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.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 126708
June 24, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Eligibility to claim input tax credits on construction of a recreational complex
Thank you for your letter of June 25, 2010, concerning the eligibility of the [...] (the City) to claim input tax credits (ITCs) with respect to the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) paid on the construction and ongoing operating costs associated with a new multi-use recreational complex.
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 City is a municipality and a public service body as those terms are defined in subsection 123(1) and is registered for GST/HST purposes under business number [...].
2. The City holds title to a parcel of real property (the Property) which is on one legal description. The Property includes two buildings and a parking area.
3. The City is in the process of constructing a multi-use recreational complex on the Property. This complex will include [...] existing arenas, each with [...] dressing rooms, that will be incorporated into the new complex, an aquatic centre with [...] lap pool, leisure pool and splash pool, a gymnasium and fitness area with change rooms, various multi-use meeting rooms, retail spaces and food services spaces. You expect that the complex will be used by the City primarily to provide clubs and other organizations facilities for rent. The rental income is expected to be approximately $[...] per year.
4. Prior to the commencement of construction, you determined that approximately [...]% of the revenues earned from the Property were from commercial activities. You have also determined that the remaining [...]% of the revenues were from exempt activities (supplies of programs geared primarily to children 14 years of age and under, which we understand are exempt under section 12 of Part VI of Schedule V to the ETA).
5. Upon completion of the new recreational complex, it is expected that approximately [...]% of the revenues earned will be from commercial activities and the remainder of the revenues will be from exempt activities. You have stated that this revenue allocation is representative of the expected use of the new complex, which would indicate [...]% of the available rental time would be used in commercial activities.
6. The City has not filed an election under section 211 in respect of the Property.
RULINGS REQUESTED
You would like to know if the City can claim ITCs at a rate of 100% for GST/HST paid on the following:
• construction costs for the new recreational complex,
• capital personal property acquired for use in the new complex,
• expenses incurred in the course of the ongoing operations of the new complex.
You also asked us to comment on the effects of filing an election under section 211 in respect of the Property either now or in the future.
INTERPRETATIONS GIVEN
Your request for a ruling focuses on whether the allocation methods you are using for the purposes of determining the extent to which the Property is for use in commercial activities are fair and reasonable.
It is a question of fact whether the methods used by a person to determine the extent to which capital real property is used in commercial activities are fair and reasonable in given circumstances. While we may be in a position to offer comments on whether a proposed allocation method is unreasonable in a particular set of circumstances, it remains a question of fact whether a particular method used by a registrant is fair and reasonable. Such a determination can generally only be made at the time of audit. While it appears that your allocation methods may be fair and reasonable in the circumstances, we are not in a position to provide a ruling on the issue. However, we can provide the following GST/HST interpretations.
1. The City will be eligible to claim full ITCs with respect to the construction of the new recreational complex provided that:
• the construction costs form an improvement to the Property,
• immediately after the Property or a portion of it was last acquired by the City, the City was using the Property primarily (more than 50%) in its commercial activities, and
• at the time tax in respect of the improvements is paid or becomes payable, the Property is used primarily in commercial activities of the City.
2. The City will be eligible to claim ITCs with respect to the acquisition of capital personal property only if the property is acquired for consumption, use or supply primarily in commercial activities of the City. If the capital personal property is for consumption, use or supply primarily in commercial activities of the City, the City will be eligible to claim full ITCs. If the capital personal property is acquired for consumption, use or supply otherwise than primarily in commercial activities of the City, the City will not be eligible to claim ITCs in respect of the property.
3. The City will be eligible to claim ITCs for expenses in respect of non-capital property and services acquired, other than improvements to capital property, to the extent that the property or service is acquired for consumption, use or supply in commercial activities of the City.
Note that for all ITC claims, the City must also meet the documentary requirements for claiming ITCs and must claim the ITCs within the allowable time frame, generally, four years from the time the tax is paid or becomes payable.
Explanation
Interpretation 1
General ITC eligibility
Subsection 169(1) allows a registrant to claim ITCs in certain circumstances. This subsection provides the basic rules with respect to determining a person's ITC eligibility for the GST/HST paid or payable on the acquisition of property and services.
The ITC of a person is the amount determined by the formula A x B in subsection 169(1). In the formula, element A is the tax that is paid or becomes payable by a registrant on the acquisition of the property or service, while element B is the percentage determined under paragraph (a), (b) or (c). Paragraph (a) of the description of element B is not relevant to your situation. Where property or a service is acquired for use in improving capital property of the person,
paragraph (b) of the description of element B provides that the percentage is equal to the extent to which the person was using the capital property in commercial activities of the person immediately after the capital property, or a portion of it, was last acquired by the person. Paragraph (c) of the description of element B provides that in any other case, the ITC is based on the extent to which the property or service is acquired for consumption, use or supply in commercial activities of the person.
Improvements to capital real property
The new recreational complex would generally be considered an improvement to the Property. "Improvement" is defined in subsection 123(1) as any property or service supplied to a person for the purpose of improving particular property of the person to the extent that the consideration payable for the property or service would be included in determining the cost (or in the case of capital property, the adjusted cost base) of the particular property for purposes of the Income Tax Act.
In addition to the provisions of paragraph (b) of the description of element B in subsection 169(1), subsections 209(1) and 199(4) further affect the ITC eligibility. Those subsections provide that where an election under section 211 is not in effect in respect of capital real property, a municipality is entitled to full ITCs on the acquisition of an improvement to capital real property only if, at the time tax in respect of the improvement is paid or becomes payable, the capital real property is used primarily in commercial activities of the municipality. No ITC is permitted on the improvement if the capital real property is used otherwise than primarily in commercial activities at the time tax in respect of the improvement is paid or becomes payable.
Commercial activity
A commercial activity means any business carried on by a person or an adventure or concern of the person in the nature of trade (other than one carried on without a reasonable expectation of profit by certain individuals, trusts, or partnerships), except to the extent that the business or adventure or concern involves the making of exempt supplies by the person. A commercial activity also includes making supplies of real property, other than an exempt supply.
Subsection 141.01(3) provides that a person is considered to use property (e.g., capital real property) in commercial activities only to the extent that the property is used for the purpose of making taxable supplies for consideration in the course of an endeavour of the person. To the extent that the property or service is consumed or used for the purpose of making supplies in the course of an endeavour that are not taxable supplies made for consideration, or for a purpose other than making supplies, the person is deemed to use the property otherwise than in commercial activities.
Determining extent of use
Subsection 141.01(5) provides that the methods used by a person in a fiscal year to determine the extent to which the consumption or use of property or services is for the purpose of making taxable supplies for consideration or for other purposes, or the extent to which property or services are acquired for such purposes, must be fair, reasonable and used consistently by the person throughout the year. If more than one method of allocating an input is fair and reasonable in given circumstances, a registrant will be required to choose one of the methods and that method is to be used consistently throughout the year.
The concept underlying ITC allocation methods is that a method or methods used must link a particular property or service to its use for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration. The purpose of any ITC allocation method is to produce a result that is a reasonable reflection of the extent to which inputs (upon which GST/HST has been paid or is payable) are for use in commercial activities.
It is a question of fact whether a particular method accurately reflects the actual extent to which a particular input was acquired or is used in commercial activities or otherwise and does not provide distorted results in a particular circumstance.
There is no requirement that the same allocation factor be used for an entire input (i.e., the whole capital real property) in any particular case. If the use of a single factor in relation to a particular capital real property does not result in a fair and reasonable allocation of the property used in making taxable supplies for consideration and other uses, such a single factor approach cannot be used. The goal behind choosing a factor or factors is to establish a fair and reasonable allocation method that achieves the correct result (i.e., the extent to which the property is for use in making taxable supplies for consideration or for some other purpose).
Interpretation 2
With respect to the tax paid or payable by the City on the acquisition of capital personal property, the ITC eligibility will depend on whether the property is acquired for use primarily in commercial activities. While paragraph (c) of the description of element B in subsection 169(1) provides that the ITC is based on the extent of use of the property in commercial activities, the "primary use" rules in section 199 must be considered in determining the extent of use in commercial activities. If capital personal property is acquired for use primarily in commercial activities, paragraph 199(2)(b) deems the capital personal property to be for use exclusively in commercial activities in which case the City is eligible to claim full ITCs for the GST/HST paid or payable on the acquisition of the capital personal property. If the capital personal property is acquired for use less than primarily in commercial activities, no ITCs can be claimed.
Interpretation 3
There is no "primary use rule" for determining the ITC entitlement with respect to GST/HST paid or payable on the acquisition of property and services that are neither an improvement to capital property nor capital property (e.g., general operating and overhead expenses that the City incurs in their day to day operations). The City would calculate its ITCs on the acquisition of such property and services based on the extent to which the property or service is for consumption, use or supply in commercial activities, subject to the following rules:
• the City cannot claim any ITCs if the property or service is for consumption, use or supply 10% or less in commercial activities, and
• the City can claim full ITCs if the property or service is for consumption, use or supply exclusively (90% or more) in commercial activities.
Note that for all ITC claims, the City must also meet the documentary requirements for claiming ITCs and must claim the ITCs within the allowable time frame, generally, four years from the time the tax is paid or becomes payable.
The documentary requirements for claiming ITCs are set out in the section, "Requirement to support a claim for input tax credits (ITCs)" in guide RC4409, Keeping Records. The rules on the time limit for claiming ITCs are set out in GST/HST Memorandum 8.1, General Eligibility Rules, beginning at paragraph 82. These publications are available on the Canada Revenue Agency's web site.
We would further note that with respect to any GST/HST paid or payable that is not recoverable as an ITC, the City may be eligible for a rebate under section 259 with respect to that tax. Further information on the municipalities' rebates may be found in the section, "GST/HST public service bodies' rebate" in guide RC4049, GST/HST Information for Municipalities, which is also available on the Canada Revenue Agency's web site.
Election under section 211
The election under section 211 allows a public service body, including a municipality, to opt out of the primary use rules discussed above on the acquisition of, or improvements to, capital real property. If an election under section 211 is in effect in respect of capital real property of a municipality at the time improvements to the property are made, the ITC eligibility is based on the extent to which the capital real property was used in commercial activities of the person immediately after the property, or a portion of it, was last acquired by the person without regard to the primary use rule. Note that the property must still be used more than 10% in commercial activities in order to have any ITC eligibility.
If the City was using the Property primarily in commercial activities at the time tax in respect of the improvements was paid or became payable, the City would be eligible to claim full ITCs and it would be unnecessary to file the election under section 211 with respect to the Property.
For further information on the election under section 211, see the section, "Election for real property of a public service body", in guide RC4081, GST/HST Information for Non-Profit Organizations.
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,
Melissa Mercer
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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