Principal Issues: Are factors evaluated in previous interpretation 1999-0006955 still applicable?
Position: Generally, yes, but each situation must be considered based on its own facts.
Reasons: The location of activities carried on for the purpose of paragraph 149(1)(d.5) is a factual determination.
XXXXXXXXXX 2010-037696 P. Burnley (613) 957-2100
January 11, 2011
Dear XXXXXXXXXX :
Re: Income Earned by a Paragraph 149(1)(d.5) Corporation
This is in response to your email correspondence of August 4, 2010, requesting our comments on a capital gain arising on the sale of shares by a corporation that is wholly-owned by a public body performing a function of government in Canada. In your email, you explain that you need to determine whether the capital gain constitutes income earned from activities carried on outside the geographical boundaries of the public body for the purpose of proposed paragraph 149(1)(d.5) of the Income Tax Act (the "Act").
The situation outlined in your letter appears to relate to a factual one, involving specific taxpayers. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings". This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on our website at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. Although we cannot comment on your specific situation, we are able to provide the following general comments, which may be of assistance.
Paragraph 149(1)(c) of the Act exempts from tax the income of a municipality or a municipal or public body performing a function of government in Canada. In general, and subject to subsections 149(1.2) and 149(1.3) of the Act, paragraph 149(1)(d.5) of the Act exempts from tax the income of a corporation, commission or association, not less than 90% of the capital of which was owned by one or more municipalities, if the income for the period of the corporation, commission or association from activities carried on outside the relevant geographical boundaries does not exceed 10% of its income for the period. Proposed amendments to paragraph 149(1)(d.5) and subsections 149(1.2) and (1.3) will extend the exemption to include entities owned by public bodies performing a function of government, applicable for taxation years beginning after May 8, 2000.
In your email, you asked if the factors considered in a previous interpretation of this Directorate (1999-0006955) are still applicable in determining if certain capital gains are included in income earned outside the geographical boundaries of a paragraph 149(1)(d.5) entity. This interpretation related to a hypothetical situation where a municipal corporation used surplus cash balances to make passive investments from time to time. The investment in question was made up of shares in a taxable Canadian corporation. In that situation, all of the dealings with and in relation to the shares (the initial acquisition of the shares and physical delivery of the share certificates, the storing and safekeeping of the certificates, the receipt of dividends, including deposit in a bank account or delivery of the cheque, and the ultimate sale of the shares) were carried on within the geographical boundaries of the municipality. In our view, these facts suggested that the dividend income from the shares and the capital gains arising on their sale were derived from activities carried on within the geographical boundaries of the municipality.
Whether income for a particular period is from activities carried on inside or outside specified geographical boundaries is a question of fact that must be considered on a case-by-case basis. If a particular situation is the same or very similar to the one reviewed in our previous interpretation, the CRA would likely not consider the activities related to the capital gain to be carried on outside the relevant geographical boundaries for the purpose of paragraph 149(1)(d.5).
We trust that these comments will be of assistance.
Yours truly,
Eliza Erskine
Manager
Non-Profit Organizations and Aboriginal Issues Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch