17 May 2017 Interpretation 174642

Holdco is a privately-held corporate registrant that has contracted with an arm’s length person to develop a project on its land an apartment complex (with no retail component) the units in which will be occupied by individuals attending one or more of the post-secondary institutions located nearby. The building and land on which the building is constructed (“the Residence”) is represented to be a “multiple unit residential complex.” (“MURC”) On its completion, Holdco will sell it to a registered limited partnership (“LP#1”), whose only use thereof will be its lease (under the “Master Lease”) to a second registered limited partnership (“LP#2”).. A professional management company (“MgmtCo”) will manage and operate the Residence.

It is estimated that during the regular academic session from September to May, more than 10% of the units will be supplied for short-term stays (generating rentals of more than $20 per day) and, during June through August, that 90% or more of the apartment units will be supplied for short-term stays (under one month) – with the balance for long-term stays.

In finding that LP#1 will not be subject to the self-supply rule in s. 191(3) when it leases the Residence to LP#2, CRA noted that LP#1 was a builder because it acquired its interest in the Residence (before any occupancy) for the primary purpose of leasing it other than to an individual and that the conditions in s. 191(3)(b)(i) will not be met given that LP#1 and LP#2 entered into the lease of the multiple unit residential complex (the Residence) for the purpose of managing and leasing the residential units and not for the purpose of occupancy of a unit by an individual as a place of residence. Furthermore, s. 191(3)(b)(i.1) is inapplicable, nor will s. 191(3)(b)(ii) be met given that LP#1 is not an individual.

Furthermore, s. 191(10) would not deem the builder (LP#1) to give possession of the residential units to an individual under a lease for occupancy as a place of residence LP#1 given that the builder will not be making exempt supplies described in Sched. V, Pt.1, s. 6.1 or 6.11. S. 6.1 does not apply as it applies only to a supply of property that is land, or a building (or that part of a building) that consists solely of residential units, whereas here there is a supply of a MURC. S. 6.11 will not apply given inter alia that more than 10% of the apartment units will be leased for short-term stays during the regular academic session (and that percentage will increase to 90% or more during the summer). In this regard, CRA stated that s. 6 “does not deal with the situation where the residential complex is supplied to a person under a head lease (such as the Master Lease) for a subsequent supply to another person.” Therefore, LP#2 will be required to pay GST on its lease payments to LP#1.

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 the month) during the regular academic year, and with over 90% short-term occupancy in the summer months.

Given the taxability of its supplies to LP#2 “LP#1 may also be eligible to claim ITCs in respect of the tax paid or payable on property or services acquired for consumption, use or supply in the course of making these taxable supplies of the Residence to LP#2.” In this regard, CRA stated

[A]lthough LP#2 may be making some supplies of apartment units within the Residence that may be exempt under section 6 of Part I of Schedule V to the ETA, this will not affect LP#1’s eligibility for a full ITC on the acquisition of the Residence in this circumstance.

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 with a view to leasing it to another partnership (LP#2) That “headlease” will not be exempt given inter alia that more than 10% of the apartment units will be leased for short-term stays during the regular academic session (and that percentage will increase to 90% or more during the summer). In this regard, CRA stated that s. 6 “does not deal with the situation where the residential complex is supplied to a person under a head lease (such as the Master Lease) for a subsequent supply to another person.” Therefore, LP#2 will be required to pay GST on its lease payments to LP#1.

CRA went on to note that given that LP#1 was a builder who claimed input tax credits on its purchase of the building from the developer, a subsequent sale of the building would not be exempted under s. 5, stating:

Section 5 of Part I of Schedule V exempts the sale of a multiple unit residential complex (that is, the Residence) by a builder of the complex (that is, LP#1) where the builder received an exempt supply of the complex by way of sale or where the builder was required to self-supply under subsection 191(3) with respect to the complex, and that supply was the last supply of the complex made to the builder by way of sale. Generally, this exemption will not apply where the builder has claimed an ITC in respect of the builder’s last acquisition of the complex or in respect of an improvement to the complex.