Registered charities making improvements to property leased from others
October 11, 1994
This policy statement outlines the Directorate's policy on registered charities that make improvements to property leased from others.
Registered charities may wish to lease property from others and make improvements to such property even though the improvements revert to the lessor at the end of the lease.
Leasehold: An estate in real property held by lessee/tenant under a lease. The asset representing the right of the lessee to use the leased property
Leasehold improvements: Improvements, such as a parking lot or a driveway, made by lessee to leased property
1. This policy applies to registered charities that may wish to lease property from others and make improvements to such property even though the improvements revert to the lessor at the end of the lease.
2. Registered charities must also comply with subsection 149.1(1) of the Income Tax Act prohibiting registered charities from conferring personal benefits or private benefits on its members, proprietors, shareholders, trustees, or settlers.
Non-arm's length leasehold improvement transactions
3. Registered charities may undertake improvements on property leased from one of its members. The improvements are often insignificant or made over a lengthy lease period, therefore depleting their value. However, where the improvements involve an increase in the value of the property, the registered charity must demonstrate that any personal benefits conferred on the lessor are offset by reasonable consideration to the charity.
4. Various arrangements can be made between the lessor and the lessee/charity to ensure that the lessor does not unduly benefit from the increased value of the property. For example, the lease agreement could provide:
that the improvements are to be removed from the property at the termination of the lease
that the lessor is required to pay the lessee the fair market value of the improvements at the termination of the lease
that the lessee pay discounted rental charges for the cost of the improvements amortized over the term of the lease
Arm's length leasehold improvement transactions
5. The Act prohibits registered charities from transferring resources to individuals or organizations that are not qualified donees. On this basis, a charity should not provide a private benefit to commercial landlords in the form of increased value to their property as a result of leasehold improvements undertaken by registered charities.
6. Most arrangements concerning leasehold improvements should be negotiated between the charity and the commercial landlord with this principle in mind. However, formal provisions in the lease agreement are not as important in arm's length transactions as in non-arm's length ones.
7. A charity usually wants to undertake leasehold improvements because they are both desirable and essential to its operations. If the improvements are beneficial to the landlord as well, the charity can negotiate with the landlord for reimbursement or cost-sharing of the improvements. Such agreements should properly be reflected in the lease agreement.
8. An organization does not qualify for registration as a charity if it is apparent that a landlord/lessor will receive undue benefits from a registered charity and the lessor and/or the charity are unwilling to amend a lease agreement to preclude conferring such benefits. The Act clearly provides that a charity cannot confer personal or private benefits to individuals or organizations.
- Income Tax Act, R.S.C. 1985 (5th supp.) c.1, ss. 149.1(1)
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