NPO Rental Income
by Arthur Drache, C.M. Q.C.
A recent CRA ruling [1] dealt with the question as to whether the rental of vacation properties to non-members would jeopardize the tax exempt status of an entity described in paragraph 149(1)(l) of the Income Tax Act.
Paragraph 149(1)(l) provides an exemption from Part I tax for a club, society, or association that is not a charity and that is organized and operated exclusively for social welfare, civic improvement, pleasure or recreation, or for any other purpose except profit.
When the main purpose of an organization is to provide dining, recreational or sporting facilities to its members, subsection 149(5) applies to deem the existence of an inter vivos trust. The property of the organization is deemed to be the property of the trust and income tax is payable by the trust on its property income and certain capital gains
The letter sets out the CRA’s understanding that subsection 149(5) of the Act is intended to tax income from property (including capital gains) earned from investments and other assets that are not exclusively and directly used in providing the services of the organization, to its members. With respect to rental income of a 149(1)(l) entity, paragraph 4 of IT-83R3 states that:
“.Revenue derived from the rental of club facilities may be categorized, depending upon the facts of a particular situation, either as income from property or income from business. For example, the rental of building space that is in excess of a club’s normal requirements would be property income, while the rental of dining facilities for a wedding reception or a golf course for a tournament would be business income. In distinguishing property income from business income, the courts have generally regarded the degree of the lessor’s activity associated with the rental as determinant. It should be noted that active pursuit of rental income from non-members that is categorized as business income could result in a club being disqualified as an organization exempt from tax under paragraph 149(1)(l).”
Paragraph 5 of IT-83R3 continues on to say:
“Where a club owns its premises and rents space in a club building that is in excess of its current requirements for carrying out club activities, a reasonable apportionment of common expenses (including capital cost allowance) is deductible in determining the income from the rental of the excess space. When the building is disposed of, any recapture of capital cost allowance claimed (or terminal loss) or taxable capital gain or allowable capital loss on that portion of the building rented, is to be included in the income of the trust.”
Then we have the caveat.
“However, it should be noted that the active pursuit of rental income from non-members could indicate a profit purpose resulting in an entity being disqualified as an organization exempt from tax under paragraph 149(1)(l). One of the key considerations in determining whether an organization is validly constituted and operated as a 149(1)(l) entity is whether profit is one of its purposes. Relevant issues to be considered as to whether the rental of property is actively sought from non-members would be:
· the circumstances and purposes for which the property was acquired and previously used,
· the duration of the profitable rental situation,
· the amount of profit, and
· whether the income earned from the rentals to non-members is used for the organization’s not-for-profit objectives. ”
The good news for the organization which made the query was this:
It is our view that the rental of vacant property to non-members would likely not affect the tax exempt status of a 149(1)(l) entity where the rental income was incidental, the rental of the property to non-members was infrequent or for a short period of time during a transition period (e.g. for a period during which the property was being prepared for sale), any incidental income earned from the rental of the property was used for the organization’s not-for-profit objectives, and the incidental income earned was not made available for the personal benefit of the organization’s members.”
Of course, trying to apply these guidelines to other fact situations leaves it up to the organization to guess whether they meet these somewhat vague guidelines. But the ruling is consistent with the general notion for both NPOs and registered charities that all rental income does not taint the organization’s tax status so long as the generation of such income does not take on the characteristics of a profit making business but remains clearly incidental to the charitable or non-profit activities.