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 149(5) applies
Position: Would appear to apply based on limited information available.
Reasons: Facts of the case
2003-002153
XXXXXXXXXX Denise Dalphy, LL.B.
(613) 941-1722
October 9, 2003
Dear XXXXXXXXXX:
Re: Subsection 149(5) of the Income Tax Act (the "Act")
We are writing in reply to your letter dated May 27, 2003 wherein you requested our views as to whether subsection 149(5) of the Act would apply in a particular situation.
Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are seriously proposed in the near future and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. In particular it would appear, based on the details provided in your submission, that your transactions are partially completed or completed, and that your relevant Tax Services Office should address these issues. Notwithstanding the foregoing, we are providing the following comments.
Facts
You described a corporation (the "Company") that is organized to maintain a lake, park space and roadways in a residential community in Canada. The Company leases the land (the "Real Property") from a City for a nominal amount under a long-term lease agreement. The Company has title to a building that sits on the Real Property, which houses administrative offices, washroom and change facilities. The Company is allowed to levy fees on the Real Property in this residential community and the Company has an encumbrance on each individual title in the community. This fee is mandatory for all owners of Real Property in the community. The Company provides services, including, swimming, scuba diving, skating, beach volleyball, kayaking and fishing lessons.
The Company, under its Articles of Association, is allowed to levy fees on the Real Property. The Company has levied fees in excess of its current operating requirements. The primary reason for doing so is that the Company needs to have sufficient cash reserves in order to meet any future requirements, such as major repair or necessary improvement to the real property (or insurance related issues).
Firstly, we do not have enough information to determine whether in a particular year the Company is an entity that is described in paragraph 149(1)(l) of the Act.
Further, as you point out, subsection 149(5) of the Act can override the exemption in paragraph 149(1)(l) of the Act and result in the taxation of income from property and certain taxable capital gains where a non-profit organization has as its main purpose the provision of dining, recreational or sporting facilities for its members.
We have not had an opportunity to review the Articles of Incorporation or the By-Laws of the organization. Nor have we have had an opportunity to review the relevant financial statements, asset statements, or any other descriptions of the activities of employees and members.
Based on the limited information that you have provided, it would appear the organization would likely fall within the ambit of subsection 149(5) of the Act. Also, and again, based on information that we have had the opportunity to review, it appears that the facilities are not exclusively used by members (as described in paragraph 149(5)(e) of the Act) and as such, even if the organization were subject to subsection 149(5), the exemption from capital gains tax in paragraph 149(5)(e) of the Act would not apply. Further, if the Company is renting out approximately half of the building to another person to which it may not deal at arms length, there is no information before us as to why, prima facie, any such rental losses would reduce a subsection 149(5) of the Act income inclusion.
Of course, if this situation does concern proposed transactions, we would be pleased to give this matter further consideration if you provide us with detailed information in the context of an advance income tax ruling.
We trust these comments will be of assistance.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
Yours truly,
Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate
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