Taxman can sting strata corporations making cash on the side
Tony Gioventu
Province
Dear Condo Smarts : Our strata has always been under the impression that strata corporations were tax-exempt. As a result, we are not required to file tax returns and we don’t pay taxes or collect HST on strata fees. We have just received a notice that we are being audited by the CRA, and we’re not sure why or what we have to do. We are a residential highrise building in Burnaby with no commercial strata lots.
–Vicky M.
Dear Vicky: Strata corporations, for the most part, are classed as non-taxable corporations under tax laws, but not all strata corporations are tax-exempt. There are several types, usually non-residential, that are not necessarily tax-exempt. But there are even exceptions where a residential strata corporation is operating a commercial enterprise as part of the strata functions. If a condominium corporation carries on a business, any profits from that business must be included in its income and it will not be considered a non-profit corporation.
The following quote from the Canada Revenue Agency FORM IT-304R2 is very clear: “Paragraph 150(1)(a) of the Income Tax Act requires all corporations, including condominium corporations, to file an income tax return each year, even if they are exempt from paying tax under Part I. A residential condominium corporation that qualifies as a non-profit organization under paragraph 149(1)(l) is exempt from Part I tax on its taxable income, but is required to file Form T1044, Non-Profit Organization (NPO) Information Return, with its T2 tax return. Although it is a question of fact whether a particular condominium corporation qualifies for an exemption under paragraph 149(1) (l), most residential condominium corporations qualify as non-profit organizations within the meaning of this paragraph.”
Strata corporations are permitted to invest their reserve funds, and the interest earned on those funds for residential strata corporations is non-taxable; however, there are many strata corporations that have variations on income that transcend the intent of activities that are intended to generate profit. This may result in lower strata fees, which could be interpreted as profit.
Because strata corporations are permitted to charge user fees, some have been innovative with their options. For example, a user fee for additional parking in a building of $25 per month is unlikely to gain much attention, but a strata corporation that rents parking to the public as an enterprise for $300 a month can generate a significant amount of revenue. Both revenues must be reported in your annual income statement, and user fees are not necessarily tax-exempt.
Strata corporations are also permitted leases or licences over common areas. Again, this can generate substantial revenue. A series of rooftop communication towers can easily generate $100,000 a year or more.
If your strata has a long-planned and funded reserve fund study, or has conducted a major special levy, you are likely generating a significant amount of interest from the investments. That interest will generate a tax statement, and your strata corporation has to ensure it has filed an annual tax return with a yearend financial statement.
Contact your accountant or the CRA if you have any questions.
Tony Gioventu is executive director of the Condominium Home Owners’ Association. E-mail [email protected].
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