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: 156633
Business Number: […]
Dear [Client]:
Subject: GST/HST RULING
Application of the GST/HST to a lease of real property on which an apartment building is constructed
Thank you for your letter of [mm/dd/yyyy] (received by our office by fax on [mm/dd/yyyy]) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a supply of real property on which an apartment building is constructed.
The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 14% in Prince Edward Island and 15% in Nova Scotia. 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.
STATEMENT OF FACTS
We understand the following from your letter and your phone message of [mm/dd/yyyy]:
1. […] (the Lessee) entered into a lease agreement (the Agreement) with […] (the Lessor) whereby the Lessee will lease certain real property (the Property) located at […]. The Property includes a portion of […] (the Existing Building), on top of which the Lessee will construct an apartment building, and other real property referred to as […][Related Areas]. The Existing Building consists of […].
2. The Lessee constructed a […] storey, […]-unit residential apartment building (the Complex) on the rooftop of the Existing Building. You indicated that the residential units in the Complex will be leased for use as a place of residence by an individual for periods of continuous occupancy of at least one month. As such, we assume that the supply of each unit in the Complex is an exempt supply under section 6 of Part I of Schedule V to the ETA. We also assume that the entire Complex is a residential complex, as that term is defined in subsection 123(1), and that the [Related Areas] form part of the residential complex.
3. Under the Agreement, the Ground Rent payment will be $[…] for the first […] years of the Term of the Agreement and will increase every […] years as indicated therein. […].
4. In addition to the Ground Rent payment, the Lessee must pay, as Additional Rent, an amount in respect of the portion of the municipal property tax bill attributable to the residential space constructed by the Lessee. You estimate this amount to be approximately $[…] annually.
5. You indicated that the construction of the Complex was completed in […][yyyy] and at that time the Lessee self-assessed the GST/HST on the fair market value of the Complex pursuant to subsection 191(3). As such, we assume that the Complex is a multiple unit residential complex.
6. You indicated that the Lessor has been charging the Lessee the GST/HST on the Ground Rent and the Additional Rent since the commencement of the Agreement.
7. We make specific note of the following content of the Agreement:
a) Paragraph […] states that the Construction Period will begin on [mm/dd/yyyy] and end on the earlier of [mm/dd/yyyy] and the date an occupancy permit is issued by […] in respect of the Complex.
b) Paragraph […] indicates that the Term of the lease is […] years which, pursuant to paragraph […], will commence on the first day after the expiry of the Construction Period (the Commencement Date). The lease term will end one day prior to the […] anniversary of the Commencement Date as indicated in paragraph […].
c) Under Article […], “Additional Rent” is defined under paragraph […] as all sums of money or charges required to be paid by the Lessee under the Agreement (except Ground Rent and Rental Taxes) either to the Lessor or otherwise, including, without limitation, payment of Realty Taxes and charges for water, gas, electricity, and other utilities servicing the Complex where not separately metered, whether or not the same are designated as “Additional Rent”.
d) Paragraph […] defines “Realty Taxes” as all real property taxes, rates, duties and assessments (including local improvement rates) impost charges or levies, whether general or special, that are levied, charged or assessed against the Complex and forming part of the residential assessment against the Lands (which is described under […] from time to time by any lawful authority, whether federal, provincial, municipal, school or otherwise. “Realty Taxes” also include any taxes payable by the Lessor in respect of the Complex which are imposed in lieu of, or in addition to, any such real property taxes, whether of the foregoing character or not, and whether or not in existence at the date hereof, and any such real property taxes levied or assessed against the Lessor on account of the Complex, but specifically excluding any taxes assessed upon the income of the Lessor and/or taxes forming part of any commercial assessment against the Existing Building and the Lands.
e) Article […] provides the terms with respect to Additional Rent. Paragraph […] states, in part, that in addition to the Ground Rent, the Lessee shall, throughout the Construction Period and the Term, pay to the Lessor or as otherwise provided in the Agreement, as Additional Rent, the following costs incurred and attributable to the Leased Lands (the portion of the Lands on which the Complex will be located) and the Complex:
* all Realty Taxes;
* all charges, costs, accounts and any other sums payable by reason of the supply of the utilities and services to the Complex or the [Related Areas] (as shown on Schedule […]);
* the Lessee’s share of the Shared Expenses as set out in Article […];
* all other sums, amounts, costs, cost escalations and charges specified in the Agreement to be payable by the Lessee.
Paragraph […] states that all the payments set out in the Agreement (other than Rental Taxes) constitute Ground Rent or Additional Rent, and shall be deemed to be and shall be paid as rent, whether or not any payment is payable to the Lessor or otherwise, and whether or not as compensation to the Lessor for expense to which it has been put. The Lessor has all the rights against the Lessee for default in payment of Additional Rent that it has against the Lessee for default in payment of Ground Rent.
RULINGS REQUESTED
You would like to know the following:
1. Is the supply of real property made under the Agreement a taxable supply or exempt supply for purposes of the ETA?
2. Is the Lessor required to charge and collect GST/HST on the Ground Rent payments payable under the Agreement?
3. Is the Lessor required to charge and collect GST/HST on amounts charged as Additional Rent that is in respect of Realty Taxes paid by the Lessor?
RULINGS GIVEN
Based on the facts set out above, we rule that:
1. The supply of real property made under the Agreement is a taxable supply of real property from the commencement of the Agreement up to the end of the lease interval (as discussed below) in which the Lessee is considered to have made and received a taxable supply of the Complex pursuant to subsection 191(3) (hereinafter referred to as the “Taxable Supply Period”). The supply of real property made under the Agreement is an exempt supply from the beginning of the lease interval immediately following the lease interval in which the Lessee is considered to have made and received the taxable supply of the Complex in accordance with subsection 191(3) and for the remainder of the lease intervals up to the termination of the Agreement (hereinafter referred to as the “Exempt Supply Period”), provided the use of the Complex by the Lessee does not change during the term of the Agreement.
2. The Lessor is required to charge and collect GST/HST on the Ground Rent payments that are paid or become payable under the Agreement for lease intervals that fall within the Taxable Supply Period. The Lessor is not required to charge and collect GST/HST on the Ground Rent payments that are payable under the Agreement for lease intervals that fall within the Exempt Supply Period.
3. The Lessor is required to charge and collect GST/HST on the consideration charged as Additional Rent in respect of Realty Taxes where the Additional Rent is paid or becomes payable during lease intervals that fall within the Taxable Supply Period. The Lessor is not required to charge and collect the GST/HST on the consideration charged as Additional Rent in respect of Realty Taxes where the Additional Rent becomes payable during lease intervals that fall within the Exempt Supply Period.
EXPLANATION
Taxable Supply Period
The Lessee’s construction of the Complex is a commercial activity as it results in a deemed taxable supply under subsection 191(3). Under this subsection, a deemed sale and re-purchase occurs where the construction of a multiple unit residential complex (MURC) is substantially complete and:
* the builder of the complex gives possession or use of the complex, or a residential unit in the complex, to an individual who is the first individual to occupy the complex, or a unit in the complex, after substantial completion of the construction;
* possession or use of the complex, or a residential unit in the complex, is given under a lease, licence or similar arrangement, and
* the lease, licence or similar arrangement is entered into for the purpose of occupancy of the complex, or a unit in the complex, by the individual as a place of residence.
Generally, a supply of real property made in Canada is subject to the GST/HST unless a specific exemption or relieving provision applies. There is no exemption or relieving provision that applies to the Lessor’s supply of real property made under the Agreement during the Taxable Supply Period. Therefore, any Ground Rent or Additional Rent payment that is paid or becomes payable under the Agreement during lease intervals that fall within the Taxable Supply Period are subject to the GST/HST.
Exempt Supply Period
After the taxable supply of the complex is deemed to be made under subsection 191(3), the Lessee will be considered to be engaged in making exempt supplies pursuant to section 6 of Part I of Schedule V to the ETA. The exemption in section 6 applies to either of the following:
* A supply of a residential complex or a residential unit in a residential complex made by way of lease, licence or similar arrangement for the purpose of its occupancy as a place of residence or lodging by the same individual where continuous occupancy of the complex or unit is at least one month, or
* A supply of a residential unit by way of lease, licence or similar arrangement made 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.
Consequently, the supply by way of lease of the Complex from the Lessor to the Lessee is an exempt supply pursuant to section 6.11 of Part I of Schedule V to the ETA. Section 6.11, in part, exempts the lease of that part of a building that forms part of a residential complex for a lease interval throughout which the lessee makes supplies of the property or parts of the property and all or substantially all of those supplies are exempt under section 6 of Part I of Schedule V to the ETA. Any Ground Rent or Additional Rent payment that becomes payable during lease intervals that fall within the Exempt Supply Period are exempt of the GST/HST.
Lease interval
For GST/HST purposes, a “lease interval” is a period of time in a lease arrangement that is attributable to a lease payment. Subsection 136.1(1) provides that where a supply is made by way of lease, licence or similar arrangement, a separate supply of the property is considered to be made for each lease interval. This provision is particularly relevant for determining whether a supply is a taxable supply or an exempt supply.
While the lease of the Complex to the Lessee is initially subject to GST/HST, it becomes exempt in the lease interval immediately following the lease interval in which the Lessee is considered to have made the taxable sale of the Complex under subsection 191(3). As a result, the Lessor would no longer be required to charge or collect GST/HST in respect of any further Ground Rent or Additional Rent payments made by the Lessee as long as the Lessee continues to make supplies of the units in the Complex and all or substantially all of those supplies are exempt under section 6 of Part I of Schedule V to the ETA.
We note that paragraph […] of the Agreement states that the Lessee will be permitted to use the Complex for the purpose of a residential apartment building, furnished suites, and a hotel. You indicated that the residential units in the Complex will be leased on an exempt basis to individuals for use as a place of residence for periods of continuous occupancy by the individual of at least one month. If the Lessee changes the use of the Complex in the future, the tax status of the supplies of the real property made under the Agreement by the Lessor would need to be re-examined to determine whether the exemption in section 6.11 of Part I of Schedule V to the ETA still applies.
Additional Rents
Standard lease agreements commonly provide for the payment of amounts known as "additional rents" as well as basic rent. Examples of amounts that might be included in a lease agreement as additional rents are percentage rents, common area expenses and certain cost reimbursements such as property taxes, insurance or utilities. Where these amounts form part of the total consideration for the supply of real property, they will take on the same tax status as the rent.
The Lessee’s reimbursement of the municipal property taxes to the Lessor is considered additional rent under the Agreement. Therefore, the Additional Rent relating to Realty Taxes is additional consideration for the supply of real property made under the Agreement.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
ADDITIONAL INFORMATION
Tax paid in error
Under the ETA, where a person has paid an amount as or on account of tax that was not payable, the person may request a refund or credit of the amount from the supplier. A supplier may refund or credit the tax within two years after the day the amount was charged or collected. Further information on the time limitations and conditions for claiming refunds and credits is available in GST/HST Memoranda Series Chapter 12.2, Refund, Adjustment, or Credit of the GST/HST under Section 232 of the Excise Tax Act, available on the CRA Web site.
Where a refund or credit is not issued by the supplier, the person may make an application under subsection 261(1) for a rebate of the tax paid in error by completing and submitting application form GST 189, General Application for Rebate of Goods and Services Tax (GST)/Harmonized Sales Tax (HST). It should be noted that a rebate application made under section 261 cannot include amounts that were paid in error more than two years before the application is filed.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-9212. 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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