2018-0776681E5 NPO and distributions to members

Principal Issues: 1. Can a condominium corporation that received a capital dividend from its wholly-owned subsidiary(that only holds a piece of real estate), distribute the funds to its members without losing its exempt status under paragraph 149(1)(l)? 2. Can a condominium corporation that received a taxable dividend from its wholly-owned subsidiary(that only holds a piece of real estate), distribute the funds to its members without losing its exempt status under paragraph 149(1)(l)?

Position: 1. Yes, as long as it otherwise qualifies under paragraph 149(1)(l). 2. No.

Reasons: 1. The capital dividend received by the corporation is not included in the income of the corporation [ss. 83(2)]. Therefore, the corporation that otherwise qualifies for the tax exemption, would be able to distribute the funds without violating the requirement under paragraph 149(1)(l) that none of its income is available for the personal benefit of a proprietor, member, or shareholder. 2. The taxable dividend is included in the income of the corporation. Therefore, if the corporation that otherwise qualified for the tax exemption, distributed the funds, it would violate the requirement under paragraph 149(1)(l) that none of its income is available for the personal benefit of a proprietor, member, or shareholder.

Author: Gauthier, Michel
Section: 149(1)(l); 149(10); 89(1.2); 89(2)

XXXXXXXXXX                                                             2018-077668
                                                                                     Michel Gauthier

March 30, 2023

Dear XXXXXXXXXX:

Re: Non-profit organization and distributions to members

This is in reply to your email inquiring about the tax implications of certain distributions made by a strata corporation (Corp) that claims the exemption from tax under paragraph 149(1)(l) of the Income Tax Act (the “Act”). The Corp has a wholly-owned subsidiary whose only asset is a piece of real estate. You informed us that the subsidiary is not a bare trustee corporation. The subsidiary is planning to sell its real estate and will realize a large capital gain, which it will distribute to the Corp through the payment of a capital dividend and taxable dividend. Consistent with our comments in paragraph 3 of Archived IT-304R2, Condominiums, we assumed the dividend income would be considered income of the Corp. The Corp plans to distribute those amounts to its members.

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

Our Comments

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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

In general terms, paragraph 149(1)(l) provides that the taxable income of an organization is exempt from tax under Part I for a period throughout which the organization meets all of the following conditions:

* it is a club, society or association;

* it is not a charity;

* it is organized and operated exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit; and

* its income is not available for the personal benefit of a proprietor, member, or shareholder, unless the proprietor, member, or shareholder was a club, society, or association which has as its primary purpose and function the promotion of amateur athletics in Canada.

As stated in paragraph 6 of Archived IT-496R, Non-Profit Organizations:

A residential condominium corporation is another example of an association that may be organized and operated for any other purpose except profit. Since a residential condominium corporation is organized as a requirement of the applicable provincial legislation and is normally not operated as a business, it will usually be considered to be organized and operated for other than commercial or financial reasons. Therefore, if the other conditions of paragraph 149(1)(l) are complied with in the year, a residential condominium corporation will generally qualify as a tax-exempt NPO.” [our emphasis]

However, if an organization holds shares to earn income from property, it may be considered to have a profit purpose, even if the income from those shares is used in furtherance of the organization's not-for-profit objectives. Whether the Corp has a profit purpose because it holds shares in its wholly-owned subsidiary and receives dividends, is a question of fact.

As noted, one of the conditions of paragraph 149(1)(l) that must be met, is that an organization’s income cannot be made available for the personal benefit of a proprietor, member, or shareholder unless the proprietor, member, or shareholder was a club, society, or association which has as its primary purpose and function the promotion of amateur athletics in Canada.

For purposes of paragraph 149(1)(l), the income of an organization is determined in accordance with section 3, taking into account that subsection 149(2) excludes the amount of any taxable capital gains realized by the organization in determining its income. This means that an organization may distribute the amount of any taxable capital gains it realized to its members and still meet the conditions of paragraph 149(1)(l), as this would not constitute a distribution of its income.

Pursuant to paragraph 83(2)(b), no part of a capital dividend received by a shareholder is included in computing the income of the shareholder. As a result, the capital dividend received from its subsidiary would not be included in the income of the Corp, and therefore, any distributions of such amounts to its members would not affect its tax exempt status under paragraph 149(1)(l). The Corp should keep adequate records to verify the source of the distribution to its members was the capital dividend it received.

Conversely, any taxable dividend received from its subsidiary will be included in the income of the Corp pursuant to subsection 82(1). The Corp will cease to qualify for the tax exemption under paragraph 149(1)(l), if it distributes the dividend income to its members.

At the time a corporation no longer meets the conditions of paragraph 149(1)(l), it ceases to be exempt and is subject to the rules in subsection 149(10). According to subsection 149(10), the taxation year of the corporation is deemed to have ended immediately before that point in time when it ceases to be exempt, and the corporation is deemed to have disposed of all of its assets immediately before that time and to have reacquired them at fair market value. In addition, subsection 149(10) deems a new taxation year of the corporation to begin at the time it ceased to be exempt.

Whether the Corp could later regain the tax exemption under paragraph 149(1)(l) for a subsequent taxation year is a question of fact that can only be determined after considering all the activities of the Corp during that year. However, the Corp likely will not meet the conditions of paragraph 149(1)(l) for its new taxation year since it includes the distribution of its income to its members. If the Corp again becomes exempt from tax, the rules in subsection 149(10) will again apply.

Nothing in this letter should be construed as implying that we are confirming that the income of the Corp is, or has been at any particular time, exempt from income tax pursuant to paragraph 149(1)(l). Whether the Corp is constituted and operated 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.

We trust that these comments will be of assistance.

Yours truly,

Ann Townsend, CPA, CMA
Non-Profit Organizations and Indigenous Issues
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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