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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
Whether the fact that a charitable organization will be leasing excess space will result in the charitable organization being considered to be carrying on business for purposes of paragraph 149.1(2)(a).
Position:
Question of fact. In this case, based on the terms of the lease and the facts as described, the charitable organization will not be carrying on business for purposes of paragraph 149.1(2)(a).
Reasons:
Based on a review of the specific terms under the lease, the charity is not providing any services to the tenant that would indicate that it is earning income from a business. Further, the excess space will be the only property of the charity to be leased to earn income.
XXXXXXXXXX 2003-002420
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the additional information provided in your correspondence of XXXXXXXXXX.
You advise that to the best of your knowledge and that of the taxpayer referred to above, none of the issues involved in the ruling request is:
(i) in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) the subject of a ruling previously issued by the Directorate.
In this letter, unless otherwise indicated, all statutory references are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act").
Our understanding of the facts, proposed transactions and their purposes is set out below.
FACTS
1) The taxpayer, XXXXXXXXXX ("Charity"), was incorporated under the laws of the XXXXXXXXXX and is a "charitable organization" within the meaning of subsection 149.1(1). The Charity has a fiscal year-end of XXXXXXXXXX. Its office is located in XXXXXXXXXX and its charitable registration number is XXXXXXXXXX.
2) The Charity is dedicated to providing XXXXXXXXXX . The Charity currently operates XXXXXXXXXX residential programs and XXXXXXXXXX day programs. It is currently governed by a board of XXXXXXXXXX directors.
3) The Charity is primarily funded by the XXXXXXXXXX with an annual funding level of $XXXXXXXXXX.
4) In XXXXXXXXXX , the Charity purchased the property located at XXXXXXXXXX. The Charity completed the renovation of the building in XXXXXXXXXX at a cost of $XXXXXXXXXX of which $XXXXXXXXXX was borrowed from the XXXXXXXXXX. This building currently houses the administration and day programs offered by the Charity.
PROPOSED TRANSACTIONS
5) The Charity is proposing to offer excess space not currently required by the Charity to downtown merchants in consideration for monthly rents. The area to be rented out to commercial tenants would be approximately XXXXXXXXXX square feet on the main floor of the building. The Charity anticipates that the excess space will be leased to XXXXXXXXXX tenants.
6) The Charity will enter into a lease with each of the prospective tenants. The term of the lease will be for a minimum of XXXXXXXXXX years but may vary depending on tenant negotiations.
7) Monthly rent will be $XXXXXXXXXX per square foot ("minimum rent") plus "triple net". You advise that the monthly rent represents fair market value.
8) Pursuant to the terms of the lease, in addition to paying the Charity the minimum rent, each tenant will pay as additional rent each month:
a) the tenant's proportionate share of the operating costs (all costs of the Charity of operating, managing and maintaining in good repair the building) for such month;
b) the tenant's proportionate share of all municipal realty taxes (including school and local improvement taxes) attributable to the leased premises; and
c) all other sums of money required under the lease to be paid to the Charity by the tenant, whether or not designated as additional rent.
You advise that a tenant's "proportionate share" means the percentage of the square footage leased to that particular tenant over the total square footage of the main floor of the building.
9) Each tenant will be responsible for paying all business or other taxes from time to time levied in respect of the payments due under the lease and the tenant's use or occupation of the leased premises.
10) Each tenant will, at its expense, provide and maintain in force during the term of the lease:
a) fire, extended coverage, and malicious damage insurance for the benefit of the Charity and the tenant for the full replacement value of all leasehold improvements made on the leased premises by the tenant; and
b) public liability insurance for the benefit of the Charity and the tenant.
11) The tenants cannot assign or sublet the leased premises without the prior consent of the Charity.
12) Each tenant will, during the term of the lease, well and sufficiently repair, maintain, amend and keep the leased premises and all such maintenance, repairs and replacements will be done to the reasonable satisfaction of the Charity.
13) Any alterations, repairs or improvements to the leased premises cannot be made without the prior consent of the Charity and will be paid for by the tenant.
14) Each tenant will pay all rates and charges for telephone, water, sewer, gas and electric light and/or power supplied to or used in the leased premises. Each tenant will also pay all rates and charges for any and all other utilities or municipal or other services, consumed by or reasonably attributable to the tenant or the tenant's occupation of the leased premises.
15) The Charity will be responsible for repairing and maintaining the foundation, outer walls and roof of the building in proper structural repair.
16) Each tenant will pay to the Charity interest at XXXXXXXXXX% per annum on all payments of rent and other sums required to be made under the terms of the lease which have become overdue so long as such payments remain unpaid.
17) Any profits made by the Charity will be used to support or expand the Charity's charitable programs.
18) You advise that the tenants will deal at arm's length with the Charity and will not operate businesses with a charitable related purpose.
19) You advise that the excess space in the building at XXXXXXXXXX will be the only property of the Charity to be leased to earn income and that staff time would be limited to the collection and recording of rent.
PURPOSE OF THE PROPOSED TRANSACTIONS
20) The proposed transactions are being undertaken to allow the Charity to utilize otherwise excess space and obtain additional funds to allow the expansion of existing programs of the Charity.
RULING GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our ruling is as follows:
Provided the terms of the lease between the Charity and the tenant are and continue to be as described in 6 to 16 above, the Charity will not be considered to be carrying on a business for the purposes of paragraph 149.1(2)(a).
This ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and is binding on the Canada and Customs Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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