On August 18, 2014, CRA issued a new document that deals with the tax implications of a leasing arrangement between a condo corporation (the “Corporation”) and a company proposing to install solar panels on several rooftops of the condominium complex. CRA was asked to consider whether the leasing arrangement would cause the Corporation to fail to meet the test to be a “non-profit organization” pursuant to paragraph 149(1)(l) of the Income Tax Act (Canada) (the “Act”).
Generally speaking, a condo corporation that meets the criteria in the definition of “non-profit organization” in the Act will be exempt from tax for the period of time during which it meets the criteria. To meet the criteria, a condo corporation must:
- be a club, society, or association;
- not be a charity;
- be organized and operated exclusively for social welfare, civic improvement, pleasure, recreation, or any other purpose except profit; and
- not make its income available for the personal benefit of a member or shareholder […].
Based on these criteria, issues that could arise from the proposed solar panel leasing arrangement include whether the activity has a profit purpose and whether the surplus funds that are generated from the activity are made available for the personal benefit of members of the Corporation. In past editions of our Charities and Not-for-Profit Newsletter [September 2013 and February 2012], our group has written about whether certain other revenue generating activities in which condo corporations often participate are evidence of a profit purpose, which will typically disqualify the particular corporation from being considered to be a non-profit organization for purposes of the Act. These are just some of the compliance issues that CRA has raised in the condo corporation context.
In this particular instance, only some of the terms of the agreement that the parties were proposing to enter into are described in the CRA document. As a result, it is impossible to say for certain whether the activity in question would cause the Corporation to fail to meet the test in the Act for a non-profit organization. However, CRA did express concern over the fact that the income from the leasing arrangement might be considered to be made available for the personal benefit of members of the Corporation since the parties to the agreement were contemplating that such amounts might be used to freeze increases in the annual reserve fund of the Corporation (which is used for the repair and replacement of capital components of common areas) and/or to offset unit owners’ monthly maintenance fees. CRA was also concerned as to whether the leasing arrangement was sufficiently connected to the Corporation’s not-for-profit objectives.
When contemplating certain commercial activities, it may be helpful for condo corporations to consider these comments made by CRA, in addition to CRA’s other published comments. These comments should also be a reminder that condo corporations must meet the test in paragraph 149(1)(l) of the Act in order to be exempt from income tax and that CRA will not consider them to be exempt from tax simply “because” they are condo corporations, to use the words of CRA.