CRA recently released a letter that discusses the tax implications of an affordable housing provider (an entity described in paragraph 149(1)(l) of the Income Tax Act (the “Act”)) that wanted to provide long-term leasing of its parking spots to a business owned by one of its board members. The housing provider intended to lease excess parking spots and charge the same rate that it charged to its tenants. The housing provider did not anticipate receiving a significant amount of rental income from leasing the parking spots.
CRA had the following comments:
The courts have recognized that an organization claiming a paragraph 149(1)(l) exemption can earn a profit, as long as the profit is incidental and arises from activities directly connected to its not-for-profit objectives. For example, maintaining reasonable operating reserves or bank accounts required for ordinary operations will generally be considered to be an activity undertaken to meet the not-for-profit objectives of an organization.
It is a question of fact whether the rental income described would be incidental and directly connected to the not-for-profit objectives of the housing provider. Income from the rental of XXXXXXXXXX parking spots under a XXXXXXXXXX-year term lease to a third party by an organization providing affordable housing will generally not be considered to be directly connected to the objective of providing affordable housing. However, a review of all of the circumstances, including (but not limited to) how and why the extra parking spots were acquired by the housing provider, and why the extra spots continue to be maintained, may indicate that the housing provider does not have a profit purpose, notwithstanding the lease.
It is also a question of fact whether the income of the organization is payable to or otherwise made available for the personal benefit of any member. An organization may fail to comply with this requirement if it distributed income during the year, either directly or indirectly, to, or for the personal benefit of, any member. It is not clear in your situation whether the board member is also a member of the housing provider."
CRA also provided other exemptions for affordable housing providers under the following sections of the Act that do not have the same requirements and restrictions imposed by paragraph 149(1)(l):
* Municipal corporations are exempt from tax under paragraph 149(1)(d.5) provided at least 90% of the capital is owned by municipalities or public bodies performing a function of government. We note that paragraph 149(1)(d.5) does not apply to an organization that is only funded, not owned, by a municipality. Paragraph 149(1)(d.5) does not preclude a municipal corporation from having a profit purpose, which may allow for more funding flexibility. Paragraph 149(1)(d.5) imposes a restriction that no more than 10% of income may be earned from activities carried on outside the geographical boundaries of the municipality or municipalities; however this restriction may not be a concern for a municipal housing organization.
* An affordable housing provider may be a registered charity. In Policy Statement CPS-020 for “Applicants that are Established to Relieve Poverty by Providing Rental Housing for Low-Income Tenants”, the Charities Directorate has determined that, on the basis of the Act and the common law, certain low-income housing organizations may be considered to be established for the purpose of relieving poverty and are eligible for registration. A registered charity is exempt from tax under paragraph 149(1)(f) and as a charity, cannot qualify for the NPO exemption provided by paragraph 149(1)(l). An affordable housing provider that is a charity must generally be registered in order to be exempt from tax (assuming that one of the other provisions noted does not apply).
* Corporations that are “constituted exclusively for the purpose of providing low-cost housing accommodation for the aged” are exempt from tax under paragraph 149(1)(i). This provision does not specifically preclude a profit purpose, although it does require that income not be available for the personal benefit of proprietors, members and shareholders.
* Paragraph 149(1)(n) exempts from Part 1 tax the taxable income of a person for a period when that person was a limited-dividend housing company (within the meaning of that expression as defined in section 2 of the National Housing Act), all or substantially all of the business of which is the construction, holding, or management of low-rental housing projects where the dividends payable are limited by its charter or instrument of incorporation to five per cent per year or less.
Here is a copy of the CRA letter.
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Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.