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: 96569
July 26, 2013
Dear [Client]:
Subject: GST/HST RULING
GST/HST Treatment of the sale of condominiums for subsequent use in a rental pool arrangement
We are writing in response to [...] [correspondence], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the sale of condominium units [...]
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 (effective April 1, 2013) and 15% in Nova Scotia. The GST applies in the rest of Canada at the rate of 5%.
Effective April 1, 2013, the 12% HST in British Columbia has been replaced by the 5% GST and a provincial sales tax.
The submission from your office included [...] [relevant documents].
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Statement of Facts
We understand as follows:
1. The condominium hotel project known as [...] (the "Development") is being constructed by [...] (the "Declarant"). The Development is situated in [...] [Location A], [...].
2. The Development is being constructed [...] and, when completed, will include [...] [information about number of floors and the number of units]. All of the Units are intended for condominium hotel use in a rental pool arrangement, subject to certain opt-out rights for purchasers.
3. The Declarant will register the Declaration pursuant to the provisions of the [...] [legislation] in respect of the Development.
4. [...] requires that the Development be subject to a rental management program that restricts occupation by owners [...] to no more than [#] days per month. The purpose of the [...] requirement is to ensure that [...] of the Units in the Development are used for short-term rental purposes and are available as hotel accommodation for visitors to [Location A].
5. Every Unit purchaser is required to be a member of [...] (the "Association"). The purpose of the Association is to maintain and manage [Location A] lands, promote [Location A] as a year-round [...] [destination], [...] [plan activities] at [Location A] and provide [...] guest services [...], such as information services, garbage collection and garden maintenance.
6. Each Unit purchaser is required to pay an annual basic fee to the Association [...]. Purchasers that participate in the rental pool are also required to pay a [...] equal to [...]. Every purchaser is also required to pay an initial entry fee to the [...] Association equal to [...]. When a Unit is resold, new purchasers are generally required to pay an entry fee equal to [...].
7. The Units are marketed to potential purchasers as hotel condominium properties and are sold on a turn-key furnished basis with all of the furniture and other items necessary for the use of the Unit as a hotel.
8. The Declarant has arranged for [...] ("the Manager") to [have] [...] the exclusive right to operate the rental pool for the Development. [...], the Manager is responsible for managing the rental of the Units in accordance with the requirements of [...] (the "Agreement").
9. Every Unit purchaser is required to enter into the Agreement with the Manager, which is subject to certain opt-out provisions. At the time of purchase, up to [...] of purchasers are entitled, [...], to elect to withdraw their specific Unit from the rental pool. In addition, provided that [...] of the Units remain in the rental pool at all times, an owner is entitled to withdraw their Unit from the rental pool for a subsequent rental year [...]. Any Unit withdrawn from the rental pool will not participate in the rental pool for any subsequent year unless the owner elects to rejoin the rental pool.
10. Under [...] of the Declaration, no owner of a Unit may at any time lease or permit occupation of their Unit (except for immediate family members and guests) unless it is pursuant to the Agreement as part of the rental pool.
11. Unless a purchaser elects to opt out of the rental pool at the time of purchase, the purchaser is required to provide a certificate confirming that the purchaser is registered for the GST/HST at the time of closing.
12. All Units in the rental pool are intended to be rented out to visitors to [Location A] on a short-term basis (i.e., for periods of less than 60 days). Rental charges for a Unit exceed $20 per day.
13. The key provisions of the Agreement are as follows:
• [...] - Each owner of a Unit in the rental pool is entitled to share in [...] [rental revenue]. Each owner is responsible for a proportionate share of certain expenses relating to the operation of the rental pool which are deducted in determining [...] [their final share of rental revenue] (e.g., promotional discounts and commissions payable to travel agents and brokers).
• [...] - Each owner of a Unit participating in the rental pool is entitled to payment [...] of their proportionate share [...] calculated in accordance with [...]. Each owner is entitled to this payment for each day the Unit is in the rental pool, regardless of whether the specific Unit is rented during the month.
• [...] - The Manager is required to [regularly] provide each owner with [...] [documents about the overall financial performance of the rental pool and details about the individual owner's final share]
• [...] - The Manager collects GST/HST and other taxes from guests on behalf of the owners.
• [...] - The Manager is entitled to a [...] management fee equal to [...]. The Manager is responsible for payment of certain expenses out of its management fee revenue as indicated in [...] the Agreement.
• [...] - The Manager provides daily housekeeping services for rental guests and after personal use of the Units by the owners.
• [...] - Each subsequent purchaser of a Unit is required to assume the owner's responsibilities under the Agreement as a condition of sale.
• [...] - A Unit cannot be rented out to third parties by an owner except in accordance with the terms of the Agreement.
Rulings Requested
You would like a ruling confirming the following:
1. Where a Unit is sold to a purchaser who intends to participate from the time of purchase in the rental pool under the terms of the Agreement, the particular Unit will not be a "residential complex," as that term is defined in subsection 123(1) of the ETA. In those circumstances, a GST/HST-registered purchaser will be required to self-assess the applicable GST/HST on the purchase and the Declarant will not be required to collect and remit GST/HST in respect of their sale of the Unit.
2. Where the purchaser of a Unit elects to opt out of the rental pool at the time of purchase, the sale of the Unit will be a sale of a residential complex.
3. A GST/HST-registered purchaser that purchases a Unit for short-term rental usage through the rental pool will be entitled to claim input tax credits (ITCs) for the GST/HST paid on the purchase of the Unit and on ongoing operating expenses to the extent that the Unit is used in the short-term rental pool operations. Specifically, an owner that places a Unit in the rental pool for 329 or more days a year will be entitled to claim full ITCs while an owner who places a Unit in the rental pool for less than 329 days a year, including up to the maximum non-rental pool use of 120 days a year, will be entitled to claim pro-rated ITCs calculated on the proportion of the days the Unit is in the rental pool to the total days in the rental year.
Rulings Given
Based on the facts set out above, we rule as follows:
1. The sale by the Declarant of a Unit to a purchaser that participates from the time of purchase in the rental pool under the terms of the Agreement is not a sale of a "residential complex" as defined in subsection 123(1) of the ETA. The sale of such a Unit is subject to the GST/HST.
The Declarant is not required to collect the GST/HST payable in respect of a taxable supply by way of sale of a Unit where the Unit is not a residential complex and the recipient of the supply is registered for GST/HST purposes.
2. The sale by the Declarant of a Unit to a purchaser that opts out of the rental pool at the time of purchase is a sale of a "residential complex" as defined in subsection 123(1) of the ETA.
The Declarant is required to collect the GST/HST in respect of a taxable supply by way of sale of a Unit where the Unit is a residential complex and the recipient of the supply is an individual, whether or not the individual is registered for GST/HST purposes. The Declarant is not required to collect the GST/HST in respect of a taxable supply by way of sale of such a Unit where the recipient of the supply is not an individual and is registered for GST/HST purposes.
3. Provided that there is a market for short-term rentals of the Units at the Development throughout the year, a GST/HST-registered purchaser that places their Unit in the rental pool will be entitled to claim input tax credits (ITCs) for the GST/HST paid on the purchase of the Unit and on ongoing operating expenses to the extent that the Unit is used in the short-term rental pool operations. However, a purchaser or an owner of a Unit that initially places it in the rental pool for 329 or more days per year is not necessarily entitled to claim full ITCs for the tax paid or payable on the purchase of the Unit or on ongoing operating expenses.
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.
Explanation
Supplier's obligation to collect GST/HST on taxable sale of residential complex to individual
The general rule under subsection 221(1) requires every person who makes a taxable supply to collect the tax payable by the recipient in respect of the supply. However, subsection 221(2) provides certain exceptions to the general rule. Under certain circumstances, this subsection relieves a supplier from the requirement to collect the tax where the supplier makes a taxable supply of real property by way of sale to a recipient who is registered for the GST/HST. However, this exception to the general rule does not apply in respect of a taxable sale of a residential complex made to a recipient who is an individual.
Where the Declarant makes a taxable sale of a Unit that is included in the rental pool upon its purchase, the Declarant is making a taxable sale of real property that is not a residential complex. Under the application of subsection 221(2), the Declarant is not required to collect the tax payable on the supply of such a Unit if the recipient of the supply is registered for GST/HST purposes.
However, where the Declarant makes a taxable supply by way of sale of a Unit and the purchaser of the Unit opts out of the rental pool at the time of purchase, the Declarant is making a taxable sale of a residential complex. If the recipient of the supply is an individual, the Declarant is required, under subsection 221(1), to charge and collect GST/HST on the taxable sale of the complex, regardless of whether the individual is registered for GST/HST. The Declarant is not required to collect the tax payable when it makes a taxable supply by way of sale of a Unit that is a residential complex to a recipient other than an individual provided the recipient is registered for GST/HST purposes.
ITCs and extent of use in commercial activity
Provided there is a market for short-term rentals of the Units at the Development throughout the year, a GST/HST-registered purchaser is eligible for ITCs to the extent that the Unit is used in the rental pool arrangement. [...]
Pursuant to subsection 141.01(5), the method used by a person in a fiscal year to determine the extent of use of property or services in commercial activities (e.g., making short-term rentals of a condominium unit) must be fair and reasonable and used consistently throughout the year. A fair and reasonable method of determining extent of use should take into account all of the relevant facts and circumstances of the particular case.
You suggested that by placing a Unit in the rental pool for 329 or more days per year, a purchaser is entitled to full ITCs for the tax paid or payable on the purchase of a Unit and on ongoing operating expenses. However, this position ignores the provisions of [...] the Agreement. Under those provisions, a purchaser may reserve, at any time and from time to time during the term of the Agreement, up to [#] days per month for the personal use of Unit by the purchaser, the purchaser's family or the purchaser's guests.
Though the purchaser may commit, [...], to make the Unit available in the rental pool for at least 329 days in the coming year, the purchaser can nonetheless notify the Manger, [...], of their desire to use the Unit personally for certain days. Unless the Unit is already reserved for the day(s) the purchaser is requesting personal use of the Unit, the Manager must make every reasonable effort to accommodate the purchaser's request. Accordingly, it would not be reasonable, in all cases, to assume that the Unit is in fact in the rental pool for those 329 days (even if that was the purchaser's initial indication), given that the personal use of the Unit could be [#] days during a year. In some cases, such an assumption may be valid, but that would depend on the facts of the particular case.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 957-8222. 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,
Lisa Papineau
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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