7 October 1991 Income Tax Severed Letter - Hospital Foundation Expansion Program

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.

Dear Sirs:

Re: Hospital Foundation Expansion Program

This is in reply to your letter of June 18, 1991, requesting a technical interpretation with respect to the following hypothetical fact situation.

• 1. A hospital foundation (the "Foundation") is a charitable foundation as defined in paragraph 149.1(1)(a) of the Income Tax Act (the "Act") whose purpose is the accumulation of funds for the exclusive benefit of a specific hospital society. It is also a Public foundation as defined in paragraph 149.1(1)(g) of the Act. The hospital society is a Charitable Organization as defined in paragraph 149.1(1)(b) of the Act whose purpose is to provide health care in that specific hospital.
• 2. The Foundation has begun to acquire residential properties adjacent to the hospital and plans to continue to do so during a period of time which likely will not exceed three years. These properties are being acquired exclusively for the purpose of accommodating an expansion of the hospital at the earliest appropriate time.
• 3. In order to avoid any artificial increase in the cost to the Foundation of these residential properties due to possible public awareness of the Foundation's acquisition activity, the Foundation has incorporated a numbered holding corporation through which it has begun to acquire these properties. This corporation is a bare trustee, acting only as the registered title holder to preserve the anonymity of the Foundation. At all times the beneficial ownership of the properties will rest with the Foundation.
• 4. Since it will take some time to acquire sufficient property to accommodate the expansion plans of the hospital, there will be a period of time during which the Foundation does not have the appropriate personnel to manage a rental operation, the Foundation has engaged a property management company to do so on its behalf. The number of properties involved likely will not exceed ten.
• 5. The Foundation does not, anticipate the need for Ministerial approval under subsection 149.1(8) of the Act to accumulate these properties since it expects to meet its disbursement quota each year in accordance with paragraph 149.1(1)(e) of the Act.

You seek our confirmation that the Minister would not revoke the registration of the Foundation under subsection 149.1(3) of the Act and

• a) that the rental income earned is incidental to the intention for which the properties are being acquired. As such the interim rental operation would not be considered a business so paragraph 149.1(3)(a) of the Act would not apply.
• b) that the fact that a management firm has been engaged to manage this interim rental operation would not cause any income tax concerns and the requirements that substantially all people employed by the charity in carrying on the endeavour not be remunerated will not apply.
• c) that although the Foundation has acquired control of a corporation, this corporation is a bare trustee corporation with no assets, liabilities or sources of revenue on its own behalf, and the properties registered in its name are held by it in trust for their beneficial owner, the Foundation. As a result, it is reasonable to disregard the corporation due to the very specific reason for its existence which is solely to preserve the anonymity of the Foundation.
• d) that the hypothetical fact pattern does not constitute an avoidance transaction as defined in subsection 245(3) of the Act and that the general anti-avoidance provision contained in subsection 245(2) of the Act will not be applicable to this situation.

Our Comments

It appears that the interpretation you seek relates to a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.

Some of the factors in determining whether a business is being carried on involves the types of services provided by the landlord. In order for the rental income to be considered as producing property income the services provided by the landlord must be of very limited nature, basic and incidental to the tenant's occupation of the premises. Section 149.1(2) of the Act states that the Minister may revoke the registration of a charitable organization where it carries a business that is not a related business of that charity. It would be a question of fact whether the rental properties in question yield property income or income from the carrying on of a business. If the rental operations amount to the carrying on of a rental business, we doubt if it would meet the conditions stated in Section 149.1(1)(j) of the Act. In our view, however, the situation described appears to be one of incidental property income.

In our opinion, the fact that a management firm has been engaged to manage this interim rental operation would not, in and by itself, cause any concerns. Further, since in our view, there is no related business, the requirements that all or substantially all the people employed by the charity carry on the endeavour without remuneration would also not apply.

Although the Foundation has acquired control of a corporation, this corporation is a bare trustee corporation with no assets, liabilities or sources of revenue on its own behalf, and the properties registered in its name are held by it in trust for their beneficial owner, the Foundation. As a result, we agree that it is reasonable to disregard the corporation due to the very specific reason for its existence which is solely to preserve the anonymity of the Hospital.

General Anti-Avoidance Rule

The application of the general anti-avoidance rule (GAAR) presented in subsection 245(2) will deny any tax benefit resulting from an avoidance transaction. A "tax benefit" is defined in subsection 245(1) to be "a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act." The hypothetical fact pattern presented would not in our opinion result in the realization of a tax benefit to the Foundation, thus in our view, GAAR would have no application. We caution however, that the foregoing is merely in expression of opinion and is not binding on the Department.

The forgoing represents our general views with respect to the subject matter of your letter, however, the facts of a particular situation may result in a different conclusion. As indicated, these opinions are not rulings and in accordance with the guidelines set forth in Information Circular 70-6R2 they are not binding on the Department.

We trust this information will be of assistance to you.