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
Case Number: 109408
XXXXX
XXXXX
March 31, 2009
Subject:
GST/HST RULING
Lease of XXXXX Long-term Care Facility
Dear XXXXX:
Thank you for your letter of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain lease payments made by XXXXX (OPCO) and the application of the legislative changes made further to Budget 2008 which was announced on February 26, 2008.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Statement of Facts
We understand as follows:
1. OPCO is a "charity" and a "public service body" as those phrases are defined in subsection 123(1) and is registered for GST/HST purposes. OPCO has also applied for municipal determination.
2. OPCO entered into a head lease agreement (the Headlease) with XXXXX (LESSEE) whereby certain real property (the Property) was leased to LESSEE for a term of XXXXX years commencing XXXXX.
3. The Property is legally described as XXXXX.
4. Basic Rent of $XXXXX for the term was paid by LESSEE to OPCO at the time the Headlease was entered into, in accordance with XXXXX of the Headlease.
5. LESSEE completed, or engaged others to complete, the construction of a long-term care facility (the Facility) on the Property.
6. LESSEE then subleased the Property to OPCO for a term of XXXXX years, beginning on the date specified in XXXXX of the Sublease Agreement. The annual lease payment is $XXXXX (exclusive of any applicable taxes) for years XXXXX through XXXXX and $XXXXX for years XXXXX through XXXXX. OPCO was also required to pay an amount of $XXXXX (identified in the Sublease Agreement as Prepaid Rent) to LESSEE pursuant to section XXXXX of the Sublease Agreement. OPCO paid GST to LESSEE in respect of these lease payments. The total GST paid in respect of the annual lease payments from XXXXX to XXXXX and in respect of the Prepaid Rent is $XXXXX.
7. The Facility is a XXXXX-bed nursing home licensed under the XXXXX. All supplies made by OPCO at the Facility that include the provision of a unit in the facility are made under a XXXXX (the Admission Agreement).
8. LESSEE charged and collected the GST on the lease payments made by OPCO for the Property for all lease intervals ending prior to February 29, 2008. OPCO did not claim input tax credits (ITCs) for the GST paid to LESSEE in respect of the lease payments. OPCO claimed public service body rebates under section 259 with respect to 50% of the GST paid to LESSEE in respect of the lease payments.
9. Post construction of the Facility, OPCO made improvements to the Facility, paid GST in respect of these improvements, did not claim ITCs for the GST paid on the improvements and claimed public service body rebates for 50% of the GST paid in respect of these improvements. OPCO or LESSEE did not make an addition to the Facility after the construction of the residential complex was complete.
10. LESSEE has not made an election under section 236.4 in respect of the Facility.
11. LESSEE is registered for GST/HST purposes.
Ruling Requested
You would like to know whether OPCO can adjust its previously filed GST/HST returns to receive credit for the amount of GST it paid to LESSEE in respect of the lease payments for the Property that were made prior to February 29, 2008.
Ruling Given
Based on the information provided, we rule that LESSEE's supplies of the Property made by way of lease are taxable supplies where the lease payment for the supply became due on or before February 26, 2008, or was paid on or before that date without having become due. OPCO is not permitted to adjust its previously filed GST/HST returns to receive credit for the tax paid to LESSEE in respect of these lease payments.
We also rule that the supplies made by LESSEE, by way of lease, of the part of the Property that is a residential complex are exempt supplies where the lease payment for the supply becomes due after February 26, 2008, and was not paid on or before that date, or was paid after that date without having become due.
We also rule that the supplies made by LESSEE, by way of lease, of the part, if any, of the Property that does not form part of a residential complex as defined in subsection 123(1) are taxable supplies where the lease payment for the particular supply becomes due after February 26, 2008, and was not paid on or before that date, or was paid after that date without having become due iFootnote 1.
These rulings are subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by these rulings 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
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. iiFootnote 2
It is a question of fact as to whether the lease of the Property made by LESSEE to OPCO 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 Property 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 the 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 supply by LESSEE is that 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. We have not been provided with any information to conclude whether any part of any of the Property is not a residential complex. Should you require assistance with this determination, please provide us with a detailed description of the Property and the use of all area/rooms that are not residential units that are provided to residents under an Admission Agreement.
OPCO's supplies to residents of the Facility
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.
It is our view that the supply by OPCO to a resident made under an Admission Agreement that includes a residential unit is not exempt under section 6 of Part I of Schedule V to the ETA iiiFootnote 3. Provided that the Admission Agreement is representative of all admissions to the Facility, we consider none of the supplies made under these agreements that include a residential unit to be exempt under section 6 of Part I of Schedule V to the ETA.
Head lease of the residential complex portion of the Facility 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 ivFootnote 4. The head lease of the complex for each lease interval was exempt if, throughout the lease interval, the lessee 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 to any particular lessor's supply, it is necessary to distinguish between the lessee's supplies of property (i.e., rooms in the residential complex) and supplies of services that include the provision of residential units in the complex. It is only the lessee's supplies of property (i.e., residential units) that must be considered in determining whether all or substantially all of the lessee'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 lessee, whether or not they include the provision of residential units, are not taken into account in determining whether the head lease is exempt under section 6.1.
OPCO's supply made under an Admission Agreement, that includes the provision of a residential unit, is characterized as a supply of a service. While the supply of the service includes the provision of a room in the Facility, the supply is nonetheless a service and as such, would not enter into the determination as to whether all or substantially all of OPCO's supplies of the complex, or parts of the complex, are exempt under section 6 of Part I of Schedule V to the ETA. Since OPCO does not make any supplies that are exempt under section 6, section 6.1 of Part I of Schedule V to the ETA does not apply to any of the lease payments for the Facility 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. vFootnote 5. As the recipient of these taxable supplies made by LESSEE, OPCO was required to pay the tax to LESSEE. The legislation does not provide any means for OPCO to adjust its previously filed GST/HST returns to receive credit for the tax that was properly payable to LESSEE.
Head lease of the residential complex portion of the Facility after the amendments
LESSEE's supplies of the residential complex portion of the Facility 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.
Interpretation Given
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. Of particular importance in this case is 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 in this case, would apply only to the residential complex portion of the Property. Supplies of any part of the Property that is not part of the residential complex were subject to tax before the legislative changes were made and will continue to be taxable under the legislation.
Section 195.1 provides (other than for certain purposes that are not relevant to this case) 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 the Property will be capital property of LESSEE, and the change in use provisions will apply to LESSEE, only if LESSEE is a builder of the residential complex and LESSEE was deemed to have made a selfsupply of the residential complex portion of the Property prior to LESSEE's supplies of the residential complex portion of the Property becoming exempt under section 6.11 of Part I of Schedule V to the ETA viFootnote 6.
Whether LESSEE is a builder
A builder of a residential complex includes a person who, at a time when the person has an interest in the real property on which the complex is situated, carries on, or engages another person to carry on for the person, the construction of the residential complex. A builder also includes a person who acquires an interest in a residential complex at a time when the complex is under construction.
Accordingly, LESSEE is a builder of that portion of the Property that is a residential complex.
Whether the self-supply rules apply to LESSEE
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. As OPCO made no supplies with respect to the Facility that were exempt under section 6, subsection 191(10), as it read prior to its amendment, does not provide that the self-supply rules apply to LESSEE.
If OPCO initiated the construction of a residential complex prior to leasing the real property to LESSEE, OPCO is also considered a builder for GST/HST purposes. However, the self-supply rules would not apply to OPCO since the conditions of section 191, as it read prior to its amendment, were not met in the circumstances at hand.
Application of section 195.1
As a result, section 195.1 deems the residential complex portion of the Property not to be capital property of LESSEE and the change in use rules do not apply to LESSEE when the supply of the residential complex from LESSEE to OPCO became exempt under section 6.11 of Part I of Schedule V to the ETA.
Sale of the Facility
Section 5 of Part I of Schedule V to the ETA exempts the sale of a multiple unit residential complex, or an interest therein, by a person who is a builder of the complex, or an addition thereto, where:
=> the last supply of the complex, or addition, by way of sale to the builder was either an exempt supply or a deemed taxable sale of the complex, or addition, under the self-supply rules in subsection 191(3) or 191(4), unless
=> the builder substantially renovated the complex after the complex was last supplied to the builder, or
=> the builder claimed an ITC in respect of that last acquisition of the complex or addition, or in respect of an improvement thereto since that last acquisition, other than an ITC in respect of the construction of an addition to the complex.
With respect to a future sale of the Facility, or an interest therein, the sale will be taxable if the conditions of section 5 of Part I of Schedule V to the ETA are not met.
The foregoing comments represent our general views with respect to the subject matter. These comments included in this part of our letter 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 CRA 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. For lease payments that were made on or before February 26, 2008, or that became due on or before that date, the lease payments relating to the part of the Property that does not form part of the residential complex were also payments for taxable supplies of the Property as indicated in the first ruling.
ii 2. 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 case. 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.
iii 3. The supplies made under an Admission Agreement that include a residential unit in the Facility, or that part thereof, that is licenced as a nursing home under the XXXXX are exempt under section 2 of Part II of Schedule V to the ETA. However, property and services provided and charged for on a "per occurrence" basis are likely separate supplies that may be subject to tax.
iv 4. 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.
v 5. 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 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 (e.g., LESSEE) 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. Supplies for which consideration becomes due, or was paid, on or before February 26, 2008, will not be exempt under section 6.11.
vi 6. LESSEE did not receive an exempt supply of the residential complex portion of the Property and therefore it is only necessary to determine whether LESSEE was deemed to have made a self-supply of the complex.
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UNCLASSIFIED
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