Principal Issues: (1) Is an NPO taxable on the capital gain realized upon the sale of real property it owns?
(2) Will an NPO lose its exempt status if it purchases a replacement office building with tenants who will remain in occupancy and pay rent for a transitional period of 2 months?
Position: (1) No
(2) Question of Fact, but likely not.
Reasons: (1) A validly organized and operated NPO is not taxable on capital gains.
(2) Although an NPO cannot have profit as a motive, it can earn income. The particular circumstances of the acquisition as well as the use to which the organization puts the income will be relevant.
2007-022458 XXXXXXXXXX Renée Shields (613) 948-5273 March 2, 2007
Dear Sir/Madam:
Re: Capital Gains and Rental Income of a Non-profit Organization
This is in response to your letter of February 5, 2007 posing questions regarding capital gains and rental income of a non-profit organization ("NPO").
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a transaction that has already been completed, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
The CRA's general views regarding non-profit organizations are contained in Interpretation Bulletin IT-496, "Non-profit Organizations". To qualify as an NPO within paragraph 149(1)(l) of the Income Tax Act (the "Act"), an organization must be both organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit. You have described a situation in which the purpose of the corporation in question is to own and operate office and administrative facilities for a Union Local. The corporation receives funds from the Union Local sufficient to cover the building's expenses. This reply is premised upon the existence of a properly constituted and operated NPO, although it is important to note that we are not in a position to make this determination with respect to your inquiry.
Paragraph 149(1)(l) of the Act provides that no tax is payable on the taxable income of an entity that qualifies as an NPO. Although there is a special rule in subsection 149(5) of the Act that is applicable to an NPO whose main purpose is the provision of dining, recreational or sporting facilities, the general rule means that an NPO is not taxable on capital gains arising from the disposition of capital property. Accordingly, provided subsection 149(5) of the Act doesn't apply, where a validly organized and operated NPO realizes a capital gain from the sale of real property that it owns and maintains in order to carry out its stated purposes, no tax obligation results.
Your second question is whether an NPO organized and operated for the purpose described above would jeopardize its tax-exempt status if it purchases a replacement office building occupied by tenants who will remain in possession and will pay rent to the NPO until two months after the date of acquisition by the NPO, after which time the entire premises will be occupied by the Union Local.
One of the key considerations in determining whether an NPO is validly constituted and operated is whether profit is one of its objectives. A concern in this regard might arise in a situation in which an NPO acquires a property that is considerably in excess of what it might reasonably be expected to need in the foreseeable future. Although the purchase of a property for the purpose of earning rental income could suggest a profit motive, this determination is a question of fact. Relevant considerations in such a situation would be the circumstances and purposes for which the property was acquired, the duration of the profitable rental situation and whether the income earned during the transition period is used for the NPO's not-for-profit objectives.
Yours truly,
Mickey Sarazin, CA
Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch