or director in return for any services actually rendered to the Foundation.

(c) For greater certainty, the Foundation is to be organized and operated solely for a purpose other than profit.

(d) The Foundation is authorized to issue XXXXXXXXXX shares without nominal or par value.

(e) The maximum price or consideration at or for which the shares without nominal or par value may be sold is $XXXXXXXXXX per share.

(f) Other than on incorporation, the shares shall be issued or transferred only to municipalities in the Province of XXXXXXXXXX.

(g) To the extent that the Foundation earns income in a particular year in excess of its expenditures for that year, the excess will not be accumulated for any period of time longer than is reasonable to ensure that the Foundation’s activities may be carried on and its objects accomplished.

(h) If upon the winding-up, dissolution, liquidation or amalgamation of the Foundation there remains, after the satisfaction of all debts and liabilities of the Foundation, any property whatsoever, the same shall not be paid to or distributed amongst the shareholders of the Foundation but shall be paid over, given or transferred to a registered charity, a registered Canadian amateur athletic association or a tax-exempt non-profit organization with objects similar to those of the Foundation, as chosen by the board of directors of the Foundation.

4. The Foundation has only one class of shares, all of which have equal voting rights.

5. The Subscribers each subscribed for, and now hold, one share respectively of the capital stock of the Foundation. The Subscribers reside in or near XXXXXXXXXX.

6.

XXXXXXXXXX

7. XXXXXXXXXX

Proposed Transactions

8. As soon as practical, each Subscriber will transfer his share of the capital stock of the Foundation to an XXXXXXXXXX municipality, such that XXXXXXXXXX municipalities will become the shareholders of the Foundation. Thereafter, shares of the capital stock of the Foundation will be issued or transferred only to XXXXXXXXXX municipalities.

9. XXXXXXXXXX.

10. XXXXXXXXXX.

11. The Foundation will apply to the XXXXXXXXXX for a license to conduct the Lottery in XXXXXXXXXX.

12. After receiving the requisite license, the Foundation will conduct the Lottery. XXXXXXXXXX Pursuant to the Lottery, Prizes will be distributed by chance among holders XXXXXXXXXX. Each time that a lottery draw is held, a range of Prizes will be distributed, with one Prize being relatively significant and many of the Prizes being more modest. Neither skill nor merit will play a part in determining the distribution of the Prizes.

13. No portion of the selling price (i.e., the principal amount) of XXXXXXXXXX will be allocated by the Foundation to the right inherent in XXXXXXXXXX for the Holder thereof to participate in the Lottery, nor will any consideration be stipulated as being payable for this right.

14. The Foundation will invest the money which it receives on the sale of XXXXXXXXXX. The investment income will be used by the Foundation in the order and manner set out below:

(a) to pay the administrative costs of the Foundation;

(b) to pay the Prizes; and

(c) to support XXXXXXXXXX by providing financial assistance to establish, develop, maintain, operate, improve, enhance, repair, renovate and support the community-owned facilities used XXXXXXXXXX or to subsidize the costs that would otherwise be incurred by the communities in making their facilities available to XXXXXXXXXX.

15. It is anticipated that the Prizes will represent at least XXXXXXXXXX% of the Foundation’s investment income.

16. In supporting XXXXXXXXXX, the Foundation will not provide funds directly to the respective XXXXXXXXXX. Rather, the Foundation’s financial support will be directed toward the community-owned facilities XXXXXXXXXX.

17. Where a facility is owned directly by a municipality that is a shareholder of the Foundation (rather than being owned by a separate municipally-owned corporation or body), any financial support in respect of the facility will be provided by the Foundation to the municipality in its capacity as the owner of the facility and not in its capacity as a shareholder of the Foundation.

18. After its incorporation and XXXXXXXXXX , the Foundation will operate in conformity with its Memorandum of Association and its Articles of Association. For greater certainty:

(a) the Foundation will be organized and operated solely for a purpose other than profit; and

(b) no part of the Foundation’s income will be payable to, or otherwise available for the personal benefit of, any shareholder of the Foundation (in its capacity as a shareholder).

19. After the transfer by the Subscribers of their respective shares of the capital stock of the Foundation to XXXXXXXXXX municipalities and XXXXXXXXXX

(a) all of the issued shares of the capital stock of the Foundation will be owned by XXXXXXXXXX municipalities; and

(b) the Foundation’s investment activities will be carried on and its investment decisions will be made within the geographical boundaries of one or more of the municipalities that are shareholders of the Foundation.

Purpose of the Proposed Transactions

The purpose of the Proposed Transactions is to raise money, by means of the Lottery and the investment of the proceeds of the sale of XXXXXXXXXX, to support XXXXXXXXXX by providing financial assistance to establish, develop, maintain, operate, improve, enhance, repair, renovate and support the community-owned facilities XXXXXXXXXX or to subsidize the costs that would otherwise be incurred by the communities in making their facilities available XXXXXXXXXX.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. We confirm that after completion of the Subscribers transferring their respective shares of the capital stock of the Foundation to XXXXXXXXXX municipalities, as described in paragraph 8 above, the provisions of paragraph 149(1)(d) of the Act will apply to exempt the Foundation from Part I Tax.

B. We confirm that the provisions of paragraph 12(1)(x) of the Act will not apply to include the amount of a Prize any Holder receives or becomes entitled to receive in computing the Holder’s income from a business or property or to treat such amount as profit for the purposes of subsection 9(1) of the Act.

C. We confirm that for the purposes of paragraph 12(1)(c), subsections 12(3), 12(4), 12(9) and 20(14), and Regulation 7000(2)(a), the amount of a Prize that any Holder receives, or becomes entitled to receive, will not be considered to be interest.

D. We confirm that the provisions of paragraph 40(2)(f) of the Act will apply to deem any Holder’s gain or loss from the disposition of the chance to win a Prize or a right to receive an amount as a Prize in connection with the Lottery to be nil.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding provided that the transfer of the shares is completed by XXXXXXXXXX and in respect of XXXXXXXXXX and Prizes awarded prior to XXXXXXXXXX.

Opinions

A. In our view, provided that subsection 178(1) of the Bill is enacted in a manner identical to, or substantially the same as, that which received first reading in the House of Commons on December 10, 1997, upon the Subscribers transferring their respective shares of the capital stock of the Foundation to XXXXXXXXXX municipalities, by reason of proposed paragraph 149(1)(d.5) of the Act, no tax will be payable under Part I of the Act on the taxable income of the Foundation.

B. In our view, the right to participate in the Lottery has value to the XXXXXXXXXX that would be a return on investment. Therefore, an amount equal to that value would be included in computing the Holder’s income from property. However, the determination of that value is a question of fact that would be dependent on such factors as the odds of winning, the frequency of draws, and the value of the Prizes.

The foregoing opinions are given in accordance with the practice referred to in paragraph 22 of IC-70-6R3 and are not binding on Revenue Canada, Taxation.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch