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
Case Number: 103800
Attention: XXXXX
XXXXX
March 31, 2009
Subject:
GST/HST INTERPRETATION
Lease of Long-term Care Facilities
Dear XXXXX:
Thank you for your letter of XXXXX, concerning the changes in the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) included in Budget 2008 announced on February 26, 2008, as they apply to leases of long-term care facilities.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand from the information provided that you have made representations to the Department of Finance with respect to the amendments made to the ETA and their impact on operators of long-term care facilities. The following interpretation is provided to confirm the application of the amendments where a person who constructs a residential care facility located in XXXXX leases the facility to an operator who uses the facility exclusively as a nursing home licenced under the XXXXX and provides rooms in the nursing home to residents of the nursing home. The application of the GST/HST may differ in the case of other residential care facilities.
Interpretation Given
Combined supply of a residential complex and other real property
Subsection 136(2) provides, in part, that where a lease of real property includes a residential complex and other real property that is not part of the residential complex, the residential complex and the other real property are deemed to be separate properties and the supply of each property is separate from the other, neither supply being incidental to the other.
A residential complex is defined in subsection 123(1) to include that part of a building in which one or more residential units are located, together with
(a) that part of any common areas and other appurtenances to the building, as well as 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, and
(b) that portion of the subjacent land that the residential units and related common areas represent of the entire building. ifootnote 1
It is a question of fact as to whether the lease of a nursing home to an operator is a supply of a residential complex only or supplies of a residential complex and other real property that is not part of the residential complex. For example, any part of the nursing home that is leased to a third party for the operation of a hair/barber shop would not form part of the residential complex. As discussed below, it is only the supply of a residential complex by way of lease that may be exempt under section 6.1, or new section 6.11, of Part I of Schedule V to the ETA. If the nursing home consists of a residential complex and other real property, the supply is deemed to be two separate supplies and the supply of the real property that is not a residential complex will not be exempt under section 6.1, nor under any other exempting provision, and will be subject to tax.
Operator's supplies to residents
Section 6 of Part I of Schedule V to the ETA, in part, exempts the supply of a residential unit in a residential complex by way of lease for the purpose of its occupancy as a place of residence by an individual, where the period throughout which continuous occupancy of the unit is given to the same individual is at least one month.
Generally, it is our view that the supply by an operator to a resident made under an admission agreement to a nursing home that includes a residential unit is not exempt under section 6 of Part I of Schedule V to the ETA iifootnote 2.
Head lease of a nursing home prior to the amendments
With respect to supplies for which consideration became due on or before February 26, 2008, or was paid on or before that date without having become due, section 6.1 of Part I of Schedule V to the ETA provided, in part, that the head lease of a residential complex may have been exempt for each lease interval iiifootnote 3. The head lease of the complex for each lease interval was exempt if, throughout the lease interval, the lessee (in this case, the operator) made, or held the complex for the purpose of making, supplies of the complex or parts of the complex and all or substantially all (90% or more) of those supplies were exempt under section 6 of Part I of Schedule V to the ETA.
In determining whether the exemption in section 6.1 of Part I of Schedule V to the ETA applies, it is necessary to distinguish between the operator's supplies of property (i.e., rooms in the residential complex) and supplies of services that include the provision of units in the complex. It is only the operator's supplies of property (i.e., residential units) that must be considered in determining whether all or substantially all of the operator's supplies of property are supplies of the complex that are exempt under section 6 of Part I of Schedule V to the ETA. For purposes of the "all or substantially all" test in section 6.1, supplies of services by the operator, whether or not they include the provision of units, are not taken into account in determining whether the head lease is exempt under section 6.1.
Generally, it is our view that the supply by an operator to a resident made under an admission agreement to a nursing home that includes the provision of a residential unit in the nursing home is characterized as a supply of a service. While the supply of the service includes the provision of a room in the nursing home, the supply is nonetheless a service and as such, would not enter into the determination as to whether all or substantially all of the operator's supplies of the complex, or parts of the complex, are exempt under section 6 of Part I of Schedule V to the ETA. If an operator does not make any supplies that are exempt under section 6 as is generally the case with a nursing home, section 6.1 of Part I of Schedule V to the ETA will not apply to any of the lease payments for the nursing home that became due on or before February 26, 2008, or were paid on or before that date without having become due. As no other exemptions apply, these lease payments are in respect of taxable supplies ivfootnote 4. As the recipient of these taxable supplies, the operator was required to pay GST.
Head lease of a nursing home after the amendments
A lessor's supplies of the residential complex portion of a nursing home will be exempt under section 6.11 of Part I of Schedule V to the ETA for each lease interval in respect of which consideration becomes due after February 26, 2008, and was not paid on or before that date or is paid after that date without becoming due.
The ETA contains change in use provisions that may apply where a registrant last acquired capital real property for use in commercial activities and the registrant begins to use the property exclusively for other purposes. It is important to note that the change in use provisions apply only in respect of capital property. It should also be noted that the change in use rules, if they apply, would apply only to the residential complex portion of a nursing home. Supplies of any part of a nursing home that is not part of the residential complex were subject to tax before the legislative changes were made and continue to be taxable under the legislation.
Section 195.1 provides (other than for certain purposes that are not relevant in this situation) that a residential complex is not capital property of a builder of the complex at any particular time unless construction of the complex is substantially complete and at or after the time of substantial completion and at or before the particular time, the builder has received an exempt supply of the complex or was deemed to have made a taxable supply (i.e., a self-supply) of the complex under section 191. Accordingly, the residential complex portion of a nursing home will be capital property of a lessor who is a builder of the complex, and the change in use provisions will apply, only if the lessor was deemed to have made a self-supply of the residential complex portion of the nursing home prior to the lessor's supplies of the residential complex portion of the nursing home becoming exempt under section 6.11 of Part I of Schedule V to the ETA vfootnote 5.
Whether the self-supply rules apply to a lessor
Prior to the legislative changes announced on February 26, 2008, subsection 191(10) provided, in part, that the self-supply rules in section 191 apply to a builder who makes a supply of a residential complex by way of lease that is an exempt supply under section 6.1 of Part I of Schedule V to the ETA to a recipient who is acquiring the complex or units in the complex for the purpose of making supplies that are exempt under section 6 of Part I of Schedule V to the ETA and gives possession of the complex to the recipient. The builder in this case is deemed to have given possession of the complex or a residential unit in the complex to an individual under a lease, licence or similar arrangement for the purpose of its occupancy by an individual as a place of residence. As a result, the builder is deemed, under section 191 to have made and received a taxable supply of the complex or unit (i.e., a self-supply) and to have paid and collected tax calculated on the fair market value of the complex or unit.
With respect to a nursing home, the operator does not make any supplies that are exempt under section 6 and as such, subsection 191(10), as it read prior to its amendment, does not provide that the self-supply rules apply to the lessor.
Application of section 195.1
Section 195.1 deems the residential complex portion of the nursing home not to be capital property of the lessor since, as discussed above, the self-supply rules do not apply to the lessor. As such, the change in use rules do not apply when the lessor's supply of the nursing home became exempt under section 6.11 of Part I of Schedule V to the ETA.
Subsequent sale of a nursing home
Section 5 of Part I of Schedule V to the ETA, in part, exempts the sale of a multiple unit residential complex by a person who is a builder of the complex where the last supply of the complex by way of sale to the builder was the deemed taxable sale of the complex under the self-supply rules in subsection 191(3). The exemption will not apply, however, if the builder claimed an ITC in respect of that deemed acquisition of the complex, or in respect of an improvement thereto since that deemed acquisition, or if the builder substantially renovated the complex after that deemed acquisition. As a result, the sale of a nursing home by a lessor will not be exempt under section 5 if the lessor, who is the builder, was not deemed to have received a taxable supply of the complex by way of sale under subsection 191(3).
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.
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,
Hugh Dorward
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
i 1. The definition of residential complex contains certain exclusions, i.e., buildings or parts of buildings that would otherwise be residential complexes can be excluded from the definition. The exclusions are not relevant in this situation. A complete discussion of the definition of "residential complex" is set out in GST/HST Memoranda Series Chapter 19.2, Residential Real Property. For a discussion on the land included in a residential complex, see policy statement P-069, Land Allowance For Residential Complexes.
ii 2. Generally, the supplies made under an admission agreement that include a residential unit in a nursing home licenced under the XXXXX are exempt under section 2 of Part II of Schedule V to the ETA. However, any property or services provided and charged for on a "per occurrence" basis that may be set out in the admission agreement are likely separate supplies that may be subject to tax.
iii 3. A lease interval is generally the period of time (e.g., a month) under a lease for which possession or use of the property is given and to which a lease payment is attributable.
iv 4. Paragraph 6.11(b) of Part I of Schedule V to the ETA, as introduced in the legislative changes announced in the budget of February 26, 2008, provides, in part, that the head lease of a residential complex is exempt where the lessee (e.g., the operator) uses the complex in the course of making exempt supplies and as part of the supplies, gives possession or use of all or substantially all of the residential units in the complex under leases, licences or similar arrangements for the purpose of occupancy as a place of residence by an individual. However, where the supplier (i.e., the lessor) charged, collected or remitted tax on lease payments that became due or were paid on or before February 26, 2008, section 6.11 does not apply to those supplies. In such a case, the coming into force provisions for section 6.11 provide that the section applies only to those supplies for which consideration becomes due after February 26, 2008, without having been paid on or before that date, or is paid after that date without having become due.
v 5. Assuming that the lessor did not receive an exempt supply of the residential complex portion of the nursing home, it is only necessary to determine whether the lessor was deemed to have made a self-supply of the complex.
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