21 June 2011 Internal T.I. 2010-0379561I7 - Condominium Corporation--149(1)(l)

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: Does a condominium corporation that operates a public golf course qualify for the tax exemption provided by 149(1)(l)?

Position: No.

Reasons: The condominium corporation is not operating exclusively for a purpose other than profit. Income of the condominium corporation appears to be available to its members.

			June 21, 2011

	Small & Medium Enterprises Directorate		HEADQUARTERS
									Income Tax Rulings
	Attention:  Rubin Dressler			  		Directorate
									L. Zannese
									(613) 957-2747

									2010-037956

Condominium Corporation with Public Golf Course

We are writing in response to your request for our opinion on the tax status of XXXXXXXXXX (the "Corporation"), which is a condominium corporation located in XXXXXXXXXX .

FACTS

You have provided us with the following information:

• The mandate of the Corporation is to manage and maintain the common areas of the condominium complex.
• The Corporation also operates
  • a water system;
  • a golf course;
  • a lodge which provides food services; and
  • a pro shop.
• Most of the income of the golf course for XXXXXXXXXX and XXXXXXXXXX was from fees paid by the public (non-members).
• The water system appears to benefit owners of the condominiums, as well as the golf course and the lodge.

The auditor responsible for the file is of the opinion that the Corporation did not meet the conditions of paragraph 149(1)(l) of the Income Tax Act (the "Act") in either the XXXXXXXXXX or XXXXXXXXXX taxation year. XXXXXXXXXX .

OUR COMMENTS

In order to claim the tax exemption provided under paragraph 149(1)(l) of the Act, an organization must not be a charity, it must be exclusively organized and operated for a purpose other than profit, and none of its income can be available for the personal benefit of its members. A condominium corporation only qualifies for this exemption from tax if it meets the criteria; it is not exempt merely by reason of being a condominium corporation.

It is possible for a 149(1)(l) organization to earn profits. However, the profits must be incidental and must support the not-for-profit activities of the organization (see Gull Bay Development Corporation v. HMQ, 84 DTC 6040 (FCTD)). The earning of profits cannot be a purpose of the organization. In the situation under review, the golf course appears to have been operated with a profit purpose. According to the information provided by the auditor, the Corporation budgeted to earn a profit from the operation of the golf course in both XXXXXXXXXX and XXXXXXXXXX . For the XXXXXXXXXX year, the financial statements recorded net income from the golf course in the amount of $XXXXXXXXXX , a majority of which came from non-members. This amount appears to be more than incidental taking into account the overall budget of the Corporation. In addition, we do not view the operation of a golf course as supporting the not-for-profit objectives of a condominium corporation. In short, it appears that the Corporation operated a for-profit business directed at earning revenue from third parties and attempted to "cloak" this for-profit business within its not-for-profit condominium operations. We also note that the Corporation listed as an asset "land for resale" on its financial statements. This suggests to us that there was a profit purpose in acquiring that land.

We are also of the view that the Corporation allowed its income to be available for the personal benefit of its members contrary to the provisions of paragraph 149(1)(l) of the Act. The auditor advised that the income of the golf course was used to reduce the amount of condominium fees paid by the members. In addition, members of the Corporation (condominium owners) were allowed free rounds of golf at the golf course. In order to provide the free golf, the associated expenses were likely paid out of income earned from non-members. The auditor suggested that the benefit received by members of the Corporation with respect to the free golf amounted to $XXXXXXXXXX annually. This amount appears to be a shareholder benefit for income tax purposes as well preventing the Corporation from qualifying for the tax exemption.

We also reviewed the financial statements provided by the Corporation. Although the overall result indicates that the Corporation incurred a loss in both XXXXXXXXXX and XXXXXXXXXX , we found some of the expenses recorded under specific business activities to be unusual. For example, we note that the XXXXXXXXXX financial statements recorded an expense for utilities of the condominium of $XXXXXXXXXX, with no utility expense allocated to food services. We question why, in XXXXXXXXXX , the condominium corporation incurred an $XXXXXXXXXX expense for "advertising and promotion". If the auditor has not already done so, you may want to consider reviewing the Corporation's more unusual expenses to confirm that these expenses do not have a personal element and that they were all incurred to earn income. In addition, the auditor may wish to request that the Corporation determine its taxable income in a clearer manner. Subsection 4(1) of the Act specifies that each source of income is to be determined as if it is the only source of income for a taxpayer, and provides that expenses are only deductible from income if they "may reasonably be regarded as wholly applicable to that source or to those sources."

Another issue you may wish to consider is whether the Corporation's reserves were reasonable. It appears that the Corporation has two reserve funds: a contingency fund as required by XXXXXXXXXX 's condominium legislation and then a second "unrestricted" reserve. Most provincial legislation governing condominiums has rules regarding the amount of contributions to be made by members to a reserve fund. Hence, the amount in these funds will generally be reasonable. However, the Corporation also has an "unrestricted" fund - a reserve fund that was used by all the business lines. The financial statements suggest that the "unrestricted" fund belongs to all XXXXXXXXXX of the business lines, as each business records an "amount" designated to it from this fund. This "unrestricted" reserve fund may be additional evidence that the Corporation is not operating exclusively for a purpose other than profit.

If an organization is exempt from tax under paragraph 149(1)(l) of the Act, and has as its main purpose the provision of "dining, recreation or sporting facilities" to its members, then it may be taxable on its property income under subsection 149(5) of the Act. Subsection 149(5) creates a deemed trust for these types of organizations, with the trust being taxable on all property income earned by the organization's assets. As the Corporation operated a golf course and restaurant during the years under review, it is a question of fact whether the Corporation's main purpose was to provide "dining, recreation or sporting facilities" to its members during those years and thus should have been taxable on the interest income earned from the investment of its reserve funds.

In conclusion, we agree that the Corporation likely did not meet the requirements of paragraph 149(1)(l) of the Act in XXXXXXXXXX and XXXXXXXXXX . If the Corporation wishes to qualify for the tax exemption in the future, it must reorganize its operations. Currently, the Corporation appears to be operating a for-profit business (the golf course).

We trust that these comments will be of assistance. Please contact us, if you require anything further.

Yours truly,

Eliza Erskine
Manager
Non-Profit Organizations and Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch