Residential Condos as Non-Profits
By Arthur Drache, C.M. Q.C.
In the past year or so there have been some concerns expressed as a result of some CRA Technical Interpretations about whether certain corporations qualify as non-profit corporations under paragraph 149 (1)(l) of the Income Tax Act.the potential implication being that perhaps the might be taxable or that the corporation might be taxable. The Technical Interpretations deal with the extent to which a non-profit can in fact carry on profit making activities and many felt that the issuance was an indirect attempt by the CRA to narrow the law, taking a harder line of profit-making activities than did the prior interpretations which were based on the wording of the statute and decoded cases.
While the issue is one which, like so many others, depends upon the facts, a recent ruling letter seems to give a level of comfort to those who believe that at least residential condo corporations are in fact non-profits.
The specific issue was whether excess contributions by condo owner are taxable.
The writers asked specifically whether paragraph 3 of Interpretation Bulletin IT-304R2 is still the current view of the Canada Revenue Agency. That paragraph states that “any excess of the members’ condominium fees and contributions over the corporation’s expenditures for the year is not considered to be income of the corporation.”
The letter writer had been asked by a residential condominium corporation whether excess members’ fees for a year would be income, and taxable, if the corporation did not qualify for the exemption from tax provided by paragraph 149(1)(l) of the Income Tax Act. We suspect that the query was posed because of the recent concerns expressed by some lawyers who read the earlier Technical Interpretations which seemed to resile from the long-held administrative position.
After looking at the provisions of 149(1)(l) the CRA pointed out that a condominium corporation is not exempt from tax because it is a condominium corporation; rather, it is exempt while it meets the statutory requirements. If a condominium corporation does not meet these requirements then it will be subject to tax on its taxable income for the period during which it did not qualify for the tax exemption. The letter then went on to discuss how financing works in most cases.
“Generally, owners of a unit in a condominium corporation are required by provincial legislation to pay fees to the condominium corporation in order to provide it with the funds necessary to maintain and manage the common areas of the building, as well as to pay for capital projects (for example, see sections 38 and 39 of Alberta’s Condominium Property Act). Thus, a portion of the fees received by a condominium corporation will be used in the year received to pay for that year’s current expenses and capital projects. Another portion of the fees will be designated for the corporation’s capital reserve fund to pay for identified, future capital projects (e.g., replacing a roof). In this letter we refer to any positive difference between the condominium fees received by the corporation in a year and that year’s current expenses, capital expenditures and amount designated for the capital reserve fund as an “Overage”.
The portion of the fees paid by an owner of a unit to a condominium corporation either toward immediate capital expenditures or toward the capital reserve fund is a contribution of capital and thus is not included in the income of the condominium corporation. The other portion of the fees could be considered to be income. However, based on the unique nature of residential condominium corporations, the CRA is prepared to accept that Overages do not have to be treated as income for income tax purposes, which is consistent with the position described in IT-304R2. (Our emphasis)
A residential condominium corporation must be consistent on a year-to-year basis with respect to how it treats Overages for income tax purposes. This means that if, in one year, the condominium corporation does not include an Overage in income, it cannot, in a subsequent year, use a shortfall in membership fees to reduce income from other sources such as investments, rentals or businesses. In any event, generally, an expense is not deductible in computing income from a business or property except to the extent that it was incurred for the purpose of earning income from that business or property. ”
Given the concerns which have been raised in some quarters about the status of such corporations which have translated into question filtering down to the corporate board level, we feel that it is worthwhile to let readers know about this position against misinformation which may be causing concerns.
Incidental Income of Condos: In a subsequent ruling the CRA opined on whether income from the rental of the condo rooftop for a cell phone tower would jeopardize the condo’s tax free status. The answer was “no”
“We are of the view that in many cases the income is not the income of the corporation but is instead the income of the unit owners. While each case would have to be reviewed separately on its facts and applicable provincial law, it appears that in most situations the space being rented does not belong to the corporation; rather, the corporation may be better viewed as acting as an agent for the unit owners in entering into any cell tower arrangements. If this is the case, then such arrangements generally would not jeopardize the tax-exempt status of the corporation, although the related profit would have to be allocated appropriately among unit owners for tax purposes.”
But the letter goes on to cite the applicable provincial legislation dealing with condominiums and concludes, based on that legislation that the income is that of the corporation.
“Consequently, we are of the view that incidental income from the rental of common areas may be treated as income of the condominium corporation and generally will not affect the tax-exempt status of the corporation. Incidental, in this context, means both minor and directly related to activities undertaken to meet the corporation’s not-for-profit objectives of managing and maintaining the condominium property and required reserves.”
So in the event, the income gereated from the cell tower did not mean that the condo lost its tax-free status.
But There Can Be Exceptions: In a separate ruling which came out after the one quoted above, The CRA was asked to rule on whether a condo was a non-profit where it operated a golf course.
It is possible for a 149(1)(l) organization to earn profits. However, the profits must be incidental and must support the not-for-profit activities of the organization (see Gull Bay Development Corporation v. HMQ, 84 DTC 6040 (FCTD)). The earning of profits cannot be a purpose of the organization. In the situation under review, the golf course appears to have been operated with a profit purpose. According to the information provided by the auditor, the Corporation budgeted to earn a profit from the operation of the golf course in both(two calendar years). For the one year, the financial statements recorded net income from the golf course in the amount of $X, a majority of which came from non-members. This amount appears to be more than incidental taking into account the overall budget of the Corporation. In addition, we do not view the operation of a golf course as supporting the not-for-profit objectives of a condominium corporation. In short, it appears that the Corporation operated a for-profit business directed at earning revenue from third parties and attempted to “cloak” this for-profit business within its not-for-profit condominium operations. We also note that the Corporation listed as an asset “land for resale” on its financial statements. This suggests to us that there was a profit purpose in acquiring that land.
As a consequence, the ruling was that the condo was not operating as a non-profit.
 CRA document no. 2009-0337311E5 (November 5, 2009).;CRA document no. 2009-0348621E5 (December 15, 2009): CRA document no. 2009-0348621E5 (December 15, 2009).