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.
Principal Issues: Did the corporation qualify for the tax exemption provided by paragraph 149(1)(l) of the Act for the taxation years under review?
Position: No.
Reasons: The corporation operated a for-profit business during those years. In addition, income of the corporation was made available to one of its members.
June 10, 2011
Compliance Programs Branch HEADQUARTERS
Speciality Audits Section Income Tax Rulings
Attention: Rubin Dressler Directorate
L. Zannese
(613) 957-2747
2011-039866
XXXXXXXXXX (the "Corporation")
We are writing in response to your request for our views as to whether the Corporation qualified for the tax exemption provided by paragraph 149(1)(l) of the Income Tax Act (the "Act") for the XXXXXXXXXX to XXXXXXXXXX taxation years. We also acknowledge receipt of the materials provided for our reference, which included the auditors' notes, a summary of the Corporation's incorporating documentation and the Corporation's financial statements for the years under review.
FACTS:
Based on the material provided, our understanding of the facts is as follows:
In general terms, paragraph 149(1)(l) of the Act provides that the taxable income of an organization is exempt from tax under Part I of the Act for a period throughout which the organization meets all of the following conditions:
- it is a club, society or association;
- it is not a charity;
- it is organized and operated exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit; and
- its income is not available for the personal benefit of a member or shareholder, unless the member or shareholder is an association which has as its primary purpose and function the promotion of amateur athletics in Canada.
Based on the information provided, the Corporation may be an unregistered charity. The Corporation is operating an educational institution, and education is generally a charitable object. Further, the Corporation's sister school is a registered charity. An organization that is a charity, whether or not it is registered with the Canada Revenue Agency, cannot qualify for the tax exemption provided by paragraph 149(1)(l) of the Act. You may wish to consider whether the Corporation is a charity. If it is, then in order for the Corporation to qualify for a tax exemption, it must register as a charity; the wording of paragraph 149(1)(l) prevents it from relying on that provision.
Assuming that the Corporation is not a charity, our review of the summary provided to us by the auditor of the Corporation's objects and by-laws suggests that the Corporation is organized in a manner that meets the requirements of paragraph 149(1)(l) of the Act. However, we agree with the auditor's view that the operations of the Corporation evidence a profit purpose. Moreover, it appears that income of the Corporation has been available for the personal benefit of its members, in particular to XXXXXXXXXX .
The Corporation can only claim the exemption from tax provided by paragraph 149(1)(l) of the Act if it is operated exclusively for a purpose other than profit. This does not mean that a 149(1)(l) organization cannot earn a profit; it can, but the profit must be incidental and must result from activities undertaken to support the organization's not-for-profit objectives. The earning of profit cannot be or become a purpose of the organization. The decision of the Federal Court in Gull Bay Development Corporation v. HMQ, 84 DTC 6040 ("Gull Bay") turns on this point.
In the current situation, the Corporation has earned a profit every year since XXXXXXXXXX , and these profits have been increasing in amount. The balance sheet of the Corporation records investments of approximately $XXXXXXXXXX , and unallocated reserves of approximately $XXXXXXXXXX for the fiscal year ending in XXXXXXXXXX . These amounts appear to be more than incidental and suggest that the Corporation has a profit purpose. In fact, there is little evidence that the Corporation is something other than a for-profit business undertaken for the benefit of its members, especially in light of the personal wealth element discussed below.
In addition to operating without a profit purpose, an organization claiming the tax exemption provided by paragraph 149(1)(l) of the Act cannot make its income available for the personal benefit of its members. Income of the Corporation has benefitted a member, XXXXXXXXXX , both directly and through his wholly-owned corporation, the sister corporation described above. The indirect benefit is evidenced by various transactions described below.
The Corporation provided guarantees using its investments as collateral for loans taken out by its sister corporation, which relieved XXXXXXXXXX of this encumbrance on his own funds. This financing directly supported the sister corporation's operations and acquisitions, which increased its value, and the value of XXXXXXXXXX 's shares. The Corporation provided the sister corporation with additional funding by paying advances totalling $XXXXXXXXXX as of XXXXXXXXXX . Although the Corporation charged interest on this amount for the XXXXXXXXXX and XXXXXXXXXX taxation years, for XXXXXXXXXX it lent this amount interest-free. The Corporation paid for approximately XXXXXXXXXX % of the costs of renovations to a building that was used by the Corporation but owned by the sister corporation. These renovations increased the value of the building, which increased the value of the sister corporation, again benefitting XXXXXXXXXX . Since XXXXXXXXXX , the sister corporation has been charging rent of $XXXXXXXXXX per square foot to the Corporation for the use of the entire building. The sister corporation has an office and records in this building but the Corporation pays rent for the whole space. The rent paid by the Corporation increased under a new lease signed in XXXXXXXXXX from $XXXXXXXXXX (including occupancy costs) to $XXXXXXXXXX . In addition, the rent is indexed to increase a minimum of XXXXXXXXXX % annually. The sister corporation has used this income to acquire additional real property assets; it went from owning XXXXXXXXXX buildings in XXXXXXXXXX to owning XXXXXXXXXX buildings in XXXXXXXXXX . Moreover, the real estate expert at the TSO suggests that the rent is excessive and a more accurate fair market value rent for a building like this would be between XXXXXXXXXX . Essentially, XXXXXXXXXX has arranged the affairs of the Corporation so that it has financed the sister corporation, increasing the value of the sister corporation and its ability to pay dividends to XXXXXXXXXX .
CONCLUSION
In light of all of the above, we agree with the auditor's conclusion that the Corporation did not qualify for the exemption from tax provided by paragraph 149(1)(l) of the Act for the taxation years under review. In particular, it appears that the Corporation operated for a profit purpose and made income available for the personal benefit of at least one of its members.
Please contact us, if we may be of any further assistance.
Yours truly,
Eliza Erskine
Manager
Non-Profit Organizations and Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Cc: XXXXXXXXXX
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