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.
FROM Béatrice Mulinda
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate,
Legislative Policy and Regulatory Affairs Branch
TO [Addressee]
FILE 145125
DATE July 22, 2013
SUBJECT GST/HST INTERPRETATION
Condominium units and the exclusions to the definition of residential complex
This is in reply to your memorandum [...].
[...]. Our response is based on our understanding of the issues raised in your submission and some of the information in the request from [...].
All legislative references are to the Excise Tax Act (ETA), unless otherwise indicated.
Your submission [...] concerns issues relating to a certain rental property in [Province A]. The property is a condominium unit situated in a building that contains more than one unit where each unit is a separate parcel or other division of real property owned apart from any other unit in the building. As such, we assume that the condominium unit meets all of the requirements in the definition of "residential condominium unit" except for whether the unit is a "residential complex".
ISSUE
Your submission sets out 3 issues and then provides an analysis and your conclusion for each issue. You are seeking our views on the following:
1. The first issue contains two questions: the physical space with reference to which:
* the condominium unit's status as "a hotel, a motel, an inn, a boarding house, a lodging house or other similar premises" (a hotel, motel, inn) is to be determined (i.e., whether the determination is made in respect of the whole building, part of the building or only the unit itself); and
* the phrase "all or substantially all" in the exclusionary part of the definition of residential complex is to be calculated.
With respect to the physical space that is used in determining whether the condominium unit is a hotel, motel, inn, your view is that the determination is made based on the whole building or on the part of the building in which the particular condominium unit is situated, rather than on the particular condominium unit itself. (Footnote 1)
2. We note that the second issue appears to be the same as the first question asked in the first issue, i.e., whether one must consider the whole building or only part of the building in the determination of a hotel, motel, inn. [...]. (Footnote 2)
With respect to policy statement P099, your view is that the guidelines set out therein do not appear to exclude a resort complex that consists of a number of residential condominium units that are a separate parcel or other division of real property that are owned apart from any other unit in the building.
3. We note that the third issue appears to be the same as the second question asked in the first issue, i.e., the unit of measurement to which the phrase "all or substantially all" in the exclusionary part of the definition of residential complex applies.
With respect to this issue your view is that the unit of measurement is the number of supplies made by way of lease, licence or similar arrangement.
Response
First issue
A residential unit is defined to include a condominium unit that is occupied by an individual as a place of residence or lodging or that is supplied by way of lease, licence or similar arrangement for occupancy by an individual as a place of residence or lodging. A residential unit described in paragraph (a), (b) or (c) of the definition of "residential complex" is excluded from the definition if all the following three tests in the postamble of the definition are met:
1. the building, or that part of a building, is a hotel, a motel, an inn, a boarding house, a lodging house or other similar premises (the "Hotel Test");
2. the building is not described in paragraph (c) (the "Paragraph (c) Test"); and
3. all or substantially all of the leases, licences or similar arrangements, under which residential units in the building or part are supplied, provide, or are expected to provide, for periods of continuous possession or use of less than sixty days (the "90% Test").
You will notice that the postamble refers to the term "part" of the building for purposes of the Hotel Test and the 90% Test; only the Paragraph (c) Test uses the term "building".
In this case, the whole of the condominium unit is part of a building and the unit is owned apart from any other unit in the building. The unit meets the description in subparagraph (b)(i) of the definition of "residential complex" (that part of a building that is the whole a residential condominium unit or other similar premises that is a separate parcel or other division of real property owned apart from any other unit in the building).
Therefore, it is our view that the physical space with reference to which the condominium unit's status as a hotel, motel, inn is determined is the particular condominium unit. Similarly, the physical space with reference to which the 90% Test is calculated is the particular condominium unit.
Second issue
We agree that the guidelines in GST/HST policy statement P099 do not exclude a resort complex. However, whether a resort complex meets the Hotel Test is not relevant where the purpose is to determine if a particular condominium unit, that is a separate parcel or other division of real property owned apart from any other unit in the complex, meets the definition of a "residential complex". As stated above, in the case of a condominium, the Hotel Test is applied on a unit by unit basis.
Third issue
GST/HST policy statement P053, Application of All or Substantially All to Residential Complexes, provides that for purposes of the 90% Test, a registrant will be allowed to choose a method which is appropriate in the circumstances provided it is used consistently. The policy states that the preferable method is to base the calculation on revenues from such supplies (either daily or total), or identical lease periods or intervals (such as number of "room nights" rented or rooms available for rent). Your suggested method, the number of supplies made by way of lease, licence or similar arrangement, appears to be equivalent to the "Invoice Method" in P-053, which is considered not to be an acceptable method.
Additional issue
While not asked in your submission, [...], there appears to be some question as to who owns the condominium unit: the individuals or the supposed partnership. [...] states that the property is owned by a husband and wife as individuals, but that they are registered as a partnership for GST/HST purposes. We wish to point out the importance of determining who owns the property [...].
Under real property law in common law jurisdictions (all provinces and territories outside of Quebec) the fee simple estate can be fragmented into its legal and equitable (or beneficial) component interests. Thus while the partnership cannot hold legal title recognized by common law and provincial statute law, by severing the estate into its two component interests, for GST/HST purposes a partnership could lawfully own the beneficial interest in real property while the partners (or a third party nominee) own the legal interest in the same real property.
Recognizing whether a beneficial interest in real property is owned by (i.e., belongs to) a partnership is significant for GST/HST purposes as many of the GST/HST rules pertaining to property of a person, and in particular real property, differ for property belonging to individuals as compared to property belonging to partnerships or other persons. For example, under the change-in-use rules for capital real property, partnerships are treated the same as corporations and are not treated as an individual (or individuals), even if the partnership is composed entirely of individuals. (Footnote 3)
It is the CRA's position not to consider real property to belong to a partnership unless this can be reasonably substantiated. Without such substantiation, the CRA would consider the entire estate (including the beneficial interest) in the real property to belong to the person who holds the legal interest (i.e., the individuals).
The following information should be considered in order to substantiate whether a partnership or one or more of its partners (outside of the partnership) own the beneficial interest in real property that is used by the partnership:
1. an agreement of purchase and sale or related conveyance or other land transfer documents that states the person or persons who are purchaser(s). For example where the purchasers on the agreement of purchase and sale are "Mr. A and Mr. B on behalf of partnership ABC", this may substantiate that beneficial ownership of the subject real property belongs to partnership ABC;
2. a written partnership agreement that states who is to acquire and/or use the subject real property and how that person is to acquire the property. For example where the purchase of the subject real property by the partnership is stated as one of the purposes for forming the partnership or as an activity to be carried out by the partnership, this may substantiate that beneficial ownership of the subject real property belongs to the partnership;
3. any other agreement or similar document that sets out the roles and responsibilities of the partners and their partnership in terms of acquiring, improving or using the subject real property. For example a bare trust agreement that states that a bare trustee is purchasing the subject real property on behalf of a beneficiary that is the partnership may substantiate that beneficial ownership of the subject real property belongs to the partnership;
4. an agreement that sets out the partnership's use or right to use the subject real property by way of lease, licence or similar arrangement. For example, Messrs. A, B and C, as members of Partnership ABC, enter into an agreement with Partnership ABC to lease the subject real property from themselves, as lessors, to Partnership ABC, as lessee. This may substantiate that beneficial ownership of the subject real property does not belong to Partnership ABC; and
5. an agreement that sets out one or more of the partners' use of, or right to use, the subject real property by way lease, licence or similar arrangement. For example Partnership ABC enters into an agreement with Messrs. A, B and C (all members of Partnership ABC) to lease the subject real property from Partnership ABC, as lessor, to Messrs. A, B and C, as lessees. This may substantiate that the subject real property does not belong to the partners and, combined with other factors, may substantiate that beneficial ownership of the subject real property belongs to Partnership ABC.
Note that names on the documents noted above may only serve to verify the legal owner(s) of real property and as such may not substantiate whether a partnership is the beneficial owner of real property.
If the documents noted above are not available or do not substantiate who the beneficial owner of the subject real property is, then the following factors may be considered. While no single factor is conclusive, a majority of relevant factors may substantiate whether a partnership is the beneficial or equitable owner of real property:
* Were the funds that were used to purchase, construct or renovate the subject property owned or borrowed by the partnership or by one or more of the partners?
* Was the recipient of the supply of the real property, or of the construction materials and services used to construct or renovate the subject real property, the partnership or one or more of the partners?
* Were the purchase, construction or renovation expenses in respect of the subject real property reported for income tax purposes as expenditures of the partnership or of the partners outside of the partnership?
* Were the purchase, construction or renovation expenses recorded in the books and records of the partnership or of one or more of the partners?
* Were the bank account(s) and related records for the purchase, construction or renovation outlays/expenses those that belonged to the partnership or to one or more of the partners?
Note that in some cases one or more of the partners' names may be used on documents, forms and accounts; however, in these cases, notations may also be made to clarify that the partner or partners are acting on behalf of their partnership.
Care should be taken not to rely solely on unsubstantiated statements as to who owns the beneficial interest in the subject real property, e.g., the fact that insurance policy for the property is in the name of the partnership where there remains considerable uncertainty as to whether the partnership is in fact the beneficial owner of the subject property.
Footnotes:
1. There was no reference in your submission as to what is meant by "...the part of the whole building, in which the [condominium unit] is situated..." (see the last paragraph of page 1 and the first complete paragraph on page 2 of your memorandum). There could be a virtual infinite number of parts of a building in which the unit is situated and it is unclear as to what you were contemplating.
2. Given how critical this issue is in determining whether or not the condominium unit is or is not a residential complex, [...]. Policy statement P-099, The Meaning of 'Hotel', 'Motel', 'Inn', 'Boarding House', 'Lodging House' and 'Other Similar Premises', as used in the definition of 'Residential Complex' and 'Residential Unit' should be used as a basis in determining whether the unit is a hotel, motel, inn.
3. The change-in-use rules for capital real property of an individual are contained in sections 207 and 208. The change-in-use rules for capital real property of a person other than an individual are contained in section 206.
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