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: (A) Does the particular entity qualify for the tax exemption as a non-profit organization for purposes of paragraph 149(1)(l) of the Income Tax Act? (B) Is Part XIII tax applicable to rental income received by the non-resident entity from the leasing of real property in Canada, where the rental income is included in the computation of taxable income of the entity from operations in Canada pursuant to Part I of the Act?
Position: (A) yes (B) no
Reasons: (A) Based on the legislation, organizational documents and other Rulings given in similar situations. However, whether or not the corporation is operated for purpose other than profit as required under 149(1)(l) will be a question of fact each year. (B) To the extent the rental income is included in income of the taxpayer for purposes of Part I of the Act; subsection 805(1) of the Regulations provides that Part XIII will not apply. It should be noted that subsection 805(2) of the Regulations grants the Minister discretion in this regard.
XXXXXXXXXX 2005-013900
XXXXXXXXXX, 2006
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling - XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge your firm's subsequent letters and further submissions of XXXXXXXXXX, and the information provided during our telephone conversations.
We understand that, to the best of your knowledge and that of the taxpayer, 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 taxation 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
(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
DEFINITIONS
In this letter, the following terms have the following meanings:
(a) "Academic Senate" is the principal academic body of the Entity responsible for advising the Council on all matters relating to teaching, scholarship and research conducted in connection with the Entity;
(b) "Chancellor" of the Entity is an elected position by the Council, held for not more than XXXXXXXXXX years. The Entity's Chancellor is a member of all committees of the Entity and is required to preside over all Council meetings;
(c) "Convocation" means a committee consisting of current and past members of the Council of the Entity, graduate students of the Entity, professors and full-time academic staff of the Entity and other persons, by appointment;
(d) "Council" means the governing authority of the Entity. All appointed members of the Council must have expertise and experience relevant to the functions exercisable by the Council and they must have an appreciation of the object, values, functions and activities of the Entity. The majority of the members of the Council must be external persons (meaning persons who are not currently members of the Entity's academic or general staff or undergraduate or postgraduate students of the Entity) and must consist of at least XXXXXXXXXX members in total, including:
- XXXXXXXXXX official members of the Entity including the Chancellor, the Vice-Chancellor and the presiding member of the Academic Senate (if that person is also the Vice Chancellor, then the deputy presiding member of the Academic Senate);
- at least XXXXXXXXXX external persons, by way of appointment;
- XXXXXXXXXX elected persons who are qualified members of the academic staff of the Entity;
- XXXXXXXXXX elected person who is a qualified member of the general staff of the Entity;
- XXXXXXXXXX elected persons who are students of the Entity and who are appropriately qualified; and
- at least XXXXXXXXXX elected or appointed graduate of the Entity who is appropriately qualified.
(e) "CRA" means the Canada Revenue Agency;
(f) "Entity" means XXXXXXXXXX;
(g) "Landlord" means XXXXXXXXXX;
(h) "Lease" means the leasing arrangement between the Landlord and the Entity, inclusive of the sublease arrangement between the Tenant and the Entity for part of the Leased Premises;
(i) "Leased Premises" means the property located at XXXXXXXXXX;
(j) "Special Act" means the XXXXXXXXXX;
(k) "Tenant" means XXXXXXXXXX;
(l) "Vice-Chancellor" of the Entity is the principal executive officer of the Entity, who is responsible for promoting the interests and furthering the development of the Entity. Specifically, the Vice-Chancellor is responsible to the Council for the day-to-day management of the academic, administrative and financial operations of the Entity.
FACTS
1. The Entity is XXXXXXXXXX a body corporate without shareholders under the Special Act, and is resident in XXXXXXXXXX. For purposes of XXXXXXXXXX law, the Entity is considered a non-profit organization and exempt from income tax in XXXXXXXXXX.
2. The Entity's mailing address is XXXXXXXXXX. The Entity has been assigned the Canadian business number XXXXXXXXXX, but it has not yet filed a Canadian tax return.
3. The Entity consists of its Council, Convocation, academic teaching staff, graduates and students. The Council acts for, and on behalf of, the Entity in the exercise of the Entity's functions. The Council ultimately controls and manages the affairs and concerns of the Entity and may act in all matters concerning the Entity in such manner as appears to the Council to be best calculated to promote the object and interests of the Entity.
4. The objects of the Entity, as stated in XXXXXXXXXX the Special Act, are the promotion, within the limits of its resources, of scholarship, research, free enquiry, the interaction of research and teaching, and academic excellence. In furthering these objectives, the Entity offers a broad range of educational services and post-secondary academic courses in XXXXXXXXXX through an extensive international distant-learning program.
5. Specifically, XXXXXXXXXX of the Special Act lists the following principal functions of the Entity for the promotion of its objects:
XXXXXXXXXX
6. The Entity may, pursuant to XXXXXXXXXX the Special Act, exercise commercial functions comprising commercial exploitation or development, for the Entity's benefit, of any facility, resource or property of the Entity. As such, the Entity does conduct limited commercial activities, XXXXXXXXXX. The Entity does not conduct any commercial activities that would subject it to tax in XXXXXXXXXX.
7. The Entity operates as an integrated organization on a not-for-profit basis and without pecuniary gain to any shareholder, proprietor or member, and any profits or other accretions to the Entity are used in promoting its objects.
8. In the event the Entity is to be wound-up, amalgamated or dissolved, all of its property would be transferred to an organization, which would qualify under paragraph 149(1)(l) of the Act as an non-profit organization at that time, having similar goals or objects as the Entity.
9. As the Entity operates on a non-profit basis, the Entity does not accumulate surplus funds in excess of its reasonable needs to achieve its objectives or otherwise undertake activities inconsistent with its non-profit purpose.
10. The Entity has recently established its first educational facility outside of XXXXXXXXXX in its efforts to further its extensive international education services. XXXXXXXXXX
11. Confirmation has been received from XXXXXXXXXX that the XXXXXXXXXX Program offered by the Entity qualifies for accreditation in XXXXXXXXXX. As such, graduates obtaining their XXXXXXXXXX degree from the Canadian facility of the Entity will be qualified in the same manner as graduates of other post-secondary institutions in XXXXXXXXXX granting the same or similar degrees.
12. The Entity will not own any real property in Canada. It has entered into a Lease for approximately XXXXXXXXXX square feet of space from which the Entity's Canadian activities will provide the educational services as described in 10 above. The Leased Premises do not include any space that is not reasonably necessary for the purpose of providing the educational services.
13. The original Tenant and Landlord of the Leased Premises are both residents of Canada for purposes of the Act and both deal at arm's length with the Entity.
14. XXXXXXXXXX
15. The CRA has confirmed that the Entity is not a charity within the meaning assigned by subsection 149.1(1) of the Act, as contemplated in paragraph 149(1)(l) of the Act.
PROPOSED TRANSACTIONS
16. The Entity will offer the XXXXXXXXXX Program at the Leased Premises in Canada, as authorized by the Minister, for the XXXXXXXXXX years for which permission was granted.
17. The Entity will comply with all applicable rules and regulations in XXXXXXXXXX with respect to the current courses it offers to its students and for the overall operation of the XXXXXXXXXX Program. XXXXXXXXXX.
18. During the off-season summer months, the Entity may sublet a portion of its Leased Premises to a third party as the space will not be required for program instruction. The Entity anticipates that the rent charged to the third party will be insignificant in relation to the overall activities of the Entity in Canada.
19. Financial expenses of the Canadian activities will include payments for the following:
a) rent,
b) professional fees for both legal and accounting services,
c) furniture and equipment costs,
d) office supplies,
e) salary costs for teaching and support staff.
20. For purposes of Part I of the Act, the Entity will derive its revenue from the tuition fees of the Canadian XXXXXXXXXX Program and the ancillary rental income as described in 18 above. It is anticipated that such annual revenue will not exceed the actual costs of establishing and operating the XXXXXXXXXX Program for several years. However, consistent with its other educational activities, should the Entity's revenue from the Canadian activities exceed the expenses in any particular year, the excess will be used by the Entity to carry out its non-profit objectives.
21. If the Entity has available cash from the Canadian activities in any particular year, the Entity may transfer such available cash from Canada to its head office in XXXXXXXXXX to be used by the Entity to further its non-profit activities.
22. The Entity will be required to file a T2 Corporate Tax Return in Canada and remit any required withholding of source deductions with respect to all employees working in Canada.
PURPOSE OF THE PROPOSED TRANSACTIONS
23. The purpose of the proposed transactions is to provide education and post-secondary training to Canadian students by offering the XXXXXXXXXX Program, consistent with provincial education standards.
24. The Canadian activities of the Entity will operate as an extension of the XXXXXXXXXX campus, which is itself exempt from income tax in XXXXXXXXXX as a non-profit organization, organized and operated exclusively for educational purposes, no part of the net earnings of which inures to the benefit of any particular individual.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, we rule as follows:
A. The establishment of the XXXXXXXXXX Program to provide post-secondary education and training to students resident in Canada at the Leased Premises, will not, in and of itself, jeopardize the tax-exempt status of the Entity as a non-profit organization in Canada under paragraph 149(1)(l) of the Act.
B. Any amount paid or credited to the Entity as rent in a taxation year for the use of the Entity's space as described in 18 above, will, pursuant to subsection 805(1) of the Regulations, not be taxable under Part XIII of the Act as all of the rental income will be included in the Entity's income pursuant to Part I of the Act.
With respect to Ruling A above, we note that the question of whether the Entity does, in fact, operate exclusively for any purpose other than profit with no part of its income payable to or otherwise available for the personal benefit of any member, is a question of fact which must be determined on an ongoing basis.
Also note that Ruling B above does not comment on whether subsection 805(2) of the Regulations will be satisfied in the circumstances. This determination is the responsibility of the local Tax Services Office. Furthermore, as noted in paragraph 14 of Information Circular 75-6R, a request for a waiver in respect of the amount that is required to be withheld under Regulation 105, must also be submitted to the Tax Services Office in the area where the services are provided.
The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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