16 June 2004 GST/HST Interpretation 47877 - Articles Specially Designed for the Use of Blind Individuals

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:

This is in reply to your letter XXXXX concerning the application of the Goods and Services Tax/Harmonized Sales Tax ("GST/HST") to the purchase of a mixed-use building by an individual. We apologize for the delay in responding.

All references are to the Excise Tax Act ("ETA").

Scenario

1. A partnership owns a single parcel of real property consisting of a building and related land (the "Property"). The partnership is registered for purposes of the GST/HST and is neither a charity nor a public service body.

2. XXXXX percent of the building is used as a place of residence of the partners (the "Residence Portion"). The Residence Portion is not a condominium complex.

3. The Property is currently listed for sale at $XXXXX, including XXXXX.

4. A potential purchaser, an individual, may acquire the Property. If so, XXXXX would transform XXXXX% of the building formerly attributable to the Commercial Portion into a number of residential units (more than two). For purposes of this interpretation, we will assume that all of the residential units, including the former Residence Portion, would be grouped together to form a multiple unit residential complex (the "MURC").

5. The residential units in the MURC would be leased to residential tenants on a long-term basis. One of the units would be occupied by the individual as a place of residence.

6. The remaining XXXXX% of the building would be for future use in the course of commercial activities of the individual but would be vacant for some time immediately following acquisition of the Property. The Property would remain as one legal description.

7. The individual estimates that the improvements to the Commercial Portion will cost approximately $XXXXX. XXXXX estimates that the fair market value of the Property when the improvements are complete would be approximately $XXXXX

8. The individual is not a GST/HST registrant and therefore would not claim input tax credits ("ITCs") in respect of the Property or improvements thereto.

Questions

The above scenario raises the following questions:

1. What is the GST/HST treatment of the sale of the Property to the individual?

2. What are the GST/HST implications in respect of the acquisition of the Property?

Interpretation and Analysis

1. Sale of the Property by the partnership

Sales of real property are generally subject to the GST/HST unless specifically exempt. Generally speaking, the sale of a used residence is exempt from the GST/HST if it qualifies as a "residential complex" under the definition of that term in subsection 123(1). Pursuant to paragraph (a) of the definition, a "residential complex" includes that part of a building in which one or more residential units are located, together with that part of any common areas and other appurtenances to the building and the 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. Accordingly, the Residence Portion would qualify as a "residential complex" for GST/HST purposes.

Given that the Residence Portion is a "residential complex", we would generally view it as separate property from the Commercial Portion by virtue of subsection 136(2). Under the latter provision, where a supply of real property includes a residential complex and other real property which is not part of a residential complex, the supply of the complex is deemed to be a separate supply from the other real property and neither supply is incidental to the other. Further, it is our position that where real property is acquired in circumstances where subsection 136(2) applies, the residential complex and other real property that is not part of the residential complex continues to be recognized for GST/HST purposes as separate properties subsequent to the supply.

Given that the Property consists of a residential complex XXXXX and other property that does not form part of the residential complex XXXXX, we will assume that the Property was either acquired by the partnership in that form or, if not, that the partnership changed the use of the Property to its current proportions. In the former case, subsection 136(2) would have applied upon the original acquisition of the Property by the partnership. In the latter case, subsection 136(2) would have applied in respect of a deemed sale under either of sections 207 or 208.

As explained above, the Residence Portion and the Commercial Portion would continue to be separate properties subsequent to the initial application of subsection 136(2). Accordingly, where the partnership sells the Property, the Residence Portion would continue to be recognized as separate property from the Commercial Portion. In the case where subsection 136(2) did not apply upon acquisition or upon a change-in-use by the partnership (for example, if the partnership constructed the Property), it would nevertheless apply when the Property is sold to the individual. In any of the preceding events, the tax status of each portion of the Property would be considered separately.

Sale of the Residence Portion

Under the circumstances, the supply of the Residence Portion by the partnership may be exempt pursuant to either section 2 or section 4 of Part I of Schedule V.

Section 2 exempts the sale of a residential complex or an interest therein by a person who is not the builder of the complex, unless the person claimed an ITC in respect of the last acquisition of or an improvement to the complex. For this purpose, the partnership would be a "builder" under the definition in subsection 123(1) if it is described by any of paragraphs (a) to (e) therein. If any of those paragraphs apply, section 2 above would not exempt the sale of the Residence Portion; however, it may still be exempt pursuant to section 4 of Part I of Schedule V.

Section 4 exempts the sale of a single unit residential complex or an interest in the complex where the sale is made by the builder and the builder had previously self-supplied under section 191 in respect of the complex. However, paragraph 4(c) provides that the sale of the complex by the builder is not exempt under section 4 if the builder substantially renovated the complex (or engaged another person to do so) after the last acquisition of the complex by the builder. Paragraph 4(d) further provides that the sale of the complex is not exempt under section 4 if the builder claimed an ITC in respect of the last acquisition of the complex or an improvement thereto after the last acquisition of the complex.

If the partnership were a "builder" of the Residence Portion, it would have been required to self-assess pursuant to subsection 191(1); as such, the requirement in paragraph (b) above would have been satisfied. As long as paragraphs 4(c) and (d) above do not apply, the sale of the Residence Portion by the partnership would be exempt from the GST/HST pursuant to section 4 above.

Sale of the Commercial Portion

The sale of real property by a person is a "commercial activity" of the person, as defined by subsection 123(1), and is a taxable supply pursuant to sections 165 and 166 except where the supply is otherwise exempt. Under the circumstances, there would be no exemptions available in respect of the sale of the Commercial Portion by the partnership. Accordingly, it would be subject to the GST/HST when sold to the individual.

2. Tax consequences of the acquisition of the Property by the individual

Under the circumstances, the provisions of the ETA relating to deemed self-supplies of real property should be examined to determine their application, if any. Note that since the individual is not a registrant, the change-in-use provisions of sections 207 and 208 are not considered here.

Subsection 190(1)

Pursuant to subsection 190(1), where a person begins to hold or use real property as a residential complex, the person may be deemed a builder who substantially renovated the complex. For these deeming provisions to apply, all of the following conditions must exist:

(a) the property must have been

(i) last acquired by the person to hold or use as a residential complex, or

(ii) immediately before that time, held for supply, or used or held for use as capital property, in a business or commercial activity of the person,

(b) immediately before the person begins to hold or use real property as a residential complex, the property was not a residential complex, and

(c) the person did not engage in the construction or substantial renovation of, and is not, but for section 190, a builder of the complex.

For purposes of subsection 190(1), a "residential complex" is defined, in part, as "... that part of a building in which one or more residential units are located." In the present case, when the individual transforms the building for the specified uses, XXXXX% of the building then qualifies as a "residential complex" (That portion would also become a "multiple unit residential complex" under the definition provided in subsection 123(1)). At that time, subsection 136(2) can no longer apply to divide the Property in its previous ratio XXXXX. Specifically, since subsection 136(2) cannot apply to deem the former Residence Portion to be a separate property from another part of the Property now forming part of the MURC (The Federal Court concluded in The Queen v Sneyd, that a single unit residential complex cannot exist within a multiple unit residential complex.), subsection 136(2) will divide the Property in the new ratio XXXXX when the Property is transformed.

It is our opinion in this case that since the former Residence Portion was a residential complex immediately before it became part of the MURC, the condition in paragraph 190(1)(b) above would not be met. Accordingly, the deeming provisions of subsection 190(1), which would have potentially deemed the individual to be a builder and to have substantially renovated the MURC (which includes the former Residence Portion), would not apply.

Subsection 190(2)

Under subsection 190(2), self-assessment of GST/HST is necessary where real property is appropriated for the personal use or enjoyment of the individual and, immediately before the appropriation, the property was

(a) held for supply or used as capital property in a business or commercial activity of the individual, and

(b) not a residential complex.

As discussed above, it is our view in this case that immediately before the individual transforms the Property to its new proportions, the former Residence Portion is a residential complex. As such, the requirement of paragraph (b) above would not be met. Subsection 190(2) would therefore not apply to require self assessment of the MURC.

Subsection 191(3)

Subsection 191(3) will generally apply where:

(a) the construction or substantial renovation of a MURC is substantially completed,

(b) the builder of the complex gives possession of any residential unit in the MURC under a lease, licence or similar arrangement entered into for the purpose of the occupancy of the unit by an individual as a place of residence or, if the builder is an individual, occupies it himself for that purpose, and

(c) the builder or individual (as the case may be) is the first individual to occupy a residential unit in the MURC as a place of residence after substantial completion of the construction or renovation.

Where these conditions exist, the builder of the MURC is deemed to have made and received, at the later of the time the construction or substantial renovation is substantially completed and the time possession of the unit is so given to the particular person or the unit is so occupied by the builder, a taxable supply by way of sale of the MURC and to have paid and collected tax on its fair market value.

Whether subsection 191(3) applies in the present case will depend on whether the improvements to the MURC constitute a "construction" or "substantial renovation" (Under the circumstances, the individual may be considered to be a builder under subparagraph (a)(iii) of that definition.)

Black's Law Dictionary defines "construction" as:

"The creation of something new, as distinguished from the repair or improvement of something already existing ..."

Since the MURC in the present case is created within an existing building, we would not consider the individual to have constructed it. Subsection 191(3) would therefore not apply unless the improvements could be considered as a substantial renovation.

To qualify as a "substantial renovation" under the definition in subsection 123(1), all or substantially all (generally 90% or more) of the existing building that is a residential complex would have to be removed or replaced, excluding certain structural elements. Note that in the case of a mixed-use building such as the Property, we would not require the remaining XXXXX% of the building now attributable to the individual's commercial activities to have been substantially renovated for the MURC to qualify under the definition. In other words, the MURC may be evaluated separately from the non-MURC portion of the Property. Nevertheless, if only XXXXX% XXXXX of the MURC is improved, it would not qualify as having been substantially renovated.

Given that the improvements to the MURC would not qualify as a construction or substantial renovation, subsection 191(3) will not apply to require the individual to self-assess in respect of the MURC.

Rebates

As you are aware, section 257 may generally allow a rebate to non-registrants in respect of taxable supplies of real property by way of sale. However, as explained above, none of subsections 190(1), 190(2) or 191(3) would apply to deem a taxable sale of real property; as such, the conditions under which a section 257 rebate would be available do not exist in this case.

Regarding housing rebates, subsection 256.2(1) generally allows a New Residential Rental Property Rebate ("NRR") where the relevant conditions set out in subsection 256.2(3) are met. Under the circumstances, we would not consider the individual to be a "builder" of the MURC (As explained previously, we will not consider the MURC to have been constructed or substantially renovated for purposes of paragraphs (a) and (b) of the definition of "builder". Further, since the former Residence Portion was previously occupied, we would not consider the condition in subparagraph (d)(ii) of the definition of "builder" to be met.). As a result, only the qualifying condition in subparagraph 256.2(3)(a)(i) is relevant in this case. However, because the individual was not the recipient of a taxable supply by way of sale of a residential complex, subparagraph 256.2(3)(a)(i) is not applicable. The individual is therefore ineligible for a NRR.

Finally, since we would not consider the individual to have constructed or substantially renovated the MURC, the individual would not meet the eligibility criteria in paragraph 256(2)(a) for a new housing rebate. Moreover, the individual will not be eligible for a new housing rebate under section 254 as the eligibility criteria in paragraph 254(2)(a) requiring a builder to make taxable supply of single unit residential complex to an individual is not met.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above or any other GST or Harmonized Sales Tax matter, please do not hesitate to contact me at (613) 952-8816.

Yours Truly,

Paul Hawtin
Rulings Officer
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2004/07/06 — RITS 48523 — [Fees as a Supply of Financial Service]