10 February 2010 External T.I. 2009-0347571E5 - 149(1)(l) Entity - Gain on Real Property

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: 1. Whether a gain on the disposition of real property by a paragraph 149(1)(l) entity is a taxable capital gain. 2. What the reporting requirements are with respect to the disposition.

Position: 1. Likely no. 2. A T2, Corporation Income Tax Return.

Reasons: 1. A validly organized and operated paragraph 149(1)(l) entity is generally not taxable on a capital gain. 2. Corporations resident in Canada must file a T2 for every taxation year.

								2009-034757
XXXXXXXXXX							Kathryn McCarthy, CA
(613) 828-9377
February 10, 2010

Dear XXXXXXXXXX ,

Re: Paragraph 149(1)(l) Entity - Capital Gain on Real Property

This is in response to XXXXXXXXXX letter of September 28, 2009, and further to our telephone conversation on January 7, 2010, concerning the above-noted issue. It is our understanding that XXXXXXXXXX is now retired. The situation you describe is as follows:

• your client is a religious congregation of missionary sisters (the "Society") that was incorporated with no share capital under the laws of the province of XXXXXXXXXX ;
• the Society is an entity described under paragraph 149(1)(l) of the Income Tax Act ("the Act"), otherwise also referred to as a non-profit organization, and it is unclear whether it has been filing income tax returns in Canada;
• the only asset of the Society is real property in the form of a convent ("the Property") in which XXXXXXXXXX sisters reside;
• the sisters teach at a local elementary school;
• the sisters wear a full religious habit which identifies them as a religious community;
• once the sisters either both leave Canada to join the head office of the religious organization located in XXXXXXXXXX or pass away, the Property will be sold;
• the Property was acquired in XXXXXXXXXX for $XXXXXXXXXX as a result of XXXXXXXXXX ;
• the XXXXXXXXXX assessed value of the Property was $XXXXXXXXXX pursuant to the Assessment Roll Report; and
• the Society's bylaws provide that upon the wind-up or dissolution of the Society, the remaining assets will be transferred to the XXXXXXXXXX head office organization.

You enquired as to whether a capital gain on the sale of the Property, prior to the wind-up of the Society, is subject to income taxation under the Act, and what the reporting requirements would be with respect to the disposition of the Property.

Our Comments

The situation outlined in your letter appears to be a factual one, involving specific taxpayers. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular IC70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This IC and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

Pursuant to subsection 149(1) of the Act, no tax is payable under Part I of the Act on the taxable income of a person for a period when that person was (amongst others) a non-profit organization described in paragraph (l) thereof. Paragraph 149(1)(l) describes certain organizations that are organized and operated for non-profit purposes. These types of organizations are discussed in Interpretation Bulletin IT-496R, Non-profit Organizations.

It is a question of fact whether a particular entity is exempt from tax under paragraph 149(1)(l) of the Act. One of several requirements for such an entity is that it must not be a charity within the meaning assigned by subsection 149.1(1) of the Act. Whether a particular entity is such a charity is also a question of fact.

Although a non-profit organization described in paragraph 149(1)(l) of the Act generally is not subject to tax under Part I of the Act on the taxable income for the period that it qualifies under the paragraph, there is a special rule in subsection 149(5) of the Act that is applicable to a paragraph 149(1)(l) entity whose main purpose is the provision of dining, recreational or sporting facilities (club). The special rule under subsection 149(5) essentially provides that

(a) the club is treated as an inter vivos trust subject to tax under Part I of the Act on its taxable income, and
(b) the club's income and taxable income are computed on the assumption that the club has no incomes or losses other than

(i) incomes and losses from property, and

(ii) taxable capital gains and allowable capital losses from the disposition of property, other than property used exclusively for and directly in the course of providing the dining, recreational or sporting facilities provided by the club to its members.

A taxpayer's taxable income is equal to the taxpayer's income for the year plus the additions and minus the deductions permitted by Division C, pursuant to subsection 2(2) of the Act, and a taxpayer's income, which is computed under section 3 of the Act, includes taxable capital gains. Accordingly, provided subsection 149(5) of the Act does not apply and provided the Society is organized and operated as a non-profit organization that satisfies the conditions in paragraph 149(1)(l), the Society will not be subject to tax on the taxable capital gain from the sale of real property that it owns and maintains in order to carry out its stated purposes.

Further, we would mention that an entity as described under paragraph 149(1)(l) of the Act must comply with certain filing requirements under the Act. As also stated in paragraph 15 of Interpretation Bulletin IT-496R, a T2, Corporation Income Tax Return, is required, pursuant to paragraph 150(1)(a) of the Act, to be filed for every taxation year if the entity is a corporation resident in Canada. Other filing requirements for an entity as described under paragraph 149(1)(l) of the Act are explained in the CRA Guide T4117, Income Tax Guide to the Non-Profit Organization (NPO) Information Return.

While you may already know, we feel obliged to state that the foregoing comments do not constitute an advance income tax ruling as explained in Information Circular IC 70-6R5, Advance Income Tax Rulings; accordingly, they are not binding on the CRA but they simply represent an expression of an opinion.

We trust that these comments will be of assistance.

Yours sincerely,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch