12 July 2004 GST/HST Interpretation 49606 - PROPOSED LAW/REGULATION Eligibility to claim input tax credits related to pension plan expenses

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.

We refer to your memorandum XXXXX to Costa Dimitrakopoulos concerning the application of the Goods and Services Tax (GST) to certain deemed supplies made under the Excise Tax Act (the Act).

All legislative references are to the Act.

Background

1. XXXXX (the Residence) is a residential facility located in XXXXX and is legally described as XXXXX. The Residence is owned by the operator, XXXXX (the Corporation). The Residence is not a condominium complex.

2. The Residence is a multi-unit facility that offers a retirement living environment to individuals living there (the Residents). The Residence contains three types of apartments - studios, one bedroom and two bedroom suites. The apartments include carpeting and draperies, but are otherwise unfurnished. Each apartment contains a kitchenette with cupboards, a sink and a refrigerator, and there are heating and air conditioning controls in each unit. Most apartments also feature a balcony or patio.

3. In addition to the above, the Residence includes a common dining room, a private dining room (used for special occasions such as Residents' birthdays, etc.), a laundry room where Residents can wash and dry clothes, a billiard room, an activity/exercise room, a chapel, a room where individuals can play cards, a library and a television room. All of these rooms are for the use of the Residents and their guests. The Residence also includes a beauty salon/barber shop, where Residents can, for an additional fee, receive beauty services and haircuts.

4. In addition to the use of a specific apartment, a Resident receives the following property and services:

(a) Three meals per day served in the common dining room (meals for guests can be purchased for an additional fee)

(b) All utilities, except telephone, including cable television

(c) No charge laundry facilities where the Resident can launder his or her clothes

(d) Weekly housekeeping and linen services

(e) Use of a parking space

(f) A number of social events in which the Resident may partake

(g) Emergency pull cords in each apartment

(h) Use of the billiard lounge, activity/exercise room, chapel, card room, library, and TV room

(i) Free, scheduled bus transportation services for shopping, banking and medical appointments

(j) XXXXX

5. There are two live-in couples that manage the Residence on a 24-hour per day basis and that can provide immediate emergency assistance.

6. A Resident who moves into the Residence enters into a rental agreement (the Rental Agreement), a sample of which XXXXX was included with your submission. The Rental Agreement contains the following provisions:

(a) The Landlord agrees to rent a specific apartment in the Residence to a Resident for their personal use;

(b) Staff at the Residence are allowed to enter the apartment to perform the basic housekeeping services and therefore additional locks are not permitted on the entrance door to the apartment;

(c) A Resident must be capable of providing their own health care and personal care needs. Staff at the Residence do not offer assistance with medications, bathing, dressing, mobility needs, or other health or personal care activities; a Resident must certify that they are capable of providing for themselves in these regards and must move out of the Residence if they become incapable of providing for their own care;

(d) The Resident cannot assign or sublet their apartment without the written permission of the Landlord.

7. The current price charged to a Resident for the above property and services, including the supply of the unit, is as follows:

•   Studio apartment, single occupancy - $XXXXX - $XXXXX per month

•   One-bedroom apartment, single occupancy - $XXXXX - $XXXXX per month

•   Two-bedroom apartment, single occupancy - $XXXXX - $XXXXX per month

An additional individual may occupy any apartment for an additional $XXXXX per month. These fees do not vary regardless of whether a Resident uses all, some or none of the property and services over and above the use of the apartment.

8. We are assuming that the conditions in paragraphs 191(3)(a) through (c) have been met in this case, such that the Corporation faces a self-supply in respect of the Residence.

Issue

You are enquiring as to what the object of the self-supply rules should be and the methodology you should use in determining a fair market value of the Residence. You also asked why section 191.1 does not apply to for-profit entities.( The remaining issues you raised, as set out on page 2 of your enquiry, relate to issues of methodology.)

Response

Please note that the method for valuing the property is beyond the purview of responsibilities for this Directorate. XXXXX

We would like to point out that the Act does not define the term "fair market value" other than to state that the fair market value (FMV) is to be determined without reference to the GST/HST or to provincial retail sales taxes. We recognize that there are three general methods used to arrive at the FMV of property, the cost, income and direct comparison method and that no particular method or approach to market valuation should be categorically excluded. The standards of the Appraisal Institute of Canada require that an appraisal of FMV be based on the "highest and best use" of the subject property which is defined as "the reasonably probable and legal use of the property, that is physically possible, appropriately supported, and financially feasible, and that results in the highest value". We would add that the courts have accepted, utilized and relied upon the concept of the highest and best use in arriving at FMV.

With respect to the object of valuation, i.e., the property or parts thereof that is to be valued for purposes of subsection 191(3), we provide the following comments.

Subsection 191(3) provides that when certain conditions are met, a person is deemed to make and receive a taxable supply by way of sale of a multiple unit residential complex. The person is considered to have paid as recipient and collected as supplier tax calculated on the FMV of the complex at the later of the times set out in paragraph 191(3)(d).

Accordingly, the object of valuation is the residential complex. The phrase "residential complex" is defined in subsection 123(1) to mean that part of a building that contains one or more residential units (i.e. the apartments) together with

"(i) 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, and

(ii) that proportion of the land subjacent to the building that that part of the building is of the whole building".

The units in the building, the appurtenances to it, the common areas of it, and the land contiguous to it will form part of the residential complex, provided they are reasonably necessary for the use and enjoyment of the building where the units are located as a place of residence. We would add that if residential units are located in more than one building, each building would be a separate multiple unit residential complex, even if those buildings are located on the same legally described property.

In every case it is a question of fact as to whether any of the above components are reasonably necessary for the use and enjoyment of the building where the units are located as a place of residence. In the context of the Residence, it may not be unreasonable to consider the following as being "reasonably necessary ..." and therefore included in the residential complex:

•   The dining rooms (both the main room and the private room) as well as a kitchen used in preparing the meal, if applicable

•   The laundry room that is for use of the Residents as well as a laundry room used by the operator in providing the linen services to Residents

•   Parking spaces for use of the residents

•   The billiard room, activity/exercise room, card room, library and television room.

If the above are used solely to make supplies to Residents (and in some cases, their guests) it is reasonable to conclude that the rooms and parking spaces form part of the residential complex. If however, the rooms were used in some other business operated by the supplier (e.g. if the dining room was also open to members of the public who are not guests of the Residents) or if the parking lot was operated for use of the general public, it is unlikely that these components would, to a full extent, form part of the residential complex.

With respect to the application of section 191.1, there is nothing in that section that prevents the section from applying to a for-profit entity. If a for-profit entity receives or can reasonably expect to receive "government funding" (as that phrase is defined in that section) in respect of the complex and the remaining conditions of that section are met, the provisions of that section will apply to the for-profit entity.

It is true that section 191.1 does not apply to a builder that does not receive (and cannot reasonably expect to receive) government funding in respect of a residential complex (unless the builder is a government or a municipality). The reason the section does not apply to non-government funded builders (other than the exceptions noted) was a legislative decision taken by the Department of Finance when it drafted the legislation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-4393.

2004/07/05 — RITS 49726 — Employee Benefits