Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 109308-r
Business Number: [...]
January 12, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Construction activities undertaken by a charity
Thank you for your letter of May 12, 2009, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain construction activities undertaken by [...] (the Trust). Your letter was forwarded to us by the [...] GST/HST Rulings Centre for our response to you. We apologize for the delay in our response.
You previously received a response on this topic from the [...] GST/HST Rulings Centre, case number [...], dated [mm/dd/yyyy]. However, as very few details were available to the Rulings Centre at that time, only a very general interpretation was provided.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand as follows:
1. The Trust is a charity as defined in subsection 123(1) and is registered for GST/HST purposes.
2. On [mm/dd/yyyy], the Trust entered into an agreement (Agreement 1) with [...] (the Government) whereby the Government supplied to the Trust certain real property legally described as Parts [...] in [...] [Province X] (the First Lands). Agreement 1 contains the following provisions:
(a) The Trust is to have and hold the First Lands for a term of [...] years commencing on [mm/dd/yyyy] and ending on [mm/dd/yyyy].
(b) Under Article [...], the First Lands are to be used solely for the purpose of constructing, operating and maintaining [...] facilities, all of which we understand to be "improvements" as that term is defined in subsection 123(1).
(c) Under Article [...], all structures that are affixed to the First Lands, whether at the expense of the Trust or otherwise, vest in the Government. Any item that, at common law, is determined to be a trade fixture or chattel may be removed by the Trust within [...] days of the expiration or termination of Agreement 1.
(d) The rent payable by the Trust for each of the first [...] years of the term of Agreement 1 is $[...]. The first [...] years are referred to as the "construction phase", which we understand to be the period during which the Trust will undertake the construction of the [...]. After the first [...] years of the term, the rent payable by the Trust is equal to the greater of $[...] and [...]% of the Gross Revenue. The Gross Revenue is defined in Article [...] to mean [...]. Article [...].
3. The Trust constructed [...] (the Improvements) on the First Lands. The [...] that was permitted to be built was not constructed and no other improvements have been constructed by the Trust on the First Lands.
4. The Trust will manage and provide routine maintenance of the Improvements and the First Lands. The Trust operates the Improvements by providing free access to the [...] to the general public. Occasionally, the Trust will rent the entire [...] to a group or organization and charge a fee for the rental. The Trust also sells prepared food and snacks from the [...].
5. There is no evidence that the Government paid or is required to pay an amount to the Trust or to any other person in respect of the Improvements that the Trust makes to the First Lands.
6. The City of [...] (City) has established funding of approximately $[...] towards the construction of the Improvements. The City has no ownership interest in the Improvements or in the First Lands. The City is required to give approval of site plans as well as building planning and approval. The City provided the funding only upon submission of a statement of expenditures by the Trust. Documentation to support costs incurred by the Trust had to be available to City auditors.
7. It is anticipated that the Trust and the City will enter into a formal agreement for the operation and maintenance of the [...] constructed on the First Lands, whereby the Trust will operate and maintain the [...] and the City will provide 100% of the funding for the operation, maintenance and other costs incurred in operating and maintaining the [...]. While there was an indication that revenues generated from the operation of the [...], would be equally split between the City and the Trust, we will assume that any such amount payable to the City would serve to reduce the funding payable by the City to the Trust.
8. The Trust surrendered Agreement 1 effective immediately before [mm/dd/yyyy]. Another agreement (Agreement 2) was entered into on [mm/dd/yyyy], whereby the Trust leased additional lands from the Government. As discussed in our telephone call of
August 24, 2010, Agreement 2 covered all of the First Lands that were the subject of Agreement 1, as well as other real property (the Second Lands), even though the description of the First Lands does not appear to be specifically mentioned in Agreement 2. Our interpretations are based on the assumption that Agreement 2 will be amended to reflect this fact.
9. The City had a licence agreement in place with the Government over some of the real property described in Agreement 2 and the licence agreement is to remain in place under Agreement 2. It is our understanding that this licence is in respect of the right to use the [...] that are within the First and Second Lands. Further, the Government did not lease to the Trust certain office space in the [...] that is situated on the Second Lands.
10. Many of the provisions of Agreement 2 are identical to those contained in Agreement 1:
(a) The term of the lease expires on [mm/dd/yyyy].
(b) Under Article [...], of the Second Lands are to be used for the purpose of [...]. We understand that the [...] has since been closed and that the Trust is in the process of developing plans and designs for other possible uses of the building. To date, the Trust has made no improvements to the Second Lands.
(c) Under Article [...], all structures that are affixed to the First and Second Lands, whether at the expense of the Trust or otherwise, vest in the Government. Any item that, at common law, is determined to be a trade fixture or chattel may be removed by the Trust within [...] days of the expiration or termination of the Agreement.
(d) The annual rent payable by the Trust for the lease of the First and Second Lands for each of the first [...] years of the term of the Agreement is $[...]. (iFootnote 1) After the first [...] years of the term, the rent payable by the Trust is equal to the greater of $[...] and [...] % of the Gross Revenue. The Gross Revenue is defined in Article [...] to mean [...]. Article [...].
11. The Trust has not made an election under section 211 in respect of the First Lands or Second Lands.
INTERPRETATIONS REQUESTED
1. You originally asked about the status of the supply made by the Trust in respect of the construction of the Improvements.
2. You are now also enquiring as to whether the Trust is eligible to claim input tax credits (ITCs) with respect to the GST/HST paid or payable on the construction of the Improvements.
3. You are now also enquiring as to whether the Trust is eligible to claim ITCs with respect to the GST/HST paid or payable on property and services acquired for ongoing activities of the Trust.
INTERPRETATIONS GIVEN
Based on the information provided, it is our view that:
1. As a result of constructing the Improvements on the First Lands, the Trust has made an exempt supply of a service to the Government. As such, the Trust would not charge or collect the GST/HST in respect of constructing the Improvements on the First Lands. While the Trust has made no improvements to the Second Lands, the same interpretation would apply to any such improvements made to those Lands.
2. The Trust is not entitled to claim ITCs in respect of the GST/HST payable on the construction of the Improvements if the Trust is using the First Lands otherwise than primarily in the course of commercial activities of the Trust. While the Trust has made no improvements to the Second Lands, this interpretation would also apply to any such improvements made to those Lands.
3. The Trust is generally not entitled to claim ITCs in respect of the GST/HST payable on the acquisition of property and services that are for consumption, use or supply in ongoing activities of the Trust given that the Trust is required to use the net tax calculation for charities.
EXPLANATIONS
Interpretation 1
Subject to certain provisions that are not relevant to this discussion, the term "supply" is defined in subsection 123(1) as the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition. The term "service" is defined in subsection 123(1) to mean anything other than property, money, and anything that is supplied to an employer by a person who is an employee of the employer in relation to the employment of that person. Therefore, service is broadly defined and relevant to this discussion.
There is an established principle at common law that where a tenant affixes a fixture to land, the fixture becomes part of the real property and reverts to the titled owner of the land. A fixture is a chattel which is annexed or fastened to the real property. In the absence of an agreement to the contrary, fixtures are either a tenant's fixtures and removable or landlord's fixtures and nonremovable.
There is nothing in Agreement 1 or Agreement 2 to suggest that the Trust retains ownership of the Improvements (other than tenant's fixtures, if any) and in fact, the vesting provisions in Article of [...] Agreement 1 and Article [...] of Agreement 2 reinforce the principle that, upon installation, the Improvements become the property of the Government. In the present case, to the extent that the Improvements are not tenant's fixtures, the Improvements form part of the real property interest of the titled owner, i.e., the Government.
Based on the facts of this case and the information above, we consider that the Trust has made a supply to the Government as the Trust has provided the Government with a service of constructing the Improvements. Section 1 of Part V.1 of Schedule V to the ETA exempts all supplies made by a charity, other than those supplies listed in paragraphs 1(a) to (n). The supply of the service made by the Trust to the Government in this case is not excluded by any of the provisions of section 1 and the supply is therefore exempt.
While the City's funding to the Trust of $[...] is made in respect of the construction of the Improvements, which is a supply made to a specific third party (i.e., the Government) and not the City, the purpose of the City's funding is for a public purpose in that the [...] and [...] will be used by members of the public at large. As such, and in accordance with the Canada Revenue Agency's (CRA's) position on the treatment of transfer payments as set out in Technical Information Bulletin B-067, Goods and Services Tax Treatment of Grants and Subsidies, we do not view the City's funding of $[...] to the Trust to be consideration for a supply. In addition, the City's funding in respect of the construction of the Improvements is not deemed to be consideration in accordance with subsection 141.01(1.2) as the Trust's supply of the construction service to the Government is exempt (i.e., the supply is not a taxable supply made for no consideration).
Interpretation 2
Subsection 169(1) sets out the general provisions for entitlement to ITCs. With respect to the acquisition of an improvement to capital real property of a person, the ITC is based on the extent to which the person was using the capital property in commercial activities after the property was last acquired by the person.
Under the provisions of subsection 199(4), read in conjunction with subsection 209(1), the tax payable by a charity in respect of an improvement to capital real property cannot be included in determining an ITC unless the charity uses the capital real property primarily in commercial activities. Under the provisions of 199(2), a charity that uses capital real property primarily in commercial activities is considered to use such property exclusively in commercial activities.
The effect of the foregoing provisions is that a charity can only claim an ITC in respect of an improvement to capital real property if the capital property is used primarily in commercial activities. If the capital real property is used otherwise than primarily in commercial activities, no ITC can be claimed. If the capital real property is used primarily in commercial activities, the person will generally be entitled to a full ITC.
As these provisions apply to the Trust in the matter discussed herein, the ITC entitlement in respect of the Improvements will be determined by the extent to which the Trust uses the First Lands in the course of its commercial activities. For this purpose, it is necessary to determine, for each parcel of real property that forms part of the First Lands, how the parcel on which an Improvement is situated is used: if the parcel is used primarily in commercial activities, a full ITC is available; in any other case, no ITC is available.
The Trust will be viewed as using the First Lands for two purposes: making an exempt supply of the Improvements to the Government; and using the First Lands in the course of the Trust's ongoing activities. The allocation between the exempt supply to the Government (see below for determining the extent of use for this purpose) and the ongoing activities must be made on a fair and reasonable basis.
Supply to Government
In some circumstances, a fair and reasonable manner to determine the extent to which improvements are considered to be for making a supply to the landlord would be based on that portion of the tenant's cost of making the improvements that is reimbursed by the landlord. In other circumstances, other factors may need to be taken into consideration.
In this case, we note that there is no reimbursement paid by the Government to the Trust with respect to the construction of the Improvements and that the Trust will use the Improvements for a prolonged period of time, that is, the lease is for a period of [...] years. As such, in this case, it would be fair and reasonable to allocate the Trust's costs of making the Improvements to the use of the First Lands in the ongoing activities of the Trust.
Use in ongoing activities of the Trust
There are only two identified ongoing activities for which the Trust uses the First Lands: making supplies of the [...] to the general public for no consideration (and occasionally making supplies of the [...] to groups or organizations for a fee); and, selling items from the [...].
The supplies of the [...] to the general public and to groups or organizations would generally be viewed as supplies of real property by way of lease, licence or similar arrangement. Under the circumstances described in this letter, these supplies are exempt.
The supplies of items from the [...] may or may not be exempt depending on the nature of the products sold, whether they are sold as part of a fund raising activity and whether they are sold for more than their direct cost. Further information on the exemptions that may apply can be found in guide RC4082, GST/HST Information for Charities. If, after reviewing the guide, you need further information in this regard, please call GST/HST Rulings at 1-800-959-8287.
Based on the foregoing, with respect to the use of the First Lands in ongoing activities of the Trust, it appears the Trust would be using the Lands largely in the course of making exempt supplies.
Once all uses of the First Lands are determined, the Trust will not be able to claim an ITC in respect of the tax payable on the Improvements if the First Lands are used otherwise than primarily for the purpose of making taxable supplies for consideration. In such a case, however, the Trust will normally qualify for the 50% GST/HST public service body rebate available to charities.
We note that, while no improvements have been made to the Second Lands, the same analysis could be used to determine the Trust's ITC eligibility should improvements be made to those Lands. As requested in your email of November 16, 2010, we would also note that these interpretations would apply whether the City provides 100% funding for the operation and maintenance of the [...] or whether such costs were shared equally between the City and the Trust.
The section 211 election
As stated in our understanding, the Trust has not filed an election under section 211.
The filing of an election under section 211 has two general effects with respect to capital real property of a charity that is covered by the election:
• Supplies of the real property that would otherwise be exempt under section 1 of Part V.1 of Schedule V to the ETA are excluded from that exemption, and
• The ITC eligibility for improvements to the capital real property are based on the extent to which the person making the election uses or supplies the real property in commercial activities (subject to a minimum extent of use rule) rather than on whether the real property is used primarily in commercial activities.
With respect to the first bullet, most supplies of real property by a charity are exempt under section 1 of Part V.1 of Schedule V to the ETA. However, if an election under section 211 is filed with respect to a particular parcel of qualifying real property, a supply of that real property will be excluded from the exemption in section 1 of Part V.1 of Schedule V. That is not to say that the supply of the real property is necessarily taxable because even if the election under section 211 is filed, the supply of the real property will be exempt if another exempting provision outside of section 1 of Part V.1 of Schedule V applies. As it applies to the Trust in the circumstances described herein, the exemption in section 5 of Part V.1 of Schedule V may apply. That section exempts a supply made by a charity of any property or a service where all or substantially all (90% or more) of the supplies of the property or service supplied by the charity are made for no consideration.
With respect to ITC eligibility and the election under section 211, as an election under section 211 was not in effect when the Improvements were made, the Trust will not be eligible to claim ITCs on the Improvements unless the real property to which the Improvements were made is used primarily in commercial activities. Further information on the section 211 election, ITC eligibility and the tax implications of filing a section 211 election is available in guide RC4082.
Interpretation 3
Pursuant to section 225.1(2), charities that are GST/HST registrants have to use a special net tax calculation. As such, the Trust is only required to account for 60% of the GST/HST collectible on its taxable supplies and the Trust can only claim ITCs for purchases of real property, capital personal property and improvements to real or capital property of the charity, provided the Trust is entitled to claim the ITC in accordance with the rules for such property and improvements. The Trust must remit 100% of the GST/HST collectible on its sales of capital property and other specifically enumerated supplies. In addition, the Trust may claim the 50% public service bodies' rebate for any GST/HST payable by the Trust and for which the Trust cannot claim an ITC, whether the tax payable relates to its taxable or exempt activities.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-954-8852. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Hugh Dorward
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
i 1. We note that in the recitals to the agreement, the parties agreed that the first [...] years of the term runs from [mm/dd/yyyy] to [mm/dd/yyyy]. The annual rent payable from [mm/dd/yyyy] to, [mm/dd/yyyy], is $[...]. This period extends beyond the actual construction phase and includes the first part of the operating phase.
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UNCLASSIFIED
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