2014-0530241E5 Municipal Corporation

Principal Issues: Does a particular society qualify for the exemption from tax under 149(1)(d.5)

Position: Question of fact

Reasons: In this case it is a factual determination that can only be made retrospectively.

Author: Townsend, Ann
Section: 149(1)(d.5), 149(1.3)

XXXXXXXXXX

                                                      Ann Townsend
                                                      2014-053024

June 4, 2015

Dear XXXXXXXXXX

Re:  Municipal Corporation         

This is in response to your letter of April 30, 2014 requesting confirmation that the XXXXXXXXXX is exempt from income tax under paragraph 149(1)(d.5) of the Income Tax Act (the “Act”). We also acknowledge the additional information you submitted on June 18, 2014 and various telephone conversations (Filion/XXXXXXXXXX). 

In this letter, unless otherwise expressly stated, all statutory references are to the provisions of the Act.

It is our understanding that XXXXXXXXXX was incorporated in XXXXXXXXXX under the Society Act (XXXXXXXXXX) as a non-share corporation and has members instead of shareholders. It was established to represent and advocate the interests of XXXXXXXXXX municipalities to the federal and provincial governments. XXXXXXXXXX has XXXXXXXXXX classes of membership that includes XXXXXXXXXX. XXXXXXXXXX

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations. Although we cannot comment on your specific situation, we are able to provide the following general comments which may be of assistance.

OUR COMMENTS

Generally, paragraph 149(1)(d.5) exempts from tax, subject to the restrictions in subsections 149(1.1), 149(1.2), and 149(1.3), a corporation, commission or association provided:

*     not less than 90% of the capital of which was owned by one or more entities each of which is a municipality in Canada, or a municipal or public body performing a function of government in Canada; and

*     the income for the period of the corporation, commission or association from activities carried on outside the geographical boundaries of the municipalities, or the municipal or public bodies performing a function of government in Canada, does not exceed 10% of the income for the period.

It is a question of fact whether the income for a particular period is from activities carried on within or outside the geographical boundaries of the municipalities. When making this determination, it is only the activities of the corporation, commission or association that is relevant and not the income of subsidiaries. Regarding investment income, such as interest and dividends, the income earning activities are considered to take place where the investment decisions and dealings are performed.

The word "capital", as used in paragraph 149(1)(d.5), is not defined in the Act or jurisprudence. To establish the ownership of capital of a non-share corporation and to determine whether the 90% test is met, the CRA’s longstanding position has been to look to the degree of control over the corporation.  

Therefore, in our opinion, the determination of the ownership of capital of a non-share corporation is a question of fact, which necessitates a review of all the relevant documents such as articles of incorporation, by-laws and agreements relating to control of the corporation and its assets. We consider that the following factors would be relevant in making such determination: the identity of the members, the structure of the corporation, who exercises control over the financing, operation and direction of the corporation, who has the right to elect or change the board of directors or to reverse its decision, who can contribute capital and receive a distribution of capital, details regarding asset distribution on winding-up or dissolution and whether a person other than her Majesty in right of Canada, a province, a Canadian municipality or a municipal or public body performing a function of government in Canada has any right to acquire any capital of the corporation. 

Since the capital ownership test in paragraph 149(1)(d.5) is a factual determination, it is our opinion that no single factor is determinative of who owns the capital of a corporation without share capital. Therefore, we are of the view that the voting rights that you describe in your letter are not, in themselves, sufficient to conclude that the municipalities own at all relevant times the capital of the corporation in accordance with paragraph 149(1)(d.5).

Paragraph 149(1.3) will prevent the application of paragraph 149(1)(d.5) to an entity if it can be shown that any person (or group including any person) other than a municipality, Her Majesty in right of Canada or a province, or a municipal or public body performing a function of government in Canada, controls the corporation directly or indirectly in any matter whatever, that is, if any such person or group has “de facto control”. Therefore, paragraphs 149(1)(d.5) and subsection 149(1.3) interact to require the entity to meet two distinct tests – the capital ownership test and the shareholder votes test.

It is a question of fact whether a corporation is "controlled, directly or indirectly in any manner whatever" by a person or a group of persons, which can only be determined after a review of all relevant factors of a particular situation. In general, the expression refers to a controller, who has any direct or indirect influence that, if exercised, would result in control in fact of the person.

A ruling may be issued with respect to paragraph 149(1)(d.5) for a an interpretive issue on a proposed transaction in circumstances where the location of the income-earning activities and the share ownership can be clearly identified. Also, the ruling would reference specific facts and note that the ruling is only valid provided the facts remain unchanged. As outlined in paragraph 19 of Information Circular 70-6R6, there are situations in respect of which the Directorate will not issue a ruling. In particular, we will not rule on a fact situation where there is no doubt as to the interpretation of the legislation applicable to the proposed transaction. According to the facts you have provided, XXXXXXXXXX appears to be organized in conformity with paragraph 149(1)(d.5); however, the determination is primarily a factual or legal determination, which can only be made retrospectively for each taxation year. Therefore, we are not in position to issue a ruling or to make a determination as to whether XXXXXXXXXX is exempt from tax for any particular period. 

I trust the above will be of assistance.

Yours truly,

R. Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues Section
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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