Income not incidental to a corporation’s activities can jeopardize its tax exemption
Condominium corporations are typically non-profit organizations, making them exempt from income tax. However, according to the Canada Revenue Agency (CRA), a non-profit condo corporation could lose its status if it generates income from activities that are not incidental to the corporation’s overall non-profit activities.
All of this raises the question: what sort of activities, profits or revenues might jeopardize a condominium corporation’s non-profit status, thereby exposing it to income tax, including tax on interest earned by the corporation’s reserve fund investments?
To this lawyer’s knowledge, there are no court decisions on this point. However, the CRA has published a few relevant technical interpretations. Though it should be noted that the CRA interpretations do not have the force of law, they are only an expression of CRA’s views. A court might rule otherwise.
What follows are brief summaries of those CRA interpretations:
A CRA interpretation on Dec. 15, 2009, found that a condominium corporation’s non-profit status may be lost if the corporation rents a suite for an amount that exceeds the costs of operating and maintaining the suite. In other words, a condominium corporation can’t earn rental profits without jeopardizing its non-profit status. This is true even if the profits are not distributed to owners, but are only used to reduce common fees.
Rooftop solar panels
A May 5, 2011 CRA interpretation found that condominium corporations could earn revenue from rooftop solar panels to generate electricity that will be sold to the Power Authority under Ontario’s Feed-In Tariff program without jeopardizing the corporation’s non-profit status.
This is true even if the profits are used to reduce or offset common fees. The reasoning is that non-profit organizations can earn a profit “as long as the profit is incidental and the activity is in support of the organization’s not-for-profit objectives”. CRA’s interpretation is that this principle will apply in most cases to solar panel hydro generation.
A CRA interpretation on June 21, 2011, found that a condominium corporation’s non-profit status is jeopardized if the corporation earns profit from operating a golf course, pro shop and restaurant. These activities were not felt to be in support of the corporation’s non-profit objectives. The interpretation includes the following: “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.”
A July 13, 2011 CRA interpretation found that a condominium corporation’s non-profit status is not jeopardized if the condominium corporation earns profit from a rooftop lease for a telecommunications tower. Even if the income is more than is “incidental to the non-profit activities”, such income will usually be considered income of the unit owners (and therefore would not jeopardize the corporation’s non-profit status).
According to a May 23, 2013 CRA ruling, if locker space is sold, it is not clear whether a capital gain would belong to the corporation or to its members (because this depends on the applicable provincial legislation). If the unit owners own the common elements, they would earn the capital gain on the sale and there would be no impact upon the corporation. If the corporation owns (and sells) a locker, this again would likely not jeopardize the corporation’s non-profit status, assuming the corporation has owned and maintained the locker as part of the corporation’s overall non-profit purposes. However, the corporation must not pay out the funds to its members or it risks losing its tax-exempt status.
Renting out the locker space would likely be treated as only generating incidental income, meaning the income generated is both minor and directly related to activities undertaken to meet the corporation’s non-profit objectives of managing and maintaining the condominium property and reserves. However, the ruling states that whether the income generated is material is a question of fact. If the income is material, the corporation risks losing its tax-exempt status.
An Aug. 12, 2013 CRA interpretation explored whether the following actions with respect to a caretaker suite might affect the condominium corporation’s tax-exempt status:
If the corporation sold the suite at fair market value and placed the proceeds into its reserve fund, this would not necessarily remove it from tax-exempt status.
Conversely, renting out the unit would indicate that the corporation is no longer pursuing exclusively non-profit purposes, which could result in the corporation losing its tax-exempt status. Additionally, if the corporation used the income to decrease its members’ fees, it would be considered to have made income available for the personal benefit of its members, and would cease to meet the requirements for tax-exempt status.
If the corporation rents out a suite to members for the sole use of their guests, this would likely be viewed as an activity undertaken for meeting the non-profit objectives of the corporation, as long as the profits are not material and are not made available to the members.
Finally, if a caretaker suite is repurposed as a facility intended to make a profit by charging people for its use (such as a fitness or health centre), the corporation may lose its tax-exempt status unless the income can be shown to be incidental.
The bottom line is that a condominium corporation’s non-profit status may be jeopardized if the corporation earns any income that is not incidental to the corporation’s non-profit activities. However, the problem is that it is difficult to draw any clear conclusions from the CRA interpretations. In other words, it’s not clear when a revenue-generating activity will be considered “incidental” to the corporation’s non-profit status. The most one can say is that it will depend upon the particular circumstances in each case.
James Davidson is a partner at Nelligan O’Brien Payne LLP, and has been a member of the firm’s Condominium Law Practice Group for more than 30 years. He represents condominium corporations, their directors, owners and insurers throughout eastern Ontario.
[This article originally appeared on the Real Estate Management Industry (REMI) News Network http://www.reminetwork.com/condobusiness ]