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.
To:
[Client]
FROM:
Melissa Mercer
Rulings Officer,
Real Property Unit,
Financial Institutions and Real Property Division
Place de Ville, Tower A, 15th Floor
320 Queen Street
Ottawa, Ontario
K1A 0L5
CASE NUMBER:
129276
DATE:
April 4, 2011
Subject:
GST/HST RULING
Whether supply of energy included in rent is subject to recapture of input tax credits
The following is our response to your email dated September 27, 2010, in which you forwarded a request for an opinion as to whether the recaptured input tax credit (RITC) rules apply to utilities billed to [...] (the Corporation) by their landlords.
We understand that the Corporation, as a condition of their leases, must pay the utilities to the landlords or directly to the utility companies on behalf of the landlords. In either case, the landlords are the recipients of the supply from the utility supplier and the Corporation pays for these utilities, consisting of heat and electricity, as part of their lease agreements. The utilities are billed to the Corporation on a monthly basis as additional rental charges. The Corporation pays the GST/HST on the base rent as well as the additional rental charges for the utilities. The Corporation is considered a large business for purposes of the RITC rules and may be subject to RITCs if the supply of utilities by the landlords is considered to be a separate supply of specified energy.
You have provided the following documents for our consideration:
1. A lease between [...] [Company A] and the Corporation for unit #[...] located at [...] [City 1, Province X]. (Lease #1)
2. A lease between [...] [Company B] and [...] [Company C] and the Corporation for the unit located on [...] [City 2, Province Y]. (Lease #2)
3. A lease between [...] [Company C] and the Corporation for unit #[...] located at [...] [City 3, Province X]. (Lease #3)
4. A lease between [...] [Company D] and the Corporation for unit #[...] located at [...] [City 4, Province X]. (Lease #4)
5. A lease between [...] [Company E] and the Corporation for floors [...] inclusive located at [...] [City 5, Province X]. (Lease #5)
6. A lease between [...] [Company E] and the Corporation for floors [...] inclusive located at [...] [City 5, Province X]. (Lease #6)
We make specific note of the following content of the above mentioned leases:
a) Paragraph [...] of Article [...] of Lease #1 states that the Corporation will pay all charges for utilities billed to the Corporation. Schedule [...] defines "Rent" as all minimum rent and additional rent payable pursuant to the lease. Schedule [...] also defines "Additional Rent" as all sums or charges required to be paid by the Corporation whether payable to the landlord or any other person.
b) Paragraph [...] of Article [...] of Lease #2 states that the Corporation must pay the cost of light and electric power consumed for the premises rented. Article [...] also states that the landlord may charge the Corporation for the cost of the light and electric power in advance as additional rent. Article [...] defines "Additional Rent" as all sums paid by the Corporation under the lease except for basic rent whether or not the amounts are payable to the landlord. In addition, Article [...] states that any amounts paid to the landlord by the Corporation other than basic rent will be deemed to be rent and shall be paid as additional rent.
c) Paragraph [...] of Article [...] of Lease #3 states that the Corporation shall pay to the landlord taxes, utilities and operating costs. Paragraph [...] of Section [...] states that the Corporation shall be responsible for the cost of electricity, whether or not it is separately metered. If the electricity is not separately metered it will be paid by the landlord and then the Corporation will pay their apportioned share to the landlord at the same time the basic rent is payable. In this case, Article [...] of the lease will apply which states that all amounts payable to the landlord by the Corporation under the lease shall be deemed to be rent.
d) Section [...] of Article [...] of Lease #4 states that the Corporation will pay to the landlord a utilities charge within [...] days of being notified of the amount by the landlord. Section [...] of Article [...] further states that all amounts payable under the lease, other than the basic rent, are considered "Additional Rent". Schedule [...] defines "Rent" as base rent and additional rent.
e) Paragraph [...] states that the Corporation will pay, as additional rent, monthly [amounts] on account of electricity as detailed in paragraph [...] of the lease. Paragraph [...] of Lease #5 states that the Corporation will pay the cost of all electricity supplied to the premises.
f) Paragraph [...] states that the Corporation will pay, as additional rent, monthly [amounts] on account of electricity as detailed in paragraph [...] of the lease. Paragraph [...] of Lease #6 states that the Corporation will pay the cost of all electricity supplied to the premises.
Large Business
From July 1, 2010 until June 30, 2018, with the introduction of the HST in Ontario and British Columbia, large businesses will be required to repay or "recapture" the portion of any available input tax credits (ITCs) that is attributable to the provincial part of the HST that becomes payable, or is paid without having become payable, in respect of a specified property or service that is acquired, or brought into one of these provinces, by a large business for consumption or use by that business in those provinces. Large businesses are those businesses making taxable supplies of more than $10 million annually and certain specified financial institutions.
Specified Property
The RITC requirement will generally apply to specified property and services that are acquired, or brought into Ontario or British Columbia, by a large business for consumption or use by that business in these provinces. Property and services that are acquired in Ontario or British Columbia for consumption or use outside these provinces will generally not be subject to the RITC requirement. In general, specified property and services would include specified energy, such as utilities.
Additional Rents
Standard commercial lease agreements commonly provide for the payment of amounts known as "additional rents" as well as basic rent. Examples of amounts that might be included in a lease agreement as additional rents are percentage rents, common area expenses and certain cost reimbursements such as property taxes, insurance or utilities.
The charges for utilities (heat and electricity) that are billed to the Corporation by their landlords or the utility companies are considered additional rent under the respective lease agreements. This additional rent forms part of the total consideration paid in respect of the supply of the real property. A landlord calculates and collects GST/HST on the amount of the base rent as well as the additional rents. GST/HST must be collected by the landlord on the total consideration for the taxable supply made by the landlord, even if the landlord is not required to pay GST/HST on some of their input costs.
The base rent and additional rent paid by the Corporation for the utilities is consideration for a single supply of real property. The utilities are merely an element of that supply. As such, the Corporation is not acquiring a supply of specified energy. Therefore, the payments to the utility companies on behalf of the landlords, and to the landlords for the utilities included in the rent, will not be subject to the RITC rules.
If you require further information or wish to discuss this further, please contact me at 613-954-4393.
Melissa Mercer
Rulings Officer
Real Property Unit
Financial Institutions and Real Property Division
UNCLASSIFIED
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