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.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 174642
Dear [Client]:
Subject: GST/HST INTERPRETATION
Application of the GST to the supply of a multiple unit residential complex by way of a head lease
Thank you for your [correspondence] concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of a multiple unit residential complex by way of a head lease. We apologize for the delay in responding to you.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Based on your [correspondence] and your telephone conversations with my colleagues, our understanding is as follows:
1. Holdco is a privately-held corporate entity that is registered for GST/HST purposes. Holdco is not a university, a public college, or a school authority for GST/HST purposes.
2. Holdco owns land that is situated in […][Province X]. The land is situated in a neighbourhood that is in close proximity to a number of post-secondary institutions.
3. Holdco has contracted an arm’s length person to develop a project on the land. Generally, the project involves the construction of a building that will be comprised of approximately [#] fully self-contained apartment units, each with one or two bedrooms, a full bathroom, and a kitchen. The building will also include common areas such as reception, laundry rooms, and communal social areas for use by individuals who will occupy the apartment units. The building will not include any non-residential areas such as retail stores or restaurants.
4. It is expected that the apartment units will be occupied by individuals attending one or more of the post-secondary institutions located nearby.
5. Pursuant to local development codes, the apartment units cannot be […][separately titled]. You have asserted that the building, along with the land on which the building is constructed (“the Residence”) will be a “multiple unit residential complex” as defined in subsection 123(1).
6. Once the construction of the building is completed and the occupancy permits are issued, Holdco will sell the Residence to a limited partnership (“LP#1”). Holdco will have no further involvement in the project after the sale of the Residence to LP#1. Holdco will make no use of the Residence at any time prior to the sale to LP#1.
7. LP#1 is registered for GST/HST purposes. LP#1 will fund the acquisition of the Residence from Holdco through capital contributed to LP#1 by its limited partners. None of the partners in LP#1 is, or is controlled by, a person that is a university, a public college, or a school authority for GST/HST purposes.
8. The first use of the Residence will be by way of a single lease (“the Master Lease”) between LP#1 and a second limited partnership (“LP#2”).
9. LP#1 will not manage or operate the Residence, nor will LP#1 lease or licence the apartment units to individuals. LP#1’s sole activity will be to supply the Residence to LP#2 by way of a long-term lease, subject to standard commercial terms.
10. LP#2 will be registered for GST/HST purposes and will subcontract the management and operation of the Residence to a professional management company (“MgmtCo”). None of the partners in LP#2 is, or is controlled by, a person that is a university, a public college, or a school authority for GST/HST purposes. MgmtCo is not a university, a public college, or a school authority for GST/HST purposes.
11. MgmtCo is registered for GST/HST purposes and will manage and operate the Residence for LP#2. As part of the services to be provided to LP#2, MgmtCo will facilitate agreements between LP#2 and individuals for short-term stays (that is, stays where the same individual has continuous occupancy of an apartment unit for a period of less than one month) and long-term stays (that is, stays where the same individual has continuous occupancy of an apartment unit for a period of at least one month) in the Residence. MgmtCo will charge a fee to LP#2 for the services provided.
12. Assuming full capacity, it is expected that the Residence will accommodate [#] individuals during the regular academic session from September to May and will have double occupancy short-term stays during the months of June through August. Apartment units will be supplied on a first-come first-serve basis throughout the year. As such, there will be no specific units, groups of units, or floors of units, that are specifically designated as being exclusively for short-term or long-term stays.
13. No portion of the Residence will be used for non-residential purposes. All of the apartment units will be used for residential purposes. In addition, it is expected that all common areas such as reception, laundry rooms, and communal social areas will be reasonably necessary for the use and enjoyment of the individuals occupying the apartment units.
14. Supplies of apartment units will be a mix of short-term and long-term stays. During the regular academic session from September to May, it is estimated that […][more than 10%] of the apartment units will be supplied for short-term stays, while […][less than 90%] of the apartment units will be supplied for long-term stays. During the months of June through August, it is estimated that 90% or more of the apartment units will be supplied for short-term stays, while the remaining apartment units will be supplied for long-term stays. This pattern of use is expected to recur every year. Based on gross annual rental revenue, revenue from short-term stays is expected to be approximately […]% of gross annual rental revenue with revenue from long-term stays expected to be approximately […]% of gross annual rental revenue.
15. Generally, it is expected the short-term stays will be supplied to individuals who are visiting one or more of the post-secondary institutions located nearby for a few weeks at a time. The consideration for the supply of an apartment unit for short-term stays will be greater than $20 for each day of occupancy.
INTERPRETATION REQUESTED
You would like to know the following:
1. Notwithstanding that LP#2 is the person making supplies of apartment units to individuals for short-term and long-term stays, will LP#1 be subject to the self-supply rule in subsection 191(3) when it leases the Residence to LP#2?
2. Assuming LP#1 will not be subject to the self-supply rule in subsection 191(3), will either section 6 or 6.1 of Part I of Schedule V to the ETA apply to exempt the supply of the Residence by LP#1 to LP#2 under the Master Lease, resulting in no tax being payable by LP#2 on the lease payments to LP#1?
3. Provided the supply of the Residence from LP#1 to LP#2 under the Master Lease will be a taxable supply (that is, the supply of the Residence by LP#1 to LP#2 under the Master Lease will not be an exempt supply under Part I of Schedule V to the ETA) would LP#1 be entitled to claim a full input tax credit (ITC) for the GST paid or payable on the acquisition of the Residence from Holdco, or would LP#1 be required to prorate its ITC based on the extent that LP#2 uses the Residence in commercial activities?
INTERPRETATION GIVEN
Based on the information provided:
1. LP#1 will not be subject to the self-supply rules in subsection 191(3) when it leases the Residence to LP#2. Please see the explanation below for more information.
2. None of the sections in Part I of Schedule V to the ETA will apply to the supply of the Residence from LP#1 to LP#2 under the Master Lease. Consequently, LP#2 will be required to pay GST on its lease payments to LP#1. Where LP#1 and LP#2 are not dealing with each other at arm’s length, the consideration for the lease of the Residence (that is, the lease payments) will be deemed to be equal to the fair market value. Any future sale of the Residence by LP#1 will be subject to GST. Please see the explanation below for more information.
3. Where LP#1 acquires the Residence for the sole purpose of making taxable supplies of the Residence to LP#2 under the Master Lease, LP#1 would be entitled to claim a full ITC for the GST paid or payable on the acquisition of the Residence from Holdco, pursuant to subsection 169(1), as well as ITCs for tax paid or payable on property or services acquired for consumption, use or supply in the course of making those taxable supplies of the Residence to LP#2 provided that all of the conditions for claiming the ITCs are met. Please see the explanation below for more information.
EXPLANATION
Deemed self-supply under subsection 191(3) of the ETA
The term “multiple unit residential complex” is defined in subsection 123(1) to mean a residential complex that contains more than one residential unit, but does not include a condominium complex. You have asserted that the Residence is a multiple unit residential complex for GST/HST purposes, although you have not provided any information to support this assertion.
Generally, subsection 191(3) deems a builder of a multiple unit residential complex to have made a self-supply (that is, a sale and purchase) of the complex where certain conditions are met. However, before determining whether those conditions are met, one must first determine whether a person is a builder.
With respect to a residential complex such as a newly constructed multiple unit residential complex, the term “builder” is defined in subsection 123(1), in part, to mean a person who
(d) acquires an interest in the complex
(i) in the case of a condominium complex or residential condominium unit, at a time when the complex is not registered as a condominium, or
(ii) in any case, before it has been occupied by an individual as a place of residence or lodging,
for the primary purpose of
(iii) making one or more supplies of the complex or parts thereof or interests therein by way of sale, or
(iv) making one or more supplies of the complex or parts thereof by way of lease, licence or similar arrangement to persons other than to individuals who are acquiring the complex or parts otherwise than in the course of a business or an adventure or concern in the nature of trade.
Based on the information you have provided, including your assertion that the Residence is a multiple unit residential complex for GST/HST purposes, LP#1 will be regarded as a builder of the Residence given that LP#1 intends to:
* acquire an interest in the complex (that is, the Residence) before it has been occupied by an individual as a place of residence or lodging; and
* acquire that interest for the primary purpose of making a supply of the complex (that is, the Residence) by way of lease (that is, the Master Lease) to a person other than to certain individuals (that is, to LP#2).
Having established that LP#1 is a builder, one can now turn to determining whether the conditions in subsection 191(3) are met. Generally, subsection 191(3) deems a builder of a multiple unit residential complex to have made a self-supply of the complex where:
(a) the construction or substantial renovation of the complex is substantially completed,
(b) the builder of the complex
(i) gives, to a particular person who is not a purchaser under an agreement of purchase and sale of the complex, possession or use of any residential unit in the complex under a lease, licence or similar arrangement entered into for the purpose of the occupancy of the unit by an individual as a place of residence,
(i.1) gives possession or use of any residential unit in the complex to a particular person under an agreement for
(A) the supply by way of sale of the building or part thereof forming part of the complex, and
(B) the supply by way of lease of the land forming part of the complex or the supply of such a lease by way of assignment, or
(ii) where the builder is an individual, occupies any residential unit in the complex as a place of residence, and
(c) the builder, the particular person, or an individual who has entered into a lease, licence or similar arrangement in respect of a residential unit in the complex with the particular person, is the first individual to occupy a residential unit in the complex as a place of residence after substantial completion of the construction or renovation.
In order for a builder of a multiple unit residential complex to be deemed to have made a self-supply of the complex, one of the three conditions set out in paragraph 191(3)(b) must be met. However, based on the information you have provided, none of those conditions will be met. Specifically, the conditions set out in subparagraph 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 (that is, the Residence) for the purpose of managing and leasing the residential units (that is, the apartment units) and not for the purpose of occupancy of a unit by an individual as a place of residence. Furthermore, subparagraph 191(3)(b)(i.1) is not applicable, and the condition set out in subparagraph 191(3)(b)(ii) will not be met given that LP#1 is not an individual.
On the surface, none of the conditions in paragraph 191(3)(b) will be met, which implies that LP#1 will not be subject to the self-supply rules in subsection 191(3) when it leases the Residence to LP#2. However, it is possible that the condition in subparagraph 191(3)(b)(i) could be met under a special deeming rule set out in subsection 191(10).
Generally, with respect to a residential complex such as a newly constructed multiple unit residential complex, subsection 191(10) provides that where
* the builder of the residential complex makes a supply of the complex or a residential unit in the complex by way of lease, licence or similar arrangement and the supply is an exempt supply included in section 6.1 or 6.11 of Part I of Schedule V to the ETA,
* the recipient of the supply is acquiring the complex or unit for use or supply in the course of making exempt supplies and, as part of an exempt supply, possession or use of the complex, unit or residential units in the complex is given by the recipient under a lease, licence or similar arrangement under which occupancy of the complex or unit is given to an individual as a place of residence or lodging, and
* the builder at any time gives possession of the complex or unit to the recipient under the arrangement,
the builder is deemed to have at that time, given possession of the complex or a residential unit in the complex to an individual under a lease, licence or similar arrangement for the purpose of its occupancy by an individual as a place of residence.
The deeming rule set out in subsection 191(10) applies only where all of the conditions therein are met. For the purposes of this discussion, we will focus on the first condition which requires the builder to have made a supply of the complex or a residential unit in the complex by way of lease, licence or similar arrangement and the supply is an exempt supply included in section 6.1 or 6.11 of Part I of Schedule V to the ETA.
Section 6.1 of Part I of Schedule V to the ETA exempts a supply of property that is
(a) land, or
(b) a building, or that part of a building, that consists solely of residential units
made by way of lease, licence or similar arrangement to a recipient (in this section referred to as a “lessee”) for a lease interval (within the meaning assigned by subsection 136.1(1)) throughout which the lessee or any sublessee makes, or holds the property for the purpose of making, one or more supplies of the property, parts of the property or leases, licences or similar arrangements in respect of the property or parts of it and all or substantially all of those supplies
(c) are exempt supplies included in section 6 or 7, or
(d) are supplies that are made, or are reasonably expected to be made, to other lessees or sublessees described in this section.
Please note that section 6.1 of Part I of Schedule V to the ETA 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. Based on your assertion that the Residence is a multiple unit residential complex for GST/HST purposes, the supply of the Residence from LP#1 to LP#2 under the Master Lease will not fall within the purview of section 6.1 of Part I of Schedule V to the ETA.
Section 6.11 of Part I of Schedule V to the ETA exempts a supply made by way of lease, licence or similar arrangement of property that is a residential complex or that is land, a building or that part of a building, that forms or is reasonably expected to form part of a residential complex if the supply is made to a recipient (in this section referred to as the “lessee”) for a lease interval (within the meaning assigned by subsection 136.1(1)) throughout which all or substantially all of the property is
(a) supplied, or is held for the purpose of being supplied, in one or more supplies, by the lessee or any sublessee for the purpose of the occupancy of the property or parts of the property by individuals as a place of residence or lodging and all or substantially all of the supplies of the property or parts of the property are exempt supplies included in section 6, or
(b) used, or held for the purpose of being used, by the lessee or any sublessee in the course of making exempt supplies and, as part of one or more exempt supplies, possession or use of all or substantially all of the residential units situated in the property is given under a lease, licence or similar arrangement for the purpose of their occupancy by an individual as a place of residence.
Section 6.11 of Part I of Schedule V to the ETA applies to a supply of property that is a residential complex such as a newly constructed multiple unit residential complex. However, pursuant to paragraph 6.11(a), in order for a supply of that property to be an exempt supply included in section 6.11, all or substantially all (that is, 90% or more) of the property must be supplied (or held for purposes of being supplied) in one or more supplies for the purpose of its occupancy as a place of residence or lodging for individuals, and all or substantially all of those supplies must be included in section 6 of Part I of Schedule V to the ETA.
Section 6 of Part I of Schedule V to the ETA exempts a supply
(a) of a residential complex or a residential unit in a residential complex by way of lease, licence or similar arrangement for the purpose of its occupancy as a place of residence or lodging by an individual, where the period throughout which continuous occupancy of the complex or unit is given to the same individual under the arrangement is at least one month; or
(b) of a residential unit by way of lease, licence or similar arrangement for the purpose of its occupancy as a place of residence or lodging by an individual, where the consideration for the supply does not exceed $20 for each day of occupancy.
Based on the information you have provided, for the purposes of paragraph 6(a) of Part I of Schedule V to the ETA, some of LP#2’s supplies of apartment units in the Residence will be supplied by way of lease, licence or similar arrangement for the purpose of their occupancy as a place of residence or lodging for periods throughout which continuous occupancy of the unit is given to the same individual under the arrangement for at least one month. To be clear, based on information you provided, […][more than 10%] of the apartment units will be leased for short-term stays during the regular academic session from September to May. During the months of June through August, the number of apartment units leased for short-term stays will increase to 90% or more. It is important to note that any variation in the use of the apartment units can have a significant impact on the determination of the tax status of the supply made by LP#1, which in turn can have an impact on whether LP#1 is subject to the special deeming rule set out in subsection 191(10) and required to account for GST on a self-supply of the Residence; it can also have an impact on the application of the change-in-use rules.
Paragraph 6(b) of Part I of Schedule V to the ETA exempts a supply of a residential unit by way of lease, licence or similar arrangement for the purpose of its occupancy as a place of residence or lodging, where the consideration does not exceed $20 per day of occupancy. An apartment unit that is leased for short-term stays and is, therefore, not exempt under paragraph 6(a) of Part I of Schedule V to the ETA may still be exempt under paragraph 6(b) of Part I of Schedule V to the ETA as long as the consideration does not exceed $20 per day. Based on the information you have provided, LP#2’s supplies of apartment units for short-term stays will be for consideration greater than $20 for each day of occupancy, so these supplies will not be exempt under paragraph (b) of Part I of Schedule V to the ETA. Therefore, less than 90% of the supplies of the apartment units will be exempt supplies under section 6 of Part I of Schedule V to the ETA. As such, section 6.11 of Part I of Schedule V to the ETA will not apply to exempt the supply of the Residence from LP#1 to LP#2 under the Master Lease.
In summary, given that LP#1 is a builder, but its supply of the Residence to LP#2 under the Master Lease will not be an exempt supply included in section 6.1 or 6.11 of Part I of Schedule V to the ETA, the deeming rule set out in subsection 191(10) will not apply to trigger subsection 191(3). Consequently, LP#1 will not be subject to the self-supply rules in subsection 191(3) when it makes a taxable supply of the Residence by way of lease to LP#2.
Application of Part I of Schedule V to the ETA to the Master Lease
As explained above, the supply of the Residence from LP#1 to LP#2 under the Master Lease will not be an exempt supply under section 6.1 or 6.11 of Part I of Schedule V to the ETA, based on the information you have provided.
Although section 6 of Part I of Schedule V to the ETA deals, in part, with supplies of residential complexes, it 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. Consequently, none of the sections in Part I of Schedule V to the ETA will apply to the supply of the Residence from LP#1 to LP#2 under the Master Lease. Therefore, LP#2 will be required to pay GST on its lease payments to LP#1.
If LP#1 and LP#2 do not deal with each other at arm’s length, subsection 155(1) may apply to deem the consideration for the lease of the Residence to be equal to the fair market value. Subsection 155(1) provides, in part, that where a supply is made between persons not dealing at arm’s length for no consideration or for consideration less than the fair market value at the time the supply is made, and the recipient is not a registrant acquiring the property or service for use exclusively in commercial activities of the recipient, the value of consideration is deemed to be the fair market value of the property or service at the time the supply is made.
It is a question of fact as to whether persons are dealing at arm’s length. Where LP#1 is dealing with LP#2 at arm’s length, the provisions of subsection 155(1) would not apply to the supply of the Residence by LP#1 to LP#2 under the Master Lease.
We would also like to bring to your attention the potential application of subsection 155(1) to Holdco’s supply of the Residence to LP#1. If Holdco and LP#1 do not deal with each other at arm’s length, subsection 155(1) may apply to Holdco’s supply of the Residence to LP#1 by way of sale.
As noted above, it is a question of fact as to whether persons are dealing at arm’s length. If Holdco is dealing with LP#1 at arm’s length, the provisions of subsection 155(1) would not apply to Holdco’s supply of the Residence to LP#1 by way of sale.
Availability of ITCs
Subsection 169(1) provides that a person that is a GST/HST registrant is generally entitled to claim an ITC to recover the GST/HST paid or payable on property or a service based on the extent to which the person acquired or imported the property or service for consumption, use or supply in the course of commercial activities of the person, where all of the other conditions for claiming an ITC are met. Pursuant to subsection 123(1), "commercial activity" of a person means, in part, a business carried on by the person, except to the extent to which the business involves the making of exempt supplies by the person.
Where, in its own right as a partnership, LP#1 acquires the Residence for the sole purpose of making taxable supplies of the Residence to LP#2 under the Master Lease, it will be considered to have acquired the Residence solely in the course of commercial activities and will be entitled to claim a full ITC on the acquisition, where all of the other conditions for claiming an ITC are met. 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. Please note that, although 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.
Future sale of the Residence by LP#1
Generally, a supply of real property made in Canada is taxable unless there is a specific exempting provision. Part I of Schedule V sets out certain exempting provisions in respect of the supply of real property.
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.
As noted above, LP#1 may be entitled to claim a full ITC on the acquisition of the Residence from Holdco. Where the acquisition of the Residence from Holdco is the last acquisition of the Residence by LP#1 and LP#1 has claimed an ITC in respect of the last acquisition of the Residence, it will not meet all the conditions for the exemption under section 5 of Part I of Schedule V. Therefore, if there are no changes to LP#1’s current situation, any future sale of the Residence by LP#1 will be taxable as there is no exempting provision that would apply.
If there are any changes to LP#1’s current situation, such as changes that might trigger the self-supply rules in subsection 191(3), and LP#1 is anticipating a sale of the Residence, we would encourage you to contact us regarding the tax status of the sale.
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) 670-1358. 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,
Melissa Mercer
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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