A. INTRODUCTION
In a CRA Views dated March 18, 2013, the Income Tax Rulings Directorate responded to a request from the Charities
Directorate for assistance in developing an application for corporations that
are a housing corporation resident in Canada and exempt from tax because of
paragraph 149(1)(i) of the Income Tax Act (Canada) (“low-cost housing
corporations”) for registration as a qualified donee. This request resulted
from Budget 2011, which proposed amendments to the Income Tax Act (Canada) concerning the regulatory regime for certain types of qualified
donees. Effective January 1, 2012, CRA was required to maintain a list of
low-cost housing corporations and create a registration process for them as
qualified donees.
This Charity Law Bulletin provides an overview of
the definition for low-costing housing corporations as set out in the CRA
Views, together with the proposed application processes recommended to the
Charities Directorate by Rulings.
B. REVIEW OF CHANGES TO QUALIFIED DONEE REGIME
As discussed in Charity Law Bulletins No. 245 and No. 253,
Budget 2011 proposed to extend to specific qualified donees certain regulatory
requirements under the Income Tax Act that already applied to registered
charities. These changes affected entities previously defined as “a housing
corporation resident in Canada and exempt from tax under this Part because of
paragraph 149(1)(i)” in paragraphs 110.1(1)(a) and 110.1(1)(b) and the
definitions "total charitable gifts" and "total Crown
gifts" in subsection 118.1(1). As a result, Budget 2011 proposed that
low-cost housing corporations (and other qualified donees) were to be identified
in a publicly available list maintained by the Charities Directorate and as
such, the definition of a low-cost housing corporation now states “that has applied for registration” added to it at section
149.1.
Prior to these amendments, low-cost housing corporations
were exempt from income tax, and gifts to them were eligible for an official
donation receipt. As a qualified donee under the new regime, low-income housing
corporations must now also ensure that they maintain adequate books and records
and issue donation receipts in accordance with the regulations. Low-income
housing corporations are therefore now also subject to penalties and
assessments for failing to comply with these obligations as a qualified donee,
including suspension or receipting privileges or the revocation of qualified
donee status.
These amendments became effective on January 1, 2012,
necessitating the Charities Directorate to develop an application process by
which low-cost housing corporations can become registered. In this regard, although
the requirement that low-cost housing corporations register with the Charities
Directorate and be listed on its' website has been in place since January 1,
2012, the Charities Directorate has yet to develop an application process in
order to comply with the Income Tax Act (Canada).
The Charities Directorate website currently notes that
until the application process is developed, low-cost housing corporations
continue to be qualified donees, but will need to apply for registration in
order to obtain or continue the qualified donee status once the application
process is complete.
C. CRA VIEWS CONCERNING APPLICATION PROCESS
The CRA Views provides comments
concerning the eligibility requirements for low-cost housing corporations to be
eligible under 149.1(1)(a)(i), together with recommendations concerning the
application process to be used by the Charities Directorate.
1. Overview of Requirements
In order for a low-cost housing corporation to be a
qualified donee under 149.1(1)(a)(i), the definition
requires it to be both resident in Canada and exempt from tax by virtue of
paragraph 149(1)(i). Specifically, the low-cost housing corporation must meet
the criteria set out in paragraph 149(1)(i) on an ongoing basis, even on the
winding-up, dissolution, or amalgamation of the corporation. In this regard,
previous technical interpretations concerning 149(1)(i) entities are confirmed
in the CRA Views. Specifically, the low-cost housing corporation must be
constituted exclusively, and operate for, the purpose of providing low-cost
housing accommodation for the aged,
which is generally 55 years of age or over.
However, Rulings also defines low-cost housing
accommodation to include “comfortable but modest rental accommodation at rent
levels which are low relative to rent levels generally available for similar
accommodations (other than subsidized or non-profit accommodations) in the same
community”. In addition, Rulings notes that this can include providing meals,
laundry services, home furnishings, medical/nursing care, house-keeping
services, resident aides’ services and general assistance with matters of
living.
In addition, the requirement that no part of the income of
the low-cost housing corporation was payable to, or was otherwise available for
the personal benefit of, any proprietor, member or shareholder thereof requires
that may not distribute income, either directly or indirectly, to, or for the
personal benefit of any member or shareholder. In this regard, the CRA Views
notes that the governing documents of a low-cost housing corporation, i.e.,
it’s letters patent or articles of incorporation and by-laws, must specifically
state that such distribution of income is prohibited.
2. Proposed Application Process
With regard to the application process, it was recommended
that the Charities Directorate adopt an application process that requires
applicants to clearly evidence that they are constituted and operated as a
low-cost housing corporation. In this regard, Rulings suggests a letter
enclosing various documentary evidence of this fact. The documentation
suggested includes:
• An
explanation of the type of activities, obligations and responsibilities the
applicant is entitled to undertake by virtue of its enable documents;
• A
description of the actual operations of the applicant and the services provided
in fulfilment of its stated objectives and activities, including a statement as
to the persons to whom the applicant will be providing services; and
• A
full statement as to how the applicant meets the criteria as a low-cost housing
corporation; in particular, age of residents, rent charged, and how its
constitutes “low-cost” housing accommodation.
As a result, the application suggested to the Charities
Directorate is similar to that currently required by applicants for registered
charity status, in that the applicant must provide a complete statement of
activities in order to evidence that its activities demonstrate that it is both
exclusively constituted and operated for the purposes of providing low-income
housing.
In addition, the application should also include:
• A
statement indicating whether, to the best of the Applicant’s knowledge, the CRA
has at any time considered the corporation’s eligibility as a low-cost housing
corporation within the meaning of paragraph 149(1)(i) of the Act. If yes,
provide a copy of any relevant documentation.
It should be noted that CRA’s recent NPO Risk
Identification Project concerning organizations exempt from income tax under
paragraph 149(1)(l) of the Income Tax Act (Canada) identified
approximately 39,000 non-profit organizations on the basis of T2, T3, and T1044
filings. Since there was no registration process for low-cost housing corporations
required before January 1, 2012, corporations would have declared that they are
exempt under 149(1)(i). While it is unknown how many corporations operate as
low-cost housing corporations, presumably CRA has audited, or been asked by
corporations in the past, on the basis of their eligibility. Although the
number of 149(1)(i) entities is not publically known, it may be a significant
number and a requirement that the applicant include a prior statement from
Rulings or an audit letter confirming this status would obviously be of
assistance to the Charities Directorate in registering these organizations.
D. CONCLUDING COMMENTS AND IMPLICATIONS FOR LOW-COST HOUSING CORPORATIONS
Although the registration process may not to be
implemented in the near future, it will be important for low-cost housing
corporations to be aware of this proposed application process so that they can
begin reviewing their governing documents, i.e., letters patent and by-laws, to
ensure that they have purposes and activities which ensure that they are
constituted and operating exclusively as low-cost housing corporations. In this
regard, they should ensure that they are not conducting any activities which
would suggest that they are not operating exclusively for the purpose of
providing low-cost housing accommodation for the aged. In this regard, the
recommendations concerning the application in the CRA Views also suggest that
the applicant include “If relevant, a description of any other activities
carried on by the applicant, such as business activities”. It is not clear at
this time if carrying on business activities (or even if “related business”
activities are permissible) would mean that the low-cost housing corporation is
not operating exclusively for the purposes of providing low-cost housing
accommodation for the aged.
It will be interesting to see how the Charities
Directorate applies the recommendations from Rulings when developing a process
for low-cost housing corporations to apply for registration as a qualified
donee.