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, 11th Floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 193324
Dear [Client]:
Subject: GST/HST INTERPRETATION
Clause (a)(ii)(A.1) of the definition of “qualifying residential unit”
Thank you for your correspondence of [mm/dd/yyyy], wherein you requested an interpretation regarding clause (a)(ii)(A.1) of the definition of “qualifying residential unit” in subsection 256.2(1) of the Excise Tax Act (ETA).
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 ETA unless otherwise specified.
Based on the information you provided in your letter, our understanding is as follows:
1. A person who is a “builder” for GST/HST purposes (hereafter referred to as “the Builder”) and another person who is a purchaser and not a “builder” for GST/HST purposes (hereafter referred to as “the Purchaser”) will enter into an agreement of purchase and sale (hereafter referred to as “the […] Purchase Agreement”) pursuant to which the Builder will construct and sell, and the Purchaser will purchase, a multiple unit residential complex (hereafter referred to as “the Complex”) on a particular day (hereafter referred to as “the Closing Day”) at an agreed upon purchase price (hereafter referred to as “the Purchase Price”).
2. The Builder and the Purchaser will deal with each other at arm’s length for GST/HST purposes.
3. The Builder:
a. has expertise in acquiring land, obtaining the required approvals and permits, and contracting and supervising the construction of multiple unit residential complexes similar to the Complex;
b. typically does not hold and operate multiple unit residential complexes on a long-term basis; and
c. is registered for GST/HST purposes.
4. The Purchaser:
a. has a mandate to acquire residential apartment buildings (that is, multiple unit residential complexes similar to the Complex) in […] and has expertise in managing and operating such buildings;
b. obtains funding for the acquisition of residential apartment buildings through various sources including equity commitments from third parties, such as pension funds;
c. holds residential apartment buildings for purposes of supplying the residential units situated therein as long-term residential housing for individuals; and
d. will register for GST/HST purposes where it engages in commercial activities (for example, where the Purchaser supplies commercial office space in residential apartment buildings).
5. The Builder and the Purchaser will enter into the […] Purchase Agreement in advance of the Builder starting construction of the Complex. (However, in different situations it is possible that the Builder and a different purchaser might enter into an agreement of purchase and sale for the construction and sale of a different multiple unit residential complex after the Builder has already started constructing the multiple unit residential complex. Since this is not the situation in the case at hand, this different situation will not be dealt with in this interpretation letter.)
6. The Closing Day will be the day on which construction of the Complex will be completed pursuant to the terms and conditions of the […] Purchase Agreement, and on that day:
a. the Builder will transfer possession and ownership of the Complex to the Purchaser; and
b. the Purchase Price will be payable by the Purchaser to the Builder.
The Closing Day generally occurs […][X Months] after entering into the […] Purchase Agreement.
7. The Purchase Price will be an arm’s length price negotiated between the Builder and the Purchaser.
8. After construction of the Complex is substantially completed and occupancy permits are obtained for some or all of the residential units situated in the Complex, the Builder will begin to enter into lease agreements with individuals under which the individuals will be given possession or use of a residential unit for the purpose of the occupancy of the unit by an individual as a place of residence. Leases of the residential units situated in the Complex will be exempt supplies for GST/HST purposes pursuant to section 6 of Part I of Schedule V.
9. Prior to the Closing Day, but after construction of the Complex is substantially completed, at least one of the individuals who has entered into a lease agreement with the Builder will occupy a residential unit situated in the Complex as a place of residence. After this occurs, the Builder:
a. will report, in its GST/HST return for the reporting period that includes the time that possession or use of the residential unit is given to the first individual to occupy a residential unit as a place of residence, the GST/HST that the Builder will be deemed to have collected as the supplier of a taxable supply by way of sale of the Complex pursuant to subsection 191(3); and
b. will claim a new residential rental property rebate pursuant to subsection 256.2(3) in respect of the GST/HST that the Builder will be deemed to have paid as the recipient of a taxable supply by way of sale of the Complex pursuant to subsection 191(3).
Setting aside the interpretation requested below, you have asked us to assume that the Builder will satisfy all other eligibility conditions for claiming the new residential rental property rebate under subsection 256.2(3).
10. Occupancy permits will be obtained for some or all of the residential units situated in the Complex […][Y Months] before the Closing Day.
11. The Closing Day will occur within […][Z Months] of construction of the Complex being substantially completed. However, there could be situations where the Builder and a different purchaser have a closing day outside of these parameters, depending on commercial variables.
12. On the Closing Day, the Builder will transfer possession and ownership of the Complex to the Purchaser and the Purchaser will pay the Purchase Price to the Builder. The sale of the Complex by the Builder to the Purchaser will be an exempt supply for GST/HST purposes pursuant to section 5 of Part I of Schedule V.
13. The lease agreements that the Builder will have entered into with individuals for occupancy of the residential units situated in the Complex will be transferred and assigned to the Purchaser on the Closing Day.
14. The Purchaser will continue to lease-up the remaining residential units situated in the Complex after the Closing Day. The Purchaser will manage and operate the Complex thereafter.
INTERPRETATION REQUESTED
You would like to know if the Builder would be regarded as having met the conditions set out in clause (a)(ii)(A.1) of the definition of “qualifying residential unit” in subsection 256.2(1), notwithstanding that the Builder holds the residential units situated in the Complex for the purpose of leasing the units to individuals as a place of residence and for the purpose of selling the Complex to the Purchaser.
INTERPRETATION GIVEN
Based on the information you provided in your letter, it is our view that the Builder would satisfy the conditions set out in clause (a)(ii)(A.1) of the definition of “qualifying residential unit” in subsection 256.2(1).
EXPLANATION
Generally, subsection 256.2(3) provides a partial rebate of the GST/HST paid by a person who purchases or builds a residential complex (that is, a new residential rental property) if certain eligibility conditions are met. Pursuant to paragraph 256.2(3)(c), one of the eligibility conditions is that, at the particular time when tax first becomes payable in respect of the purchase from the supplier or tax in respect of the deemed purchase is deemed to have been paid by the person, as the case may be, the residential complex must be a “qualifying residential unit” of the person or include one or more “qualifying residential units” of the person.
Pursuant to subsection 256.2(1), a “qualifying residential unit” of a person, at a particular time, means
(a) a residential unit of which, at or immediately before the particular time, the person is the owner, a co-owner, a lessee or a sub-lessee or has possession as purchaser under an agreement of purchase and sale, or a residential unit that is situated in a residential complex of which the person is, at or immediately before the particular time, a lessee or a sub-lessee, where
(i) at the particular time, the unit is a self-contained residence,
(ii) the person holds the unit
(A) for the purpose of making exempt supplies of the unit that are included in section 5.1, 6.1, 6.11 or 7 of Part I of Schedule V,
(A.1) for the purpose of making exempt supplies of property or a service that includes giving possession or use of the unit to a person under a lease to be entered into for the purpose of its occupancy by an individual as a place of residence, or
(B) if the complex in which the unit is situated includes one or more other residential units that would be qualifying residential units of the person without regard to this clause, for use as the primary place of residence of the person,
(iii) it is the case, or can reasonably be expected by the person at the particular time to be the case, that the first use of the unit is or will be
(A) as the primary place of residence of the person or a relation of the person, or of a lessor of the complex or a relation of that lessor, for a period of at least one year or for a shorter period where the next use of the unit after that shorter period is as described in clause (B), or
(B) as a place of residence of individuals, each of whom is given continuous occupancy of the unit, under one or more leases, for a period, throughout which the unit is used as the primary place of residence of that individual, of at least one year or for a shorter period ending when
(I) the unit is sold to a recipient who acquires the unit for use as the primary place of residence of the recipient or of a relation of the recipient, or
(II) the unit is taken for use as the primary place of residence of the person or a relation of the person or of a lessor of the complex or a relation of that lessor, and
(iv) except where subclause (iii)(B)(II) applies, if, at the particular time, the person intends that, after the unit is used as described in subparagraph (iii), the person will occupy it for the person’s own use or the person will supply it by way of lease as a place of residence or lodging for an individual who is a relation, shareholder, member or partner of, or not dealing at arm’s length with, the person, the person can reasonably expect that the unit will be the primary place of residence of the person or of that individual; or
(b) a prescribed residential unit of the person.
In order to satisfy the conditions set out in clause (a)(ii)(A.1) of the definition of “qualifying residential unit,” the person must satisfy the following two conditions:
1. the residential unit or units must be held by the person for the purpose of making an exempt supply of property or a service; and
2. the exempt supply must include giving possession or use of the residential unit or units to a person under a lease to be entered into for the purpose of its occupancy by an individual as a place of residence.
Based on the information you have provided in your letter, we are of the view that in this particular scenario the Builder satisfies the conditions set out in clause (a)(ii)(A.1) of the definition of “qualifying residential unit.” That is, during the time that the Builder holds the Complex, the Builder holds the residential units contained therein for the purpose of making exempt supplies of the units pursuant to section 6 of Part I of Schedule V to the ETA, which includes giving possession or use of the residential unit to a person under a lease to be entered into for the purpose of its occupancy by an individual as a place of residence.
The fact that the Builder has entered into the […] Purchase Agreement to sell the Complex to the Purchaser does not preclude the Builder from meeting the conditions set out in clause (a)(ii)(A.1) of the definition of “qualifying residential unit.”
The terms “residential complex” and “residential unit” are defined in subsection 123(1) and are two distinct things for purposes of the GST/HST. Generally, a residential complex is a thing composed of two or more elements (such as the residential unit, common areas, appurtenances and land) and is a thing in its own right. A residential unit may be a component of a residential complex in certain situations, but it is also a thing in its own right.
As such, the Builder can hold the Complex (a residential complex) for the purpose of making a supply by way of sale to the Purchaser, and also hold the residential units contained therein for the purpose of making exempt supplies of the units by way of lease to individuals who will occupy the units as a place of residence.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretation given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation or the additional information provided herein.
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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