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.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 187870a
Business Number: […]
Dear [Client]:
Subject: GST/HST RULING
Lease of real property
[This amended letter concerns] […] the application of the goods and services tax/harmonized sales tax (GST/HST) to the lease of real property by […](the Corporation) to […](the Tenant). […]
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.
STATEMENT OF FACTS
Based on […], we understand the following:
1. The Corporation owns and operates a rental housing complex located [in Province X] […] (the Building), consisting of [#] single or double independent living suites and shared common areas. The Corporation provides housing at reasonable rates for seniors who are at least 55 years of age and whose income is less than 5 times the annual rent. For 2018, the maximum income was $[…] for the single suites and $[…] for the double suites. Less than 5% of the tenants have an income equal to or greater than the maximum income amounts.
2. The Corporation was designated to be a municipality under subsection 259(1) in respect of activities that involve the provision of rent-geared-to-income (RGI) housing, with an effective date of [mm/dd/2002]. It has been a designated municipality in respect of these activities ever since.
3. The Corporation is not registered for GST/HST purposes.
4. You stated that the Corporation is a non-profit organization. However, it is not a qualifying non-profit organization for purposes of the GST/HST public service bodies’ (PSB) rebate, as its percentage of government funding is not at least 40% of its total revenue. As such, the Corporation is not entitled to the PSB rebate for qualifying non-profit organizations.
5. You also stated that the Corporation claims the PSB rebate for municipalities for the GST/HST paid or payable on all its purchases and expenses.
6. [Beginning in 2009] […], the Corporation undertook a major renovation of the Building […]. The new common area contains offices, a kitchen, a library, a dining room hall, and a bingo room.
7. The Corporation had two existing lounges that became unused as a result of the new common area, which it decided to lease to a third party.
8. The Corporation entered into a Lease Agreement with […](the Tenant), operating as […] with respect to the Premises, […]. The Tenant is using the Premises as a day care facility as defined in the […][relevant provincial legislation].
9. Section […] of the Lease Agreement states that the Landlord (i.e., the Corporation) agrees to lease to the Tenant the Premises, including all heating, ventilating, mechanical and electrical equipment, and water, sewage and electrical power services and utilities installed in the Premises, for the exclusive use of the Tenant.
10. The Lease Agreement states that, for the period [mm/dd/yyyy], through [mm/dd/yyyy], the annual rent shall be $[…][less than $50,000] (payable at $[…] monthly), plus GST. For each year thereafter commencing [mm/dd/yyyy], rent charges shall be reviewed and shall be adjusted as cost of living may warrant, but not to exceed cost of living. The Lease Agreement was amended to commence in [mm/dd/yyyy], which was the time the daycare opened and the Tenant began paying rent. […].
11. Section […] of the Lease Agreement states that the Tenant shall pay to the Corporation its proportionate share of costs for hydro, water, sewer and waste removal, unless the Tenant has made arrangements to meter the utilities themselves, in which case the Landlord shall adjust the Tenant’s share of the costs.
12. Section […] of the Lease Agreement states that all amounts which are payable by the Tenant to the Corporation pursuant to the lease shall be considered to be rent and all remedies from time to time available to the Corporation for the collection of rental shall apply.
13. Section […] of the Lease Agreement states that the Tenant shall pay all business taxes, shared property taxes and other similar levies applicable to the premises including any additional property taxes levied on the property due to the day care.
14. According to section […] of the Lease Agreement, the Tenant shall be responsible for making all changes, alterations or improvements to the interior of the Premises for its own requirements, provided that, before commencing any work, the Tenant shall obtain the written approval of the Landlord.
15. The Tenant paid for improvements to the Premises for its daycare business. The Corporation did not reimburse any amounts to the Tenant for costs incurred for the improvements.
16. The Corporation has not filed an election under section 211 to treat the lease of the Premises as taxable.
RULING REQUESTED
You would like to know if the Corporation’s lease of the Premises to the Tenant is a taxable supply.
RULING GIVEN
Based on the facts set out above, we rule that the Corporation’s lease of the Premises to the Tenant is a taxable supply. However, the Corporation is not required to collect the GST/HST on the lease payments and additional rents, as it is not a GST/HST registrant. If the Corporation becomes a GST/HST registrant, it will be required to collect the GST/HST on the lease payments and additional rents.
EXPLANATION
Generally, every recipient of a taxable supply (other than a zero-rated supply) is required to pay GST/HST on the value of the consideration for the supply. An exempt supply is a supply that is not subject to GST/HST and that is included in Schedule V.
A supply of real property made by a public service body (other than a financial institution, municipality or a government) is exempt unless an exception applies. For GST/HST purposes, a public service body includes a non-profit organization.
"Non-profit organization" is defined in subsection 123(1) to be a "person (other than an individual, an estate, a trust, a charity, a public institution, a municipality or a government) that was organized and is operated solely for a purpose other than profit, no part of the income of which is payable to, or otherwise available for the personal benefit of, any proprietor, member or shareholder thereof unless the proprietor, member or shareholder is a club, a society or an association the primary purpose and function of which is the promotion of amateur athletics in Canada."
It is a question of fact whether, at any particular time, an entity meets the definition of a non-profit organization for ETA purposes. In particular, whether the Corporation meets the criterion of operating solely for a purpose other than profit must be determined on an ongoing basis.
Generally, supplies of real property (other than short-term accommodation) by way of lease for a period of more than one month by a public service body are exempt unless an exception applies. One of the exceptions is if the supply is of designated municipal property and the public service body is a person designated to be a municipality for the purposes of section 259 (that is the PSB rebate). Since the Corporation is a designated municipality for purposes of section 259 in respect of its supplies of RGI housing, it must be determined whether the Building owned by the Corporation is designated municipal property.
Designated municipal property includes property of a person who,
* at any time, is designated to be a municipality for purposes of claiming the PSB rebate for municipalities;
* intended to consume, use, or supply the property more than 10% in the course of activities specified in its designation at that time; and
* is eligible to include an amount in its non-creditable tax charged of GST/HST paid on a supply of the property made to the person or an improvement to the property by the person at that time, for purposes of claiming the PSB rebate.
In general terms, "non-creditable tax charged" means the GST/HST paid or payable on property or services for which a PSB cannot claim an input tax credit (ITC), rebate, refund or remission, other than a PSB rebate.
Once property qualifies as designated municipal property, it is treated as such for as long as it is held by the designated municipality. The definition does not enable only part of a property to be designated municipal property.
The Corporation has been designated as a municipality in respect of its supplies of RGI housing under subsection 259(1) since [mm/dd/2002]. We understand that, throughout the time that the Corporation has been designated, it has intended to supply more than 10% of the housing units in the Building on an RGI basis. Moreover, the Corporation became eligible in 2009 to include the GST/HST paid or payable in respect of improvements made in 2009 to the Building in its non-creditable tax charged for purposes of claiming the PSB rebate. Therefore, the Building became designated municipal property in 2009, which is when it met all three criteria of the definition.
As the Building has been designated municipal property since 2009, the lease of the Premises by the Corporation to the Tenant beginning in [yyyy] is excluded from the exemption. Since no other exemption in the ETA applies, the lease of the Premises is a taxable supply for GST/HST purposes.
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, even though these amounts may be charged separately, they will take on the same tax status as the rent.
The Corporation’s charge to the Tenant for their proportionate share of costs for hydro, water, sewer and waste removal under the terms of the Lease Agreement are additional rents. The Tenant's reimbursement of municipal property taxes, and any other taxes or levies applicable to the Premises is also considered additional rent under the Lease Agreement. These additional rents form part of the consideration for the lease of the Premises made under the Lease Agreement and will take on the same tax status as the lease.
Generally, GST/HST registrants must charge and collect the GST/HST on all taxable (other than zero-rated) supplies of property and services they make in Canada. For GST/HST purposes, a registrant is a person who is registered or required to be registered for the GST/HST. A person who is a “small supplier” is not required to be registered for the GST/HST and is therefore not a registrant (unless the person decides to register voluntarily).
A public service body is a small supplier if its total revenues from taxable supplies are $50,000 or less in the last four consecutive calendar quarters and in any single calendar quarter. A person who is not a GST/HST registrant is generally not required to collect the GST/HST on its taxable supplies. As the Corporation is not a registrant (i.e., it is a small supplier and not required to be registered for the GST/HST and it has not registered voluntarily), it is not required to charge GST/HST on the lease payments and additional rents.
If the Corporation becomes a registrant (i.e., exceeds the small supplier threshold or registers for GST/HST purposes), it would be required to charge and collect the GST/HST on all its taxable supplies. This includes the lease of the Premises, since the lease is a taxable supply.
As a designated municipality in […][Province X], the Corporation is eligible to claim the municipal PSB rebate of 100% of the GST paid or payable on eligible expenses in respect of its designated activities, i.e., supplies of RGI housing. When calculating its PSB rebate, the Corporation must take into account the extent that it intended to consume, use or supply the property or service in the course of its designated activities.
The municipal designation does not apply to any other activities that the Corporation may be engaged in, such as, the supply of residential units to tenants that are not on an RGI basis or for which no government subsidy is payable, the supply of commercial space (e.g., the lease of the Premises), or other activities that are not supplies of RGI housing.
A public service body that is a GST/HST registrant may be eligible to claim the GST/HST paid or payable on its purchases and expenses related to its commercial activities by claiming ITCs. Please note, there are special rules regarding entitlement to claim ITCs for capital personal property and capital real property.
A public service body that acquires property or services partly for use in commercial activities, and partly for use in exempt activities must apportion the GST/HST paid or payable on the property or services accordingly in calculating its ITC claim.
For more information, please refer to guide RC4049, General Information for Municipalities.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the Canada Revenue Agency (CRA) is bound by the ruling(s) given in this letter provided that: none of the issues discussed in the ruling(s) are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
If you require clarification with respect to any of the issues discussed in this letter, […]. 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,
Maria Forte-Long
Municipal Sectors Unit
Legislative Policy and Regulatory Affairs Branch Division
Excise and GST/HST Rulings Directorate
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