3 June 1996 External T.I. 9600655 - CEASING TO BE TAX EXEMPT

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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

		960065
XXXXXXXXXX	B. Kerr

Attention: XXXXXXXXXX

June 3, 1996

Dear Sirs:

Re: Paragraphs 149(1)(n), and 149(10)(a) and (b)

This is in reply to your letter of January 8, 1996, concerning a limited dividend housing company that will lose its tax-exempt status as a result of the sale of its low-cost rental housing projects.

You have asked us to confirm your interpretation of the provisions of paragraphs 149(1)(n), and 149(10)(a) and (b) of the Income Tax Act (the "Act").

Our Comments

In your letter you have outlined what appears to be an actual fact situation related to a past transaction. The review of such transactions falls within the responsibility of the Tax Services Office and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known. However, we can provide the following general comments.

In order to qualify for exemption from Part I tax for a particular period, under paragraph 149(1)(n) of the Act, a person must satisfy two conditions. First, the person must be a "limited dividend housing company". The term "limited dividend housing company" is defined in section 2 of the National Housing Act to mean a company incorporated to construct, hold and manage a low-rental housing project, the dividends payable by which are limited by the terms of its charter or instrument of incorporation to five percent per anum or less. Second, all or substantially all of the person's business must be the construction, holding or management of low-rental housing projects. The purpose of this second condition is to limit the exemption to only those corporations truly operating as limited dividend housing companies. Accordingly, a company that has previously satisfied these conditions would fail to satisfy the "all or substantially all" condition upon the sale of its low-cost rental housing projects and would cease to be exempt.

The provisions of subsection 149(10) apply upon a corporation ceasing to be exempt from Part I tax. The purpose of subsection 149(10) is to ensure that any gain or loss subsequently realized by a corporation when it is taxable does not include any gain or loss which accrued when it was exempt from tax. This is accomplished mainly by paragraphs 149(10)(a) and (b). Paragraph 149(10)(a) deems the corporation's taxation year to have ended immediately before it ceases to be exempt. Paragraph 149(10)(b) deems the corporation to have disposed of each of its properties, immediately before the time that is immediately before the time it ceases to be exempt, for an amount equal to the fair market value of each property at that time and to have reacquired each property at a cost equal to that fair market value.

As stated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch