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: Whether a municipally-owned corporation whose income is derived from loans to and investments in shares of taxable subsidiaries that carry on business outside the geographical boundaries of the municipality can be exempt pursuant to paragraph 149(1)(d.5).
Position: Factual determination.
Reasons: In our view, it is the activities of the corporation itself that are relevant for determining where its income is earned for the purposes of paragraph 149(1)(d.5). In this case, the income is earned from loans to and investments in shares of taxable subsidiaries. The facts provided indicate that the corporation's activities (making loans, buying shares, etc.) take place within the geographical boundaries of the municipality.
October 20, 2011
XXXXXXXXXX , CMA Terry Young, CA
Large Case File Manager (613) 948-5273
XXXXXXXXXX TSO
2011-039552
XXXXXXXXXX ("ACO")
Application of Paragraph 149(1)(d.5)
This is in response to your memorandum of February 3, 2011, wherein you requested our views on whether ACO was exempt from tax on its taxable income for its taxation years ended XXXXXXXXXX and XXXXXXXXXX pursuant to paragraph 149(1)(d.5) of the Income Tax Act. We also acknowledge the additional information submitted on March 28, 2011, and our various conversations (Young/XXXXXXXXXX and Young/XXXXXXXXXX ).
Background
ACO is a wholly-owned subsidiary of the City of XXXXXXXXXX (the "City"), a municipality exempt from Part I tax pursuant to paragraph 149(1)(c). ACO has been filing its corporate tax returns as a corporation exempt from Part I tax because of paragraph 149(1)(d.5), which states:
149. (1) Miscellaneous exemptions - No tax is payable under this Part on the taxable income of a person for a period when that person was...
(d.5) Municipal corporations - subject to subsections (1.2) and (1.3), a corporation, commission or association not less than 90% of the capital of which was owned by one or more municipalities in Canada, if the income for the period of the corporation, commission or association from activities carried on outside the geographical boundaries of the municipalities does not exceed 10% of its income for the period; (emphasis added)
According to the auditor's submission and confirmed by her, for the purposes of this file, ACO otherwise meets the requirements of paragraph 149(1)(d.5); the only issue is whether no more than 10% of its income is from activities carried on outside of the City's geographical boundaries.
ACO has a number of direct and indirect wholly-owned subsidiaries. These subsidiaries carry on activities inside and outside the City and are members of various partnerships carrying on activities throughout Canada and the United States.
ACO reported the following income and expenses:
XXXXXXXXXX XXXXXXXXXX
Revenue $ $
Interest XXXXXXXXXX XXXXXXXXXX
Dividends XXXXXXXXXX XXXXXXXXXX
Foreign exchange gains(losses) XXXXXXXXXX
Expense recoveries XXXXXXXXXX XXXXXXXXXX
You have asked us several questions (some have been paraphrased and renumbered):
1.
Do the principles from the jurisprudence on the taxation of interest income or business income earned by Indians apply to the application of paragraph 149(1)(d.5) of the Act?
While your memorandum does not take a position on this question, you did refer to two court cases (Large et al v The Queen, 2006 TCC 509, and Southwind v The Queen, 96 DTC 1950).
ACO's Position:
ACO feels that the Large and Southwind cases are not applicable for purposes of paragraph 149(1)(d.5). The "connecting factors" test is applied to determine whether income of an Indian is "personal property of an Indian ... situated on a reserve" within the meaning of section 87 of the Indian Act. In contrast, the test in paragraph 149(1)(d.5) does not refer to where income is situated. Accordingly, it is ACO's view that a connecting factors examination of whether the income itself is located within the municipal boundaries is not contemplated by the language of paragraph 149(1)(d.5).
Secondly, ACO notes that the purpose of the income test in paragraph 149(1)(d.5) is to prevent municipally-owned corporations from competing in commercial activities on a tax-free basis outside the municipal boundaries. This makes it apparent that only the activities of the municipal corporation itself are relevant.
Paragraph 87(1)(b) of the Indian Act exempts from taxation personal property (which includes income) of an Indian situated on a reserve. Paragraph 81(1)(a) of the Act exempts from tax any amount that is declared to be exempt from income tax pursuant to another Act of Parliament. In contrast, paragraph 149(1)(d.5) exempts from Part I tax a corporation, commission or association not less than 90% of the capital of which was owned by one or more municipalities in Canada provided that the entity's "income for the period ... from activities carried on outside the geographical boundaries of the municipalities does not exceed 10% of its income for the period". Given the wording of paragraph 149(1)(d.5), it is our view that paragraph 149(1)(d.5) is not concerned with the "situs" or the location of the income but rather the concern is with the location of the activities from which the corporation's income is generated. Consequently, we share ACO's view that the "connecting factors" test is not the appropriate test when evaluating whether an entity is exempt pursuant to paragraph 149(1)(d.5).
2.
Is the dividend and interest income received by ACO from taxable subsidiaries that carried on their activities outside the City income earned from activities carried on outside the geographic boundaries of the City for the purposes of paragraph 149(1)(d.5)?
In its submission dated XXXXXXXXXX , ACO described its activities with regard to its dividend and interest income as follows:
- ACO raises in the City the capital that it lends to, and invests in shares of, its subsidiaries.
- All ACO's activities in establishing, acquiring, financing, providing services to, exercising stewardship over, and owning, the subsidiaries take place in the City.
- Share certificates relating to ACO's investment in subsidiaries are delivered and kept in the City. ACO prepares, executes, and stores loan documentation in the City.
- ACO exercises its powers pursuant to XXXXXXXXXX Agreements with its subsidiaries in the City.
- ACO's bank accounts are located in the City and all dividends and interest are received by ACO into such bank accounts, and all disbursements of funds invested by ACO in its subsidiaries as loans and share subscription are from such accounts.
- All inter-corporate loans are negotiated by and approved by either the ACO board of directors (where required) or by ACO's officers in the City.
- ACO's authorizes and executes in the City the written agreements that relate to the provision of financial services.
- ACO performs in the City the other activities that relate to the lending arrangements and the provision of the financial services - such as coding, recording, and making deposits, calculating and recording interest amounts, etc.
- ACO's treasury functions and reporting in respect of other investments are performed in the City.
You have indicated that you have accepted that the above description of activities is accurate and that, when taking into account only ACO's activities, the income earned outside the City does not exceed 10% of its income for the period. However, you are concerned that ACO may be circumventing the object, spirit and purpose of paragraph 149(1)(d.5).
ACO's Position:
ACO submits that both the wording and the purpose of paragraph 149(1)(d.5) make it clear that the only activities relevant in determining whether the 10% income test in paragraph 149(1)(d.5) is met are the activities carried on by the taxpayer itself. ACO notes that pursuant to paragraph 149(1)(d.6), subsidiaries of municipal corporations are addressed in their own right and may be tax-exempt or taxable, depending on whether those subsidiaries themselves satisfy the income test. Paragraph 149(1)(d.5) does not expressly provide that a municipal corporation must not own subsidiaries that operate outside the municipality and that are taxable entities.
Paragraph 149(1)(d.5) refers to "income from the period of the corporation, commission or association from activities carried on outside the geographical boundaries of the municipalities". Whether income for a particular period is from activities carried on within or outside the geographical boundaries is a question of fact. In the situation described, it is our view that it is the activities of ACO and not of its taxable subsidiaries that are relevant in determining whether its income is from activities carried on within or outside the geographical boundaries of the municipality. Based on the information provided to us and accepted by you, ACO's activities relating to its dividend and interest income are substantially all carried on within the geographical boundaries of the City. Therefore, in our view, the income test in paragraph 149(1)(d.5) would be satisfied.
We note that the position above is consistent with the position taken in document E1999-0006955 (recently confirmed in document E2010-037696). In document E1999-0006955, we indicated that the acquiring, holding and disposing of shares by a municipal corporation constitute activities of the corporation and to the extent that it is reasonable to consider such activities to be carried on within the geographical boundaries of the municipality, the income from such activities should not fall within the ambit of the 10% portion of the test provided for in paragraph 149(1)(d.5).
3.
To meet the income test in paragraph 149(1)(d.5) of the Act, the corporation must show that not more than 10% of its "income for the period" is from activities carried on outside the geographical boundaries of the municipality. According to document E2001-011412, the reference to "income" means the net income of the corporation. Please confirm whether it is still CRA's opinion that the reference to income means net income.
We were asked to reconsider the issue in document E2005-011830 and we confirmed at that time that references to "income" in paragraphs 149(1)(d.5) and (d.6) mean "net income". We are still of the view that the reference to "income" in paragraph 149(1)(d.5) means net income.
XXXXXXXXXX
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Celine Charbonneau at (613) 957-2137. A copy will be sent to you for delivery to the client.
Jenie Leigh
Manager
Charitable and Financial Institutions Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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