13 August 2004 GST/HST Interpretation 49032 - Section 201 of the Excise Tax Act

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.

Dear XXXXX:

We refer to your letter XXXXX (with attachments) and your e-mails XXXXX concerning the application of the Goods and Services Tax (GST) to supplies made by XXXXX operating as XXXXX, and the response from our XXXXX Tax Services Office XXXXX. As indicated in that letter your question regarding the tax status of amounts charged at the termination of a life lease agreement was forwarded to our unit for response. We refer also to our letter to XXXXX on the same subject.

Statement of Facts

Our understanding of the relevant facts is as follows (for additional facts see XXXXX):

1. XXXXX is a registered charity within the meaning assigned by subsection 248(1) of the Income Tax Act. XXXXX is not registered for GST/HST purposes.

2. XXXXX operates XXXXX facilities for seniors' housing referred to as XXXXX. Within XXXXX and XXXXX, housing units ("Unit" or "Units") are leased to individuals ("Resident" or "Residents") under a life lease.

3. The life lease involves the Residents making a lump sum payment to XXXXX for the purchase of the right to use the Unit (the "right to use") arising under the Offer to Purchase agreement, and a monthly occupancy fee to provide for the Resident's proportionate share of the cost of operating the Units arising under the Occupancy & Operating Agreement (the "Occupancy Agreement"). The Offer to Purchase states that the right to use is personal to the purchaser and in no way creates an interest in the real property.

4. The Occupancy Agreement provides that the agreement is terminated:

•   Following the election by the Resident to vacate the premises;

•   Upon the death of the Resident;

•   Following the election by XXXXX, in accordance with the terms of the agreement, to terminate the Resident's residency.

5. When a life lease is terminated, XXXXX redeems the Resident's right to use. The Occupancy Agreement provides that upon the termination of the Resident's right to use, XXXXX repays the principal sum (i.e., the redemption value) owing to the Resident less monies owing to XXXXX pursuant to the Occupancy Agreement. These amounts owing to XXXXX are itemized in the formula contained in the Mortgage executed and delivered by XXXXX when the Occupancy Agreement is entered into in order to secure the repayment of sums the Resident is entitled to receive when the life lease is terminated.

6. The amounts owing to XXXXX include amounts that XXXXX charges back to the Resident for costs related to the use of the Unit. These costs include: the "Fixed Unit Resale Fee", the "Depreciation of appliances & floor coverings charges"(the "Depreciation Charge") and the "Restoration Charge".

•   The Fixed Unit Resale Fee is established from time to time at the sole discretion of XXXXX, but is in no case to exceed XXXXX of the amount reimbursed to the Resident at the termination of the life lease, for the purpose of recovering costs incurred by XXXXX over the long run (as opposed to costs on a specific unit basis) of re-marketing units, including advertising, promotion, selling expenses, staff time charges, legal, administrative and other costs involved with the marketing and selling of interests in units, as well as carrying costs of holding units in inventory awaiting resale including occupancy fees, interest, utilities and maintenance on units.

•   The Depreciation Charge represents the cost of any replacement of or repairs to the appliances or other objects, or XXXXX estimate thereof, necessitated by the Resident's removal of or damage thereto. For the purpose of establishing a value for the appliances they shall be depreciated at the rate of XXXXX percent (XXXXX%) per year using the straight-line method of depreciation. XXXXX will charge the Resident at the conclusion of the Occupancy Agreement whether or not the appliances have been kept in a reasonable state of repair or have been removed or damaged.

•   The Restoration Charge represents any restoration, cleaning or repair costs, or XXXXX estimate thereof, necessitated to restore the Unit to the general standard of first-class housing facilities in the City of XXXXX.

7. XXXXX of the Occupancy Agreement provides that "the Resident shall keep and maintain the unit in a good and reasonable state of repair and consistent with the general standard of first-class housing facilities in the City of XXXXX including, without limiting the generality of the foregoing, all interior partitions, fixtures, and improvements in the aforementioned premises and all electrical and telephone outlets and conduits and any appliances, fixtures and shelving, reasonable wear and tear, damage resulting from structural defects or damage caused by fire, lightning and XXXXX or any other casualty with respect to which XXXXX has received proceeds of insurance only excepted; ...". In case the Resident shall fail to do the repairs, maintenance or replacements required of him in a manner satisfactory to XXXXX and pay for the same, the latter may do so and add the cost thereof to the Resident's next month's occupancy costs. All appliances provided by XXXXX must remain with the nit upon termination of the agreement and shall be valued in accordance with the formula in the Mortgage.

8. XXXXX the Occupancy Agreement also provides that upon surrender of possession of the Unit to XXXXX, the Resident will restore and deliver the Unit in the same condition in which the Resident is required to maintain the Unit. In the event that vacant possession is given to XXXXX and the Unit returned has not been satisfactorily maintained, the Resident shall be responsible for any costs incurred by XXXXX in restoring the premises to its first-class state.

Ruling Requested

What is the GST status of the Fixed Unit Resale Fee, the Depreciation Charge and the Restoration Charge, charged to the Residents at the termination of the lease?

Ruling Given

Based on the facts set out above, we rule that the payment for the Fixed Unit Resale Fee and the Depreciation Charge is additional consideration for the supply of the Unit by way of lease that is an exempt supply pursuant to paragraph 6(a) of Part I of Schedule V. We rule that the Restoration Charge is not consideration for a supply and is not subject to GST.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

As outlined in our letter XXXXX, the supply of the housing Units by way of lease made by XXXXX to the Residents is exempt pursuant to paragraph 6(a) of Part I of Schedule V to the ETA.

•   It is our view that the Fixed Unit Resale Fee is additional consideration for the supply of the Unit by way of lease. The payment can reasonably be regarded as relating to the use of the Unit and is therefore exempt pursuant to paragraph 6(a) of Part I of Schedule V.

•   It is our view that the Depreciation Charge is additional consideration for the supply of the Unit by way of lease as it is charged for the estimated usage of the appliances whether or not the appliances have been kept in a reasonable state of repair or have been removed or damaged. In that case the payment would be exempt pursuant to paragraph 6(a) of Part I of Schedule V.

•   It is our view that the Restoration Charge is an amount (other than consideration) payable as a consequence of the breach of the Occupancy Agreement as the fee is charged to Residents who, upon termination of the agreement, have failed to do the necessary repairs, maintenance or replacements as required under the Occupancy Agreement. The amount is not consideration for a supply and is not subject to GST. Subsection 182(1) does not apply because the Occupancy Agreement is for the making of an exempt supply.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9587 or Costa Dimitrakopoulos at 954-3772.

Yours truly,

Béatrice Mulinda
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2004/08/26 F — RITS 49943 — Traitement fiscal des frais de transfert et de sortie payés aux assureurs