2022-0944461E5 NPO - Residential housing co-operative

Principal Issues: Would renting the common areas of a housing co-op to third parties (e.g., filming companies) indicate a profit purpose that would jeopardize a housing co-operative’s status as a tax-exempt NPO under paragraph 149(1)(l) of the Act?

Position: Yes.

Reasons: A tax-exempt NPO can earn profits, but the profits should be incidental. That is, the profits are not significant and arise from activities that are directly connected to the organization's not-for-profit objectives.

Author: Gauthier, Michel
Section: 149(1)(l)

XXXXXXXXXX                                                                                2022-094446
                                                                                                     Michel Gauthier


May 13, 2024


Dear XXXXXXXXXX:

Re: Residential Housing Co-operative

This is in reply to your letter dated July 7, 2022, and email dated August 31, 2022, requesting our comments on whether a residential housing co-operative (Co-op) would continue to qualify for the income tax exemption under paragraph 149(1)(l) of the Income Tax Act (Act) if it earned profits from renting its common areas to third-parties (e.g., film companies). You also asked for our comments on the Co-op’s tax-exempt status if the profits were instead earned through a wholly-owned taxable subsidiary.

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) of the Act provides that the taxable income of an organization is exempt from income tax 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 member or shareholder.

Hereafter, referred to as a tax-exempt non-profit organization (NPO).

As noted above, to be a tax-exempt NPO, an organization must be organized and operated exclusively for any other purpose except profit. According to the decision rendered by the Tax Court of Canada in Tourbec (footnote 1) , the word exclusively must be given its full effect and it is not sufficient that an organization be organized and operated mainly or primarily or chiefly for any purpose other than profit, it must be organized and operated exclusively for a non-profit purpose. The use of the word exclusively therefore indicates that while an organization may have many purposes, none of those purposes can be to earn a profit. Thus, where an organization intends, at any time, to earn a profit, it will not be a tax-exempt NPO even if it expects to use or actually uses that profit to support its not-for-profit objectives. This “destination of funds” argument has been rejected by the Canada Revenue Agency and the courts on numerous occasions for both charities and tax-exempt NPOs.

However, the courts have recognized that a tax-exempt NPO can earn a profit, as long as the profit is incidental. That is, the profit is not significant and arises from activities directly connected to the organization’s not-for-profit objectives. For example, maintaining reasonable operating reserves or bank accounts required for ordinary operations will generally be considered to be an activity undertaken to meet the not-for-profit objectives of an organization. Consequently, profit arising from these reserves or accounts will be considered incidental and will not affect the tax-exempt status of the organization.

You indicated that the Co-op earns modest revenues from providing laundry machines for use by residents of the Co-op. This service appears to be directly connected to the Coop’s not-for-profit objectives. As a result, the modest profit from the laundry machines would be considered incidental and would not affect the Co-op’s status as a tax-exempt NPO.

In contrast, the anticipated profits from renting out the Co-op’s common areas to third parties does not appear to be incidental. You indicated that, over time, you expect those profits to be considerable enough to assist the Co-op in paying for major repairs, ongoing maintenance of the building, maintaining a reserve fund, and lowering monthly maintenance fees for the residents. In addition, the renting of the common areas to third parties does not appear to be directly connected to the Coop’s not-for-profit objectives. Further, since it is the Co-op that owns the common areas and not the resident shareholders, the profit cannot be allocated to the resident shareholders of the Co-op. As such, earning profits from the rental of common areas to third parties indicates a profit purpose, which would jeopardize the Co-op’s status as a tax-exempt NPO.

You also asked for our comments on the impact, if any, on the Co-op’s tax-exempt status if profits from the rental of the common areas were earned through a wholly-owned taxable subsidiary. The fact that an organization incorporates and holds the shares of a taxable subsidiary will not, in and of itself, cause the organization not to be a tax-exempt NPO. Nonetheless, an organization claiming an exemption under paragraph 149(1)(l) of the Act must continue to operate exclusively for any purpose other than profit.

In the situation described, the Co-op will likely receive significant income from the taxable subsidiary as you expect the rental of the common areas to generate considerable after-tax profits. Based on our understanding, it appears that the Co-op will be holding shares in the subsidiary to earn property income (e.g., dividends) and consequently, it will be considered to have a profit purpose as the income (i.e., dividends) will likely be significant and does not arise from activities directly connected to the Co-op’s not-for-profit objectives (i.e., not incidental profits). This is so even if the dividends are used in furtherance of the organization’s not-for-profit objectives.

In summary, whether the Co-op is a tax-exempt NPO for any specific time period is a question of fact that can generally only be determined after the end of the organization’s fiscal year and considering all of the facts. Based on the information provided, it is our view that, even if the Co-op was determined to be a tax-exempt NPO before renting (directly or indirectly) its common areas to third parties, it would not continue to be a tax-exempt NPO afterwards because the profits from that activity would not be considered to be incidental and would demonstrate that the Co-op has a profit purpose.

We trust that these comments will be of assistance.

Yours truly,



Ms. Nerill Thomas-Wilkinson, CPA, CA
Manager
Non-Profit Organizations and Indigenous Issues
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Tourbec (1979) Inc v MNR (TCC), 88 DTC 1442; [1988] 2 CTC 2071

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© His Majesty the King in Right of Canada, 2024

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté le Roi du Chef du Canada, 2024