2020-0848221E5 Housing companies 149(1)(n)

Principal Issues: 1.Does a company that holds and manages but does not construct a low-income rental property meet the definition of a “limited-dividend housing company” in section 2 of the National Housing Act? 2.Would a company, who rents units to a registered charity which in turn rents the units to low-income families satisfy the definition of “low-rental housing project” in section 2 of the National Housing Act? 3.How does CRA verify whether a company meets the requirements of paragraph 149(1)(n) of the Act?

Position: 1. No. 2. Question of fact. 3. Various techniques.

Reasons: 1. Whether or not a company meets the definition of a “limited-dividend housing company” in section 2 of the National Housing Act is a question of fact. However, it is our view that the definition requires the company to construct as well as hold and manage the low-rental housing project. 2. The fact that the company rented units suitable for housing to a registered charity which in turn rented the units to families of low income does not appear to preclude the company from meeting the definition. 3. CRA would verify that the housing company meets the two conditions of 149(1)(n) which are that the company must be a “limited dividend housing company” as defined in section 2 of the National Housing Act and that all or substantially all of the company’s business must be from the construction, holding or management of low-rental housing projects.

Author: Gauthier, Michel
Section: 149(1)(n); National Housing Act s.2

XXXXXXXXXX                                                                                               2020-084882
                                                                                                                       Michel Gauthier

February 22, 2021

Dear XXXXXXXXXX:

Re: Limited Dividend Housing Companies 

This is in reply to your email dated May 10, 2020 requesting our comments on the application of paragraph 149(1)(n) of the Income Tax Act (Act). Specifically, you have asked for our comments in relation to the following questions:

1.    Does a company that holds and manages but does not construct a low-income rental property meet the definition of a “limited-dividend housing company” and qualify for the tax exemption under paragraph 149(1)(n) of the Act?
2.    Would  a company, who rents units  to a registered charity which in turn rents the units to low-income families satisfy the definition of “low-rental housing project” in section 2 of the National Housing Act?
3.    How does Canada Revenue Agency (CRA) verify whether a company meets the requirements of paragraph 149(1)(n) of the Act?

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 70-6R10, Advance Income Tax Rulings and Technical Interpretations.

To qualify for the tax exemption under paragraph 149(1)(n), the following two conditions must be met:

(i) The corporation must be a "limited-dividend housing company" as defined in section 2 of the National Housing Act, and
(ii) all or substantially all of the business of the corporation must be the construction, holding or management of low-rental housing projects.

You have asked about a situation where a company purchases a property with an existing building.  You asked if the absence of construction would preclude the company from being considered a  “limited-dividend housing company”, as defined in section 2 of the National Housing Act. Section 2 of the National Housing Act defines a “limited-dividend housing company” to mean a company incorporated to construct, hold and manage a “low-rental housing project”, the dividends payable by which are limited by the terms of its charter or instrument of incorporation to five per cent per annum or less.

Whether or not a company meets the definition of a “limited-dividend housing company” in section 2 of the National Housing Act is a question of fact. However, it is our view that the definition requires a company to construct, as well as hold and manage the low-rental housing project. Therefore, a company that purchases and does not construct a low-rental housing project would not meet the definition in section 2 of the National Housing Act and would not qualify for the tax exemption under paragraph 149(1)(n) of the Act.

You have also asked whether a company that rents units suitable for housing to a registered charity, which in turn rents the units to families of low income, would qualify as a “low-rental housing project”. A low-rental housing project is defined in section 2 of the National Housing Act as:

 “a housing project undertaken to provide decent, safe and sanitary housing accommodation, complying with standards approved by the Corporation, to be leased to families of low income or to such other persons as the Corporation,
*    (a) in its discretion, in the case of a housing project owned by it, or
*    (b) under agreement with the owner, in the case of a housing project not owned by it,
designates, having regard to the existence of a condition of shortage, overcrowding or congestion of housing”

The fact that the company rented units suitable for housing to a registered charity which in turn rented the units to families of low income does not appear to preclude the company from meeting the definition, where the company has been designated by the Canada Mortgage and Housing Corporation (CMHC) and the CMHC has  entered into an agreement with the company., as provided for in the definition of  “low-rental housing project”.  However, we would most likely consult with the CMHC before making any final determination.  As such, whether the housing project meets the definition as a “low-rental housing project” would remain a question of fact to be determined after a complete review of the facts and circumstances.

Finally, you have asked how the CRA verifies a company meets the requirements of paragraph 149(1)(n) of the Act and whether an agreement with CMHC that a particular company meets the definition of a limited-dividend housing company is sufficient.  An agreement by the CMHC that a company meets the definition in section 2 of the National Housing Act is an indication that a company qualifies under paragraph 149(1)(n) of the Act. However, it is the CRA’s approach to evaluate each situation on a case-by-case basis in order to make a determination. 

We trust that these comments will be of assistance.

Yours truly,

Roger Filion, CPA, CA
Manager
Non-Profit Organizations and Indigenous Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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