14 September 2011 Internal T.I. 2011-0415521I7 - Subparagraph 149(5)(e)(ii)

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: Was the capital gain that arose in XXXXXXXXXX from the disposition of land by the Corporation taxable?

Position: Yes.

Reasons: The Corporation was a golf course to which subsection 149(5) applied. The exception from tax contained in subparagraph 149(5)(e)(ii) was not met, as the land disposed of was not used exclusively for and directly in providing golfing facilities to the Corporation's members.

									September 14, 2011

	Compliance Programs Branch				HEADQUARTERS
	    Specialty Audits Section 				Income Tax Rulings
	Attention:  Rubin Dressler	  				Directorate
									L. Zannese
									(613) 957-2747

									2011-041552

		XXXXXXXXXX  (the "Corporation")

We are writing in response to your request for our views as to whether the Corporation was taxable on a capital gain realized in its XXXXXXXXXX taxation year.

FACTS

Based on the information you provided to us, our understanding of the facts is as follows:

• The Corporation is a private golf club that has existed since XXXXXXXXXX .
• The Corporation qualified for the exemption from tax provided by paragraph 149(1)(l) of the Income Tax Act (the "Act") for the XXXXXXXXXX taxation year.
• In XXXXXXXXXX , the Corporation sold a XXXXXXXXXX piece of land XXXXXXXXXX .
• The land was neither directly connected to the playing area of the golf course nor required for the use of the golf course.
• The sale of the land resulted in a capital gain to the Corporation of $XXXXXXXXXX .
• The Corporation reported the capital gain on its XXXXXXXXXX T2 corporate tax return, and claimed that the capital gain was exempt from tax pursuant to subparagraph 149(5)(e)(ii) of the Act.
• In XXXXXXXXXX , the Corporation had sold a similar piece of land. At that time, the Corporation reported the capital gain, and paid the resulting tax as required by subsection 149(5) of the Act.

OUR COMMENTS

Although an organization described in paragraph 149(1)(l) of the Act is generally not taxable under Part I of the Act on its taxable income, there is a special rule in subsection 149(5) of the Act that applies to such an organization if its main purpose is to provide dining, recreational or sporting facilities. Under subsection 149(5), an inter vivos trust is deemed to exist throughout the period during which the main purpose of the organization is to provide dining, recreational, or sporting facilities. Very generally, the following rules apply:

• the property of the 149(1)(l) organization is deemed to be the property of the trust;
• tax is payable by the trust on its taxable income for each taxation year;
• the taxable income of the trust is calculated on the assumption that there is no income or loss other than
  • income and losses from property; and
  • taxable capital gains, and taxable capital losses from the dispositions of property, other than property used exclusively for and directly in the course of providing the dining, recreational or sporting facilities provided by it to its members;
• $2,000 may be deducted in computing the taxable income of the trust, in addition to any other permitted deductions.

You have determined that the Corporation qualified for a tax exemption pursuant to paragraph 149(1)(l) of the Act for the XXXXXXXXXX taxation year. Since the Corporation's main purpose in XXXXXXXXXX was to provide golfing facilities to its members, we agree with your view that subsection 149(5) of the Act applied to the Corporation for that year.

Subparagraph 149(5)(e)(ii) of the Act contains an exception with respect to capital gains arising from the disposition of property that was used exclusively for and directly in the course of providing dining, recreation and sporting facilities to the members of the organization. Based on the facts that you have provided to us, the land disposed of by the Corporation in XXXXXXXXXX was not used by the Corporation exclusively for and directly in the course of providing dining, recreation and sporting facilities to its members. Consequently, we agree with your view that the capital gain arising from the disposition of this land was taxable. This is consistent with our past views regarding similar situations; XXXXXXXXXX .

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