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: 144125
Business Number: […]
May 31, 2012
Dear [Client]:
Subject: GST/HST RULING
Value used for purposes of self-assessment of the Goods and Services Tax/Harmonized Sales Tax (GST/HST) on a multiple unit residential complex (MURC)
Thank you for your letter of [mm/dd/yyyy], concerning which of the two values; the fair market value or the cost of a property (land and construction of improvements), the Canada Revenue Agency (CRA) recognizes for purposes of self-assessment of the GST/HST when an independent fair market value appraisal of the property is less than the cost of the property.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
1. […] (the Corporation) is a local authority that provides social housing.
2. The Corporation is determined to be a “municipality” for GST/HST purposes as that term is defined under paragraph (b) of the definition of “municipality” under subsection 123(1). The Corporation is also a “public service body” as that term is defined under subsection 123(1).
3. The Corporation is not registered for GST/HST purposes.
4. The Corporation previously requested a ruling (case # […]) concerning the application of the GST/HST to the construction of a mixed-use building situated in Ontario.
5. The Corporation has since completed the construction of two buildings on land that it purchased. Based on the information provided, one of the buildings is comprised of a residential portion and a commercial portion. The residential portion consists of residential units made available to seniors at market rent and on a rent geared to income basis. The second building is comprised of residential units made available to seniors on a rent geared to income basis.
6. The first property, located at [Address 1], was considered substantially complete on [mm/dd/yyyy], and the second property, located at [Address 2], was completed on [mm/dd/yyyy].
7. In accordance with subsection 191(3), HST in respect of the self-supply of each property was accounted for in the Corporation’s GST/HST returns. The cost of each property formed the basis for the calculation of the HST collected in respect of the self-supplies.
8. After the GST/HST returns were filed, the properties were independently appraised. These appraisals provide that the fair market value of the properties is significantly lower than the cost of the properties.
RULING REQUESTED
You would like to know which of the two values; the fair market value or the cost of the property, CRA requires a builder to use for purposes of calculating the GST/HST collected in respect of a self-supply made under subsection 191(3).
RULING GIVEN
Based on the facts set out above, we rule that the amount of tax that the Corporation is deemed to have collected on the fair market value of each of the two properties under subsection 191(3) is equal to the greater of:
i) the tax calculated on the fair market value of each residential complex at the time of the self-supply, and
ii) the total of all amounts of tax payable by the Corporation in respect of the real property that forms part of each residential complex, or an improvement to that real property.
EXPLANATION
Fair market value
The ETA does not define the term “fair market value” other than to state that the fair market value is to be determined without reference to the GST/HST or to provincial retail sales taxes. The ETA does not prescribe a specific method for determining fair market value. The CRA recognizes that there are three general methods used to arrive at the fair market value of property; the cost, income and direct comparison method, and that no particular method or approach to market valuation should be categorically excluded. The standards of the Appraisal Institute of Canada require that an appraisal of fair market value be based on the “highest and best use” of the subject property which is defined as “the reasonably probable and legal use of the property, that is physically possible, appropriately supported, and financially feasible, and that results in the highest value”. Additionally, the courts have accepted, utilized and relied upon the concept of the highest and best use in arriving at fair market value.
Although there is no legislative requirement for any person making a fair market value determination to hire an appraiser, where the CRA disagrees with the value used to calculate the amount of tax, it may request its own appraisal.
Subsection 191(3)
Subsection 191(3) sets out “self-supply” rules to be applied when a builder constructs or substantially renovates a MURC and subsequently supplies a residential unit in the complex by way of lease, licence or similar arrangement for the purpose of its occupancy by an individual as a place of residence. The builder is deemed to have sold and repurchased (i.e., self-supplied) the residential complex at its fair market value. The deemed sale occurs at the later of the time construction is substantially complete and the time possession or use of a unit in the complex is first given to an individual to occupy the unit as place of residence after the construction is substantially complete. In the case of a MURC, the builder is treated as having sold and repurchased the whole of the residential complex at its fair market value at that time. That is, the builder must account for tax on the fair market value of the entire residential complex, not just the one unit that has been supplied.
Section 191.1
Where a municipality is required to account for tax in respect of a self-supply of a residential complex under subsection 191(3), and possession or use of at least 10% of the residential units in the complex are given for the purpose of their occupancy as a place of residence by seniors, section 191.1 provides that the amount of tax deemed to be collected by the municipality in respect of the self-supply is the greater of tax calculated on the fair market value of the residential complex and the tax paid on the acquisition of the land that forms part of the residential complex and on any improvements made to such land.
If the cost of the MURC exceeds the fair market value, then the cost of the MURC should be used to calculate the amount of tax that the municipality is deemed to have collected in respect of the self-supply. Conversely, if the fair market value exceeds the cost of the MURC, then the fair market value should be used to calculate the amount of tax.
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.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-954-4393. 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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