Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
Case Number: 83707
Business Number: XXXXX
XXXXX
XXXXX
September 11, 2008
Subject:
GST/HST INTERPRETATION
Eligibility for Input Tax Credits
Dear XXXXX:
Thank you for your facsimile received in the XXXXX GST/HST Rulings Centre XXXXX, concerning the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) and eligibility to claim input tax credits (ITCs). We apologize for the delay in providing you with this response.
All legislative references are to the Excise Tax Act (the ETA) and the regulations thereunder, unless otherwise specified.
We have previously provided you with two GST/HST Rulings on the GST status of supplies made at XXXXX. We will refer to those letters in this response.
Interpretation Requested
You would like to know if XXXXX (the Company) is eligible to claim ITCs for operating costs and in respect of improvements made to XXXXX (the Facility).
Interpretation Given
For purposes of this response, we will consider the Facility to be the real property contained within the legally described parcel of land on which the building containing the residential units is situated. Further, "operating costs" will refer to the acquisition of any property and services other than capital property or improvements to capital property. We will first provide the general ITC rules for operating costs, followed by the rules for acquisitions of capital property and improvements to capital property.
Operating costs
General Rule
Generally, where a person acquires or imports property or a service and, during a reporting period of the person in which the person is a registrant, the GST/HST in respect of the property or service becomes payable by the person or is paid by the person without having become payable, that person will be eligible to claim an ITC in respect of the tax to the extent (expressed as a percentage) the property or service is acquired or imported for consumption, use or supply in the course of the person's commercial activities.
A commercial activity of a person means a business carried on by the person, or an adventure or concern of the person in the nature of trade (other than certain exclusions that do not apply in this case), except to the extent that the business, adventure or concern in the nature of trade involves the making of exempt supplies by the person. i1 A commercial activity also includes the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply. Exempt supplies are listed in Schedule V to the Act.
Used substantially all in commercial activities or in non-commercial activities
In accordance with the general rule, the tax paid or payable on operating costs generally gives rise to an ITC to the extent the property or service is used in commercial activities. A special rule exists where a person acquires property or service for consumption or use substantially all (90% or more) in either commercial activities or non-commercial activities.
Where a person acquires or imports property or a service and consumes or uses it (or intends to consume or use it) in the course of commercial activities, the person may claim an ITC equal to 100% of the GST/HST paid or payable for that input where substantially all of the consumption or use of the property or service is in the course of the person's commercial activities and all the other ITC criteria are satisfied.
Conversely, where a person acquires or imports property or a service and consumes or uses it (or intends to consume or use it) substantially all in the course of non-commercial activities (e.g., in making exempt supplies), all of the property or service is considered to be for consumption or use in activities other than commercial activities. Accordingly, no ITC can be claimed for the GST/HST paid or payable on that particular input.
Apportionment
As provided in the aforementioned GST/HST rulings issued to you, the Company makes exempt supplies XXXXX and taxable supplies XXXXX, including zero-rated supplies XXXXX. As such, the Company makes a combination of exempt and taxable (including taxable at 0%) supplies. For this reason, it will often be necessary to apportion the GST/HST paid or payable for purposes of determining ITCs.
Where property or a service is consumed or used partly in the course of a person's commercial activities and partly in its non-commercial activities (less than 90%, but more than 10% in its commercial activities), the person must apportion the GST/HST for the property or service between these two activities. Specifically, the person will be eligible to claim an ITC for the portion of the GST/HST paid or payable for the property or service that relates to its consumption or use in its commercial activities as long as all the other ITC criteria are satisfied. This apportionment is based on the extent to which the property or service is used to make taxable supplies for consideration. Any such apportionment must be fair and reasonable and used consistently throughout the year.
Real property that includes a residential complex
The Facility includes, a residential complex. ii2 Where real property is composed of a residential complex and other real property that is not part of the residential complex, the "substantially all" rule set out above applies in respect of property or services supplied in relation to the real property only to the extent that the property or service is acquired for use in relation to the non-residential complex part of the real property.
For example, the Facility contains a beauty/barber shop area that is leased to a third party. Such an area does not form part of the residential complex. The area is used by the Company to make taxable supplies by way of lease to the third party. If the Company pays for electricity for the entire Facility, the portion of that expense attributable to the leased premises would not be treated as having been incurred for use in making exempt supplies in the residential complex, even if 90 per cent of the Facility is used for that purpose. Therefore, the Company would be able to claim ITCs for the portion of the electricity expenses attributable to the taxable rentals of the beauty/barber shop area.
The substantially all rule does not apply to the residential complex part of real property that includes a residential complex and other real property that is not part of the residential complex. For example, the residential complex part of the Facility may include the area that is used to serve meals to residents (part of an exempt supply) and meals to visitors and staff (a taxable supply). That portion of an electricity expense that relates to the taxable supply of meals will not be treated as having been incurred for use in making exempt supplies, even if 90% of the supplies in the residential complex are exempt. Therefore, the Company would be able to claim ITCs for the portion of the electricity expense attributable to the taxable supply of meals made in the residential complex.
Capital property and improvements to capital property
Capital property
Capital property may be either capital personal property or capital real property.
When determining the amount, if any, of an ITC for capital personal property, in most cases, the "primary use" test applies to the property. Where capital personal property is acquired or imported by a person for use primarily (more than 50%) in its commercial activities, the person is deemed to use that property exclusively in such activities. Accordingly, the person will be eligible to claim an ITC equal to the total amount of GST/HST paid or payable on that property provided that all the other ITC criteria are satisfied. Conversely, where capital personal property is not for use primarily in the course of the person's commercial activities (i.e., it is used 50% or less in commercial activities), there is no ITC eligibility in respect of that property.
The ITC eligibility for the acquisition of capital real property will be in accordance with the general ITC rule and the substantially all rule set out above. That is, the ITC will be based on the extent to which the property is for use or supply in commercial activities; if for use or supply substantially all in commercial activities, a full ITC eligibility arises for the tax paid or payable on the capital real property.
Improvements to capital property
With respect to the ITC eligibility for acquisitions of improvements to capital property (either capital real property or capital personal property), the ITC is based on the extent, expressed as a percentage, to which the capital property was used in commercial activities immediately after the capital property, or a portion of it, was last acquired. For capital personal property, no ITC is allowed unless, at the time tax becomes payable in respect of the improvement, the capital property is used primarily in commercial activities.
It should be noted that if a person is eligible to claim an ITC in respect of tax owing on an improvement to capital property and claims the ITC, the subsequent sale of the property may not be exempt. For example, section 2 of Part I of Schedule V provides exemption for the sale of a residential complex made by a person who is not a builder of the complex. However, the exemption does not apply if the person claimed an ITC in respect of the last acquisition of the complex or in respect of an improvement to the complex since it was last acquired by the person.
ADDITIONAL INFORMATION
Self-supply of the residential complex
We want to take this opportunity to advise you of the Company's responsibility to account for GST on a deemed supply of that portion of the Facility that is the residential complex.
If a builder constructs a multiple-unit residential complex and subsequently supplies a residential unit in the complex by way of lease, licence or similar arrangement for use 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 of a unit in the complex is first provided to an individual. In the case of a multiple-unit residential complex, the builder is treated as having sold and repurchased the whole of the residential complex at its fair market value. The builder must account for tax on the fair market value of the entire residential complex. The sale is deemed to be a taxable supply, meaning that a registrant builder is generally entitled to claim ITCs on costs incurred with respect to the construction of the complex.
The Company is a builder of that part of the Facility that is the residential complex. As the complex contains more than one residential unit and is not a condominium complex, the complex is a multiple unit residential complex. The Company makes supplies of residential units (or of supplies that include the provision of a residential unit) in the complex by way of lease, licence or similar arrangement to individuals who occupy the unit as a place of residence. Accordingly, the Company is considered to have self-supplied the residential complex at the later of the time construction of the complex is substantially complete and the time possession of any unit in the complex is given to an individual as a place of residence. The Company must account for GST on the fair market value of that portion of the Facility that is a residential complex at the later of those times.
Tax owing on self-supply
The Company receives government funding in respect of the construction or operation of the residential complex and at least 10% of the residential units in the complex are for seniors, individuals with a disability, individuals whose occupancy of a unit is dependent on a means test, or some combination thereof. As such, for the purpose of calculating tax on the fair market value of the residential complex, the tax is equal to the greater of:
(a) the tax calculated on the fair market value of the complex, and
(b) the total tax payable by the Company in respect of the acquisition of the real property that forms part of the complex (e.g., the land) and any improvement to that real property.
ITCs during construction of the residential complex
As the self-supply is deemed to be a taxable supply, the construction of the residential complex, up to the time of the self-supply, is considered to be in the course of a commercial activity. To the extent that the remaining part of the Facility (i.e., that part that is not the residential complex) is used to make taxable supplies, such construction will also be considered to be in the course of commercial activities. Generally, the construction activities would be considered an improvement to capital real property and the ITC eligibility will be in accordance with the rule for improvements to capital property set out above. The "substantially all" rule discussed above would apply to the improvements in that if, during the construction phase, substantially all of the Facility is used or intended to be used in commercial activities, all of the Facility will be considered to be used in commercial activities.
ITCs after self-supply
Once the Company has made the self-supply, and is deemed to have acquired the residential complex, the complex is used, at least in part, to make exempt supplies under section 6 of Part I and section 2 of Part IV, both of Schedule V, as set out in the earlier rulings issued to you. One must take into account the extent of such use in determining the percentage of use in commercial activities of the Facility when determining ITCs on improvements made to the Facility after the self-supply of the residential complex.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
The ETA has been amended to reflect changes announced in the budget of February 26, 2008. A number of the amendments affect residential care facilities, such as the Facility. GST/HST Info Sheet GI-045, Residential Care Facilities and Proposed Changes In the 2008 Budget (copy enclosed), provides information on the amendments.
If you require clarification with respect to any of the issues discussed in this letter or on issues discussed in the Info Sheet, please call me directly at (613) 954-4393.
Yours truly,
Hugh Dorward
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
i 1. A commercial activity therefore includes a business carried on by a person or an adventure or concern in the nature of trade of the person that involves the making of zero-rated supplies (i.e., taxable supplies where the rate of tax charged is 0%).
ii 2. As it relates to this case, a residential complex is that part of the building in which the residential units are located together with that part of any common areas and appurtenances to the building and the land immediately contiguous to the building that is reasonably necessary for the use and enjoyment of the building as a place of residence for individuals.
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UNCLASSIFIED
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