7 June 1993 Income Tax Severed Letter 930915 - Strata Title Housing Co-op

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                                    930915
XXXXXXXXXX                                          W.P. Guglich
                                                    (613) 957-2102

Attention: XXXXXXXXXX

June 7, 1993

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your letters of March 12, and 22, 1993 regarding a co-operative housing project for seniors. You describe the following scenario:

* A strata title housing project for seniors is being developed in the XXXXXXXXXX area.

* The developer will be a Strata Title Co-operative Corporation, whose members will be the future residents of the housing co-operative. In a Strata Title Co-op, the Co-op has title to the land and the exterior shell of the building and the individual member owns his/her suite or unit. Each individual owner owns a share in the Co-op.

* An initial deposit of $XXXXXXXXXX for each unit will be required prior to the commencement of construction.

* After the completion of construction and sale of the last unit, it is intended that any surplus of funds will be returned to each member as a patronage dividend - an allocation in proportion to patronage.

*     Prior to the start of construction it will be necessary
      to raise additional equity financing from the Co-op
      members.  It is intended that all members be afforded
      the opportunity to pay a portion or all of the purchase
      price of their unit, prior to the completion of
      construction.  The members who participate in this
      opportunity would be entitled to receive a discount on
      the final purchase price of their unit equal to 
                XXXXXXXXXX

You request our views as to:

* Whether the return to the members of the surplus funds, after the completion of construction and the sale of the last unit, could be considered for purposes of subsection 135(7) of the Act a patronage dividend in respect of "consumer goods or services".

* The income tax implications relating to; (a) the discounts to the member's purchase price for making additional payments prior to construction or, (b) alternatively, if the participating members received additional shares in the Co-op instead of the discount.

It appears that the interpretation you seek relates to a proposed transaction to be undertaken by a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.

OUR VIEWS

The proposed refund to the unit holders after all units are sold and construction is completed could not be considered payments made pursuant to an "allocation in proportion to patronage" as defined in paragraph 135(4)(a) of the Act, in that the housing units would not be considered to be "goods or products". Since the payments would not be considered to have been made pursuant to an allocation in proportion to patronage subsection 135(7) would not be applicable. On the other hand, if these refunds were to be in the nature of a reduction of the sale/purchase price, they would have the effect of reducing the member's adjusted cost base of their unit and the Co-op would account for such reduction in computing its income.

A discount to the sale/purchase price, for making additional payments prior to the commencement of construction, would have the effect of reducing the member's adjusted cost base of his unit and the Co-op would account for such reduction in computing its income. However, where instead of the discount to the sale/purchase price the member receives additional shares, the purchase price would, for purposes of computing the member's adjusted cost base, be allocated between the unit and the additional shares received and the Co-op in computing its income would also be required to allocate the sale price between the unit and the additional shares.

If the additional payments are in the nature of loans, any compensation received in lieu of interest would be required to be included in the recipients' income.

We trust our comments will be off assistance.

Yours truly, for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch