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 the fact that a charitable organization will be leasing a housing complex to another entity to sublet to seniors will result in the charitable organization being considered to be carrying on business for purposes of paragraph 149.1(2)(a).
Position: Question of fact. In this case, based on the terms of the lease and the facts as described, the charitable organization will not be carrying on business for purposes of paragraph 149.1(2)(a).
Reasons: Based on a review of the specific terms under the lease, the charity is not providing any services to the tenant that would indicate that it is earning income from other than an investment property. Further, the housing complex will be the only property of the charitable organization to be leased for investment purposes.
XXXXXXXXXX 2002-016551
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the additional information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).
You advise that to the best of your knowledge and that of the taxpayer referred to above, none of the issues involved in the ruling request is:
i) in an earlier return of the taxpayer or a related person;
ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayer or a related person;
iii) under objection by the taxpayer or a related person;
iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
v) the subject of a ruling previously issued by the Directorate.
In this letter, unless otherwise indicated, all statutory references are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act") and the following terms have the meanings specified:
a) "Charity" means XXXXXXXXXX,
b) "Society" means XXXXXXXXXX,
c) "Society Act" means the XXXXXXXXXX, and
d) "CCRA" means Canada Customs and Revenue Agency.
Our understanding of the facts, proposed transactions and their purposes is set out below.
Facts
1) The Charity was incorporated under the Society Act on XXXXXXXXXX and is a "charitable organization" within the meaning of subsection 149.1(1). Its office is in XXXXXXXXXX and its charitable registration number is XXXXXXXXXX.
2) The Charity was formed to XXXXXXXXXX. The main activities of the Charity are to XXXXXXXXXX.
3) The Charity has approximately XXXXXXXXXX members and is currently governed by a board of XXXXXXXXXX directors.
4) On XXXXXXXXXX, the Charity entered into a loan agreement with XXXXXXXXXX (collectively the "Lenders" and individually the "Lender") to borrow $XXXXXXXXXX to construct a seniors housing complex (the "Residence"). Each Lender's share of the non-interest bearing loan is $XXXXXXXXXX. The terms of the loan agreement provide that the Lenders may direct the Charity to repay the principal in monthly instalments of a variable amount as determined by the capability of the Charity, commencing upon the completion of the Residence and the balance of the principal, if any, will be due and payable on XXXXXXXXXX.
5) On XXXXXXXXXX, the Charity purchased the property located at XXXXXXXXXX to construct the Residence. The construction of the Residence was completed in XXXXXXXXXX. The Residence consists of XXXXXXXXXX furnished units and is now ready for occupation.
6) The Society was incorporated under the Society Act on XXXXXXXXXX. It was formed for the purposes of, among other things, providing and managing low-cost housing and residential accommodation for seniors.
7) The by-laws of the Society stipulate that members of the Society must also be members of the Charity. The Society is currently governed by a board of XXXXXXXXXX directors who also sit on the board of directors of the Charity. XXXXXXXXXX, one of the Lenders, is a director of both boards.
Proposed Transactions
8) The Charity will enter into an agreement with the Society for the lease of the Residence for a term of XXXXXXXXXX years (the "Lease") on the understanding that the Society will operate and manage the Residence as a supportive residence that provides a range of services to seniors who want to live independently.
9) The Lease will be a "net" lease. Pursuant to the terms of the Lease, apart from paying the Charity a monthly rent, the Society will be responsible for paying all costs and expenses, including without limitation, all charges for gas, electricity, light, heat, power and telephone associated with the use and operation of the Residence. The Society will also be solely responsible for repairing and maintaining the condition of the Residence. The Society will obtain and pay for the cost of insurance to cover all property located on the leased premises, the cost of replacing the premises and comprehensive general liability insurance.
10) The Society will not be permitted to assign its leasehold interest in the Residence to a third party unless the assignment is to a non-profit making organization affiliated with the Charity.
11) The Charity will only lease the Residence without providing any additional services of any kind in relation to the Residence to the Society or its tenants.
12) You advise that the monthly rent to the Charity will be based on fair market value.
13) Initially, the Charity will use the rental income from the Lease principally to make payments on the loan from the Lenders.
14) The Society will oversee the day-to-day operations of the Residence which includes, advertising for tenants, entering into subleases with tenants, hiring a professional management company to provide property management services, hiring independent contractors to provide meals and ancillary supportive and housekeeping services to the tenants of the Residence. The professional management company and the independent contractors to be hired by the Society will be totally independent of the Lenders.
15) Only individuals who meet the residence criteria set out by the Society may become tenants of the Residence. The residence criteria are basically seniors who are in good health to the extent that they do not require continuous medical care and supervision. The acceptance of any prospective tenant is subject to a medical assessment and the Society receiving a satisfactory statement from the tenant's personal physician. Prospective tenants are not restricted to persons who are members of the Charity.
16) Each tenant of the Residence and the Society will enter into an agreement for accommodation and services. Pursuant to this agreement, each tenant of the Residence will pay to the Society:
a) a monthly accommodation fee for residing in the unit allocated to such tenant, and
b) a monthly service fee for the basic meals and housekeeping services provided by the Residence to such tenant.
17) You advise that several of the furnished units of the Residence have been leased to individual tenants on a monthly basis since the completion of the Residence pending the receipt of a favourable ruling from the CCRA. Except for the lease of these units, the Charity has not previously rented any of its properties to third parties XXXXXXXXXX. The Residence will be only property to be rented for investment purposes.
18) You advise that the Lenders are not related persons and that they deal with each other at arm's length within the meaning of subsection 251(1).
Purpose of the Proposed Transactions
19) The proposed transactions are being undertaken to earn investment income from the leasing of the Residence to the Society.
Ruling Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described above, our ruling is as follows:
Provided the terms of the Lease between the Charity and the Society are and continue to be as described in 8 to 15 above, the Charity will not be considered to be carrying on a business for the purposes of paragraph 149.1(2)(a).
This ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and is binding on the CCRA provided that the proposed transactions are completed before XXXXXXXXXX.
We have neither been asked nor are we expressing any view as to the tax status of the Society which is a question of fact.
Nothing in this ruling should be construed as implying that the CCRA considers the borrowing of funds by a charitable organization to finance the construction of an investment property is a devotion of resources to charitable activities or that the construction of the investment property itself is a charitable activity.
Yours truly,
XXXXXXXXXX
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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