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.
TO:
XXXXX
XXXXX
XXXXX
FROM:
Carmela Antonelli
Senior Rulings Officer
Real Property Unit
Financial Institutions and Real Property Division
DATE:
July 8, 2009
CASE:
112579
SUBJECT:
_GST/HST Interpretation
XXXXX - Availability of Section 211 Election
This memorandum is further to the response of XXXXX, provided by the Public Service Bodies and Governments Division (PSBG Division) regarding the interpretative issues raised by XXXXX, with respect to the XXXXX (the Town) infrastructure projects. The following will address the issues with respect to the availability of the section 211 election and the GST implications of the sale and leaseback agreement of the XXXXX building by the Town.
Under subsection 211(1) of the Excise Tax Act (ETA), a public service body (PSB) may file an election to treat certain exempt sales and leases of real property as taxable supplies. The election allows the PSB to claim ITCs for the GST/HST incurred on the acquisition of property, and for any improvements to it, to the extent that the property is used to make taxable supplies. The election is available in respect of real property of the PSB that is:
• capital real property;
• real property held in inventory for the purpose of supply; or
• real property acquired by way of lease, licence, or similar arrangement for the purpose of making a supply of the property by way of lease, licence, or similar arrangement, or for the purpose of assigning the arrangement.
When a section 211 election is filed in respect of capital property, the PSB is deemed to have sold the property and collected tax equal to the basic tax content (BTC) of the property. In addition, the PSB is deemed to have purchased the property and paid tax equal to the BTC of the property. As a result of the deemed purchase, the PSB could claim an ITC for the deemed tax paid to the extent that the PSB uses the property is its commercial activities.
With respect to the infrastructure upgrading projects undertaken by the Town, as stated in the response of XXXXX, by the PSBG Division, the funding received by the Town was used to upgrade its own property. The Town did not make any taxable supplies of the property to the province. It is our understanding that the Town is filing section 211 elections in an effort to recover the tax paid in respect of the upgrades. If the property is in fact capital property, by filing the election, the Town would be entitled to claim an ITC for the tax deemed paid, equal to the BTC of the property, to the extent that the property is used in the Town's commercial activities. Given that we have concluded that the Town is not making taxable supplies of the property to the province, the Town would not be able to claim an ITC equal to the BTC of the property as the property is not being used in the course of commercial activities.
Furthermore, where a municipality makes a taxable supply or deemed taxable supply of real property such that the municipality is required to account for the GST based on the BTC of the property, the special rules under section 198.1 of the ETA for determining the BTC of property of a municipality or a designated municipality in essence exclude all tax paid before February 2004 from the calculation of BTC. As such, where a municipality files a section 211 election in respect of an eligible property, the BTC of such property will exclude all tax payable prior to February 2004. Therefore, even if the Town used the property in commercial activities, the deemed tax paid as a result of filing the election would be nil as the tax originally paid by the Town relates to the period before February 2004.
With respect to the sale and leaseback of the XXXXX building, the facts provided indicate that construction on the new building began XXXXX. After completion of construction, the Town sold the building to a leasing company with a leaseback arrangement. As such, the Town retained use of the building under a lease agreement.
Where a taxable supply of real property by way of sale is made to a recipient registered for the GST/HST such that subsection 221(2) of the ETA applies, the supplier is not required to collect the tax under Division II. The recipient of the supply of real property is required to self-assess tax pursuant to subsection 228(4) of the ETA. In this case, the leasing company was required to account for the tax at the time it acquired the building from the Town. To the extent the leasing company is making a taxable supply of the building by way of lease to the Town, the leasing company is required to collect GST on the taxable lease of the building. Whether the Town is entitled to claim ITCs for the tax payable by the Town on the lease payments for the building is dependant on whether the building is used by the Town in the course of its commercial activities. If the Town is not eligible to ITCs in respect of the lease payments on the building, the Town is entitled to claim a 100% rebate of the non-creditable tax charged on the lease payments where the tax becomes payable by the Town on or after February 1, 2004.
With respect to a section 211 election, the Town is not eligible to make the election in respect of the XXXXX building since the facts indicate that the building was sold after construction was completed in XXXXX. It is, therefore, not eligible property under paragraph 211(1)(a). In addition, the XXXXX building cannot be considered eligible property under paragraph 211(1)(c) since the facts indicate that the Town is using the building for its own purposes. An election under paragraph 211(1)(c) is not available unless the Town acquired the building under a lease arrangement for purposes of supplying the building by way of lease, licence or similar arrangement, or by assignment of agreement, to a third party.
Should you require any further information on this matter, please contact me at 613-952-9212.
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