Rising fees, urgent repairs may impact resale of condo units

Rising fees, urgent repairs may impact resale of condo units

December 31, 2007

Although condominium corporations have long been treated as tax-exempt not-for-profit corporations — free to carry on their activities as long as they submit an annual filing with the Canada Revenue Agency (CRA) — this may no longer be the case for some, write Toronto lawyers Armand Conant and Joel Berkovitz in a recent issue of Condo Voice magazine.

“While condominiums are usually tax exempt, they only hold this status so long as they comply with the requirements of section 149(1)(l) of the Income Tax Act," explain Conant, partner and head of Shibley Righton LLP’s condominium law department, and Berkovitz, associate in the law firm’s condominium law department.

“This section requires that, in order to be considered a non-profit organization ('NPO') and be tax-exempt, an organization must: (a) not be a charity; (b) be organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit; (c) be operated exclusively for the same purpose for which it was organized or for any of the other purposes mentioned in (b and (d) not distribute or otherwise make available for the personal benefit of a member any of its income,” they add.

While most residential condominium corporations will qualify for an exemption under this section, Conant and Berkovitz say some may run into problems.

“In certain circumstances, however, condominium corporations can run afoul of parts (c) or (d). This is particularly true today, with some condominium corporations expanding their scope of operations into activities that were previously only undertaken by for-profit enterprises.”

Specifically, they write, recent technical interpretations from the CRA have cautioned not-for-profit organizations against undertaking any sort of business activity with the expectation of making a profit.

“Technical Interpretations do not carry the force of law, and are not binding on the courts or the CRA itself, but they are a useful look into the CRA’s position on issues and provide a window into how the CRA is likely to rule.”

Activities that may lead the CRA to believe a condominium is operating with the purpose of earning a profit could include renting a guest suite for an amount in excess of its cost, or leasing rooftop space for the installation of solar panels or cell phone antennas, says the article.

As long as the income from these activities is incidental and not material, Conant and Berkovitz say there shouldn’t be much cause for concern. Activities that are less closely connected to a condominium corporation’s key objectives, however, may face greater scrutiny.

For example, they write, a 2010 CRA interpretation looked at a condominium corporation that operated a golf course, which was budgeted to make a profit and generated most of its revenues from non-members.

Conant and Berkovitz say it is also important to consider what is done with profits realized by the corporation, as some types of profits can be safely distributed to condominium owners without jeopardizing non-profit status.

For example, they explain, profits realized from the sale of capital property may be able to be distributed to owners, but the owners would be liable for the tax on that capital gain.

Ultimately, they write: “It’s the CRA’s position that an NPO can earn profits, but the profits should be incidental and arise from activities that are undertaken to meet the organization’s non-profit objectives. While most condominium corporations’ activities shouldn’t cause concern, condominiums which are engaged in short-term rental businesses, golf courses, rooftop equipment leases, or other activities which yield a profit for the corporation are encouraged to seek professional advice to make sure that they are not in danger of losing their tax-exempt status.”