By Theresa L.M. Man

The Canada Revenue Agency (CRA) released CRA View 2018-0776681E5, dated March 30, 2023, concerning tax implications of distributions made by a strata/condo corporation that claims tax exemption as a non-profit organization (NPO) under paragraph 149(1)(l) of the Income Tax Act (ITA). The condo corporation has a wholly-owned subsidiary that only owns one piece of real estate and is not a bare trustee. The subsidiary plans to sell the real estate and distribute its large capital gain to the condo corporation by paying a capital dividend and taxable dividend. The CRA was asked whether the condo corporation could distribute the said capital dividend or a taxable dividend to its members without losing its NPO status.

Under paragraph 149(1)(l), an NPO is exempt from Part I tax provided that it meets all of the following requirements: (1) it is a club, society or association; (2) it is not a charity; (3) it is organized and operated exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit; and (4) its income is not available for the personal benefit of a proprietor, member, or shareholder, unless that proprietor, member, or shareholder was a club, society, or association which has as its primary purpose and function the promotion of amateur athletics in Canada.

The CRA indicated that residential condominiums are required to be organized under the applicable provincial legislation for condominiums and they normally are not operated as a business. Therefore, they are usually considered to be organized and operated for other than commercial or financial reasons, thereby meeting requirement #3 in the ITA. Provided that the other three requirements in paragraph 149(1)(l) are also met, they would generally qualify for tax-exempt NPO status.

However, where an organization holds shares to earn income from property, it may be considered to have a profit purpose, even if the income is used to further the organization’s not-for-profit objectives. In that case, it is a question of fact whether or not the corporation has a profit purpose if it holds shares in a wholly-owned subsidiary and consequently receives dividends.

In relation to requirement #4, for purpose of paragraph 149(1)(l), “income” is determined in accordance with the rules in section 3 of the ITA, while taking into account that taxable capital gains are excluded from the computation of income under subsection 149(2). NPOs may therefore distribute the amount of taxable capital gains to their members, as this is not considered a distribution of income.

Since a capital dividend received by a shareholder is not included in income under paragraph 83(2)(b) of the ITA, the capital dividend received from its subsidiary would not be included in the condo corporation’s income. Therefore, any distributions of such amounts to the corporation’s members would not affect the corporation’s NPO status. The CRA indicated adequate records must be maintained to verify that the source of the distribution to its members was the capital dividend it received. On the other hand, since taxable dividends received from the subsidiary would be included in the condo corporation’s income pursuant to subsection 82(1) of the ITA, the condominium would lose its NPO status if it distributes these funds to its members.

If a condominium loses its NPO status, it would cease to be exempt from Part 1 tax and becomes a taxable entity. The rules in subsection 149(10) would apply, so that the corporation’s taxation year is deemed to end and a new one begins. There is a deemed disposition of all of its property at fair market value immediately before the exempt status is lost, and then it would have to re-acquire all property at fair market value at that time. Whether the condominium could later qualify for NPO status is a question of fact to be determined based on the corporation’s activities during that year. However, the condominium likely will not meet paragraph 149(1)(l) conditions for its new taxation year, since it includes the distribution of its income to its members.

​Read the June 2023 Charity & NFP Law Update