CRA finds that a headlease structure for a student residence avoided triggering the GST/HST self-supply rule

Shortly before the occupancy of a newly constructed apartment complex (expected to be predominantly occupied by students), LP#1 purchases the building from the developer. As this taxable sale occurs before any unit is occupied, and LP#1 acquired the building for the purpose of leasing it to another partnership (LP#2) rather than an individual, LP#1 will qualify as a builder for GST/HST purposes. That “headlease” will not be exempt because more that 10% of the units will be occupied for short-term stays (under one month) during the regular academic year, and with over 90% short-term occupancy in the summer months.

On the other hand, the “self supply” rule (usually triggering GST/HST on the first occupancy of a newly-constructed apartment complex on the complex’s fair market value) will not apply to LP#1 and, indeed, it likely will obtain full input tax credits for the GST/HST paid by it on its purchase of the building from LP#1. This GST/HST on the FMV is effectively deferred until LP#1 sells the building, perhaps decades down the road.

Neal Armstrong. Summaries of 17 May 2017 Interpretation 174462 under ETA s. 191(3) and s. 169(1) and Sched. V, Pt I, s. 5.