19 December 2005 GST/HST Interpretation 63297 - Application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a Certain Management and Operating Lease Agreement

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 XXXXX to Marcel Boivin, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a certain management and operating lease agreement. The agreement was previously reviewed by the XXXXX GST/HST Rulings Centre, which issued a response XXXXX. We have agreed to review the matter again.

All legislative references are to the Excise Tax Act (ETA) unless otherwise noted.

Our understanding of the situation is as follows:

1. The XXXXX "the Centre" was incorporated by an act of XXXXX "the Province" in XXXXX. The Centre was designated as a hospital authority by Revenue Canada (now the Canada Revenue Agency) effective XXXXX, and as such, the Centre is a "hospital authority" as defined in subsection 123(1). The Centre is also a "public institution" and a "public service body", as those phrases are defined in subsection 123(1). Our records indicate that the Centre was registered for the GST/HST on XXXXX, and that the registration was cancelled on XXXXX ^[x]footnote 1.

2. The real property from which the Centre operates is owned by the Province, which we assume has made a supply of the property by way of lease, or similar arrangement to the Centre. The real property includes a parking lot that, until XXXXX, was operated by the Centre to provide parking spaces by way of lease, licence or similar arrangement in the course of a business carried on by the Centre. We do not know whether the parking lot has its own legal description separate from other real property supplied by the Province to the Centre or whether the parking lot forms part of one or more larger parcels of land. ^[xi]footnote 2

3. The Centre entered into XXXXX "the Agreement" with XXXXX "the Auxiliary" to have the Auxiliary manage and operate the parking lot effective XXXXX. The Agreement contains the following provisions:

(a) XXXXX.

(b) XXXXX.

(c) XXXXX.

(d) XXXXX:

(i) XXXXX;

(ii) XXXXX;

(iii) XXXXX;

(iv) XXXXX;

(v) XXXXX, and

(vi) XXXXX.

(e) XXXXX.

The Centre, if eligible, has not filed an election under section 211 in respect of the Property ^[xii]footnote 3.

4. All revenues and expenses from the operation of the parking lot are reported on the financial statements of the Auxiliary. It is our understanding that the revenue generated from the parking lot operation would be in excess of the small supplier threshold set out in sections 148 and 148.1.

5. The Auxiliary is a "charity" as defined in subsection 123(1) and is registered for GST/HST purposes. The Auxiliary has not filed an election under section 211 in respect of the Property.

Issues

1. Should the Centre be collecting HST in respect of the amounts it receives from the Auxiliary under the XXXXX agreement?

2. If there was a change-in-use of the Property, from use in a commercial activity to use in an exempt activity, should the Centre account for tax on the fair market value of the property at the time of the change-in-use?

3. Should the Auxiliary be collecting HST on the parking fees?

Response

1. Though not entirely free from doubt, we consider the Centre to have made a supply of the Property by way of lease to the Auxiliary. If the Property forms a legally described parcel of land, separate from any other real property, the supply to the Auxiliary is excluded from exemption by virtue of paragraph 25(d) of Part VI of Schedule V to the ETA. If the Property merely forms part of a larger parcel of land, the supply of the Property to the Auxiliary will be exempt provided that, immediately before entering the lease with the Auxiliary, that parcel was not used primarily in commercial activities of the Centre.

2. In considering whether the change-in-use rules apply at the time the Property is supplied by the Centre to the Auxiliary, it must be determined whether the Property is capital property of the Centre and whether the primary use of the Property changes at that time. It must be noted that if the Property does not have its own legal description and is merely part of a larger parcel of real property, there will be a change in use only if the primary use of that entire parcel has changed.

If the change-in-use rules apply, it is the basic tax content of the real property that forms the basis of the assessment, rather than the fair market value of that real property.

3. The supply of a parking space by the Auxiliary is exempt under section 1 of Part V.1 of Schedule V to the ETA and therefore no HST should be collected on the supply.

Explanation

The Agreement

It is possible to view the Agreement as nothing more than a contract for management services to be provided by the Auxiliary to the Centre. Some of the terms in the Agreement could be consistent with either a contract for the supply of management services or for a supply of the Property by way of lease. However, there are some indications that the Agreement is best characterized as a supply of the Property by way of lease from the Centre to the Auxiliary.

•   There is a demise of property. XXXXX refers to the XXXXX and the Property is described in XXXXX the Agreement. Perhaps ideally, the demise of the Property would be more explicitly stated in the preamble (which instead refers to the management and operation of parking services on the Property) or in a separate paragraph of the Agreement. Nonetheless, the fact that the Agreement refers to the demised Property cannot be ignored ^[xiii]footnote 4.

•   The terms used by the parties in the agreement (i.e., it is referred to as a lease), while far from conclusive in establishing the existence of a lease, cannot be ignored.

•   If the Agreement were only a contract for the management of the parking lot, one could expect to see a greater degree of control as to how the management activities are to be performed (e.g., hours of operation, minimum/maximum vehicle occupancy, minimum staffing requirements). Instead, the Auxiliary is given a degree of control of the Property in that its only main restriction is to use the Property as a parking lot ^[xiv]footnote 5. It is possible to consider the lack of specific control or accountability mechanisms as support for a finding that the Centre has made a supply of the Property and that the Agreement is not merely a contract for the supply of management services.

•   The fact that the Auxiliary must XXXXX suggests that the Auxiliary was given an interest in the Property. If the Auxiliary had not been given such an interest, it may not be necessary to include such a provision. ^[xv]footnote 6

In commercial practice, it is common for leases of property for certain lengths of time to be registered at the provincial land titles office ^[xvi]footnote 7. You may wish to ascertain whether the Agreement has been so registered. If it has, that would lend further support to a finding that the Property has been supplied by way of lease. We would caution you, however, that the non-registration of the Agreement does not mean that the Property has not been supplied by way of lease.

There are other indications that the Centre made a supply of the Property to the Auxiliary. The fact that the full revenues and expenses from the parking lot operation are reported in the Auxiliary's financial statements suggests that they are not merely providing management services to the Centre. If such were the case, the revenues of the Auxiliary would only be the consideration they receive from the Centre for managing the Property and the parking lot revenues would be treated as those of the Centre.

Accordingly, while not entirely free from doubt, it is our opinion that the Agreement provides for a supply of the Property by way of lease from the Centre to the Auxiliary.

A supply of real property by a public service body is exempt unless any of the exceptions to exemption, as identified in paragraphs 25(a) through 25(h) of Part VI of Schedule V to the ETA, apply. Subparagraph 25(f)(i) excludes from exemption a supply of real property by way of lease where the supply is made in the course of a business carried on by the body and the period throughout which continuous possession of the property provided under the lease is for less than one month. In the case at hand, continuous possession is given for a period of XXXXX years less a day and therefore that exception to the exemption does not apply. However, paragraph 25(d) excludes from exemption a supply of real property where, immediately before the time tax would be payable in respect of the supply if it were a taxable supply, the property was used primarily in commercial activities of the public service body.

If the Property is a legally described parcel of land in its own right, separate from other real property that the Centre has acquired from the Province, one must consider whether the Property was used primarily in commercial activities before it was leased to the Auxiliary. Given that the Centre operated the parking lot up until the time the Property was leased to the Auxiliary and the supply of a parking space by way of lease, licence or similar arrangement by the Centre is excluded from exemption by virtue of paragraph 25(h), the supply by way of lease to the Auxiliary would be excluded from exemption by virtue of paragraph 25(d). Note that under the concept of lease intervals in subsection 136.1(1), each subsequent supply by way of lease of the Property from the Centre to the Auxiliary for each lease interval would also be excluded from exemption by virtue of paragraph 25(d) of Part VI of Schedule V to the ETA.

If the Property is merely part of a larger parcel of land, the exception in paragraph 25(d) of Part VI of Schedule V to the Act will apply only if that entire parcel of land was used primarily in commercial activities. If that entire parcel was not used primarily in commercial activities immediately before the lease of the Property to the Auxiliary began, the supplies to the Auxiliary will be exempt as no other exceptions in section 25 of Part VI of Schedule V apply.

Change-in-use

Prior to XXXXX, the Centre was operating the parking lot and the supply of parking spaces was excluded from exemption by paragraph 25(h) of Part VI of Schedule V to the ETA. Upon the supply of the Property to the Auxiliary, if that supply is exempt (as determined in accordance with the foregoing), the Centre would face a change in use of the Property. The change-in-use provisions of subsection 200(2) would apply at the time of the change-in-use. If the supply to the Auxiliary is not exempt (again as determined in accordance with the foregoing), there will be no change-in-use as the Centre used the property primarily in commercial activities both before and during the lease of the Property to the Auxiliary.

Supply of parking by the Auxiliary

Section 1 of Part V.1 of Schedule V to the ETA provides an exemption for a supply of any property or service made by a charity, other than a supply identified in paragraphs 1(a) through 1(n). None of the exceptions to the exemption apply to the supply of a parking space made by the Auxiliary and as such, the supply is exempt.

Additional Information

We note that the GST/HST account of the Centre was cancelled effective XXXXX. You may wish to ascertain whether that cancellation was valid. It is not clear whether the commercial activities carried on by the Centre began to be carried on by some other entity (e.g., XXXXX) after XXXXX. If the Centre continues to make supplies in the course of a commercial activity and is not a small supplier, as set out in sections 148 or 148.1, registration for the Centre is mandatory.

We would also like to point out that if the XXXXX is the person now making supplies of the Property to the Auxiliary, the supply would be exempt insofar as the Authority is also a public service body.

If you require clarification with respect to the issues discussed in this letter, please call me at 613-954-4393.

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