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.
To:
[Client]
From:
Francine Ménard
Technical Policy Advisor
Financial Institutions and Real Property
Division, Excise and GST
Rulings Directorate
320 Queen Street Ottawa ON
CASE NUMBER:
112841r
DATE:
January 7, 2011
Subject:
GST/HST Ruling
ITCs on increase in use of real property in commercial activities
The following provides clarification regarding our previous memorandum dated February 15, 2010, on the above referenced subject matter that relates to the registrant with the GST/HST number [...].
All legislative references are to the Excise Tax Act (ETA) or the regulations thereunder unless otherwise specified.
You previously stated the following:
1. You were performing a credit return audit on [...], which is identified in the GST/HST mainframe as a partnership.
2. The "partnership" has a rental chalet [...] which is run by a management firm.
3. Based on a previous audit, "personal usage" of the chalet in [yyyy] was determined to be 14.84%.
4. ITCs were allowed based on 85.16 % use in commercial activities for the [same] year [yyyy].
5. In the "partnership's" GST/HST return for [the next yyyy], the "partnership" declared a change in use (use in commercial activities is now 92.88% and "personal use" is 7.12%). Since the chalet was used substantially all in commercial activities (90% or more), the "partnership" claimed ITCs based on 100% use in commercial activities per subsection 141(1).
6. You were proposing to disallow the additional claim for ITCs under section 197, based on the change in use being less than 10% (i.e., an increase of 7.72%, from 85.16% to 92.88%).
It is important to note that there must be evidence to support the existence of a partnership and that particular care should be taken in husband and wife situations. We do not "assume" that a partnership is the "owner" of real property solely because the individuals describe it that way. The starting point is that the real property is owned by the individuals and not a partnership, since legal title would be in the names of the individuals. We need strong, preferably documentary, support to establish that a particular real property belongs to a partnership and not to the individuals on title. Reference may be made to the recent court cases on this issue, e.g., Bains et al v The Queen [2005] TCC 156. In addition, where property is, in fact, property of the partnership, there would be no "personal use" in this context. Additional information on this issue is provided below.
If the chalet is owned by individuals:
With respect to vacation properties, we trust that you are aware of Info Sheet GI025, The GST/HST and the Purchase, Use and Sale of Vacation Properties by Individuals, and that in this case you have confirmed that in fact there has been a change in use and that a fair and reasonable method was used to establish that the use in commercial activities is now 92.88%.
With respect to the question at hand, as explained by my colleague Hugh Dorward in discussions with [...], our view is that subsection 141(1) would apply to deem all of the property to be used in commercial activities once a person begins to use it substantially all (i.e., 90% or more) in commercial activities. Therefore, where a person uses real property 85% in commercial activities and increases the use to 92%, for purposes of the change in use rules and by virtue of subsection 141(1), the use in commercial activities would change from 85% to 100% which results in an increase of 15% in commercial activities.
If the chalet is owned by a partnership:
If there is strong evidence that the real property is, in fact, property of a partnership, the previous audit should not have allocated a portion of the use of the chalet to "personal use" as supplies from the partnership to the individual partners would be considered to be made in the course of commercial activities. The partnership would have been required to account for the tax collectible on the fair market value of the supply of the chalet made by the partnership to the partners. As such, the change in use provisions would not have applied when the chalet went from being supplied 14.84% of the time to the partners to being supplied 7.72% of the time to the partners as supplies from the partnership to any persons, be it the individual partners or others, are supplies made in the course of commercial activities unless the supply is exempt.
Should you require additional information, you may contact me at (613) 957-8222.
Francine Ménard
Technical Advisor
Real Property
Financial Institutions and Real Property
UNCLASSIFIED
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