1 September 2005 GST/HST Ruling 63026 - ITC eligibility in respect of coupon program

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.

In response to your request XXXXX, we wish to provide the following comments.

Our comments pertain to two main subject areas XXXXX: (1) Determining entitlement to ITCs under paragraph (b) in section 169 of the Excise Tax Act (ETA) and (2) Using time available for rent as a basis for determining the extent to which university residences are used in commercial activities.

(1) Determining entitlement to ITCs under paragraph (b) in section 169

XXXXX in determining ITCs in respect of property or services acquired for the purpose of improving capital real property (hereafter referred to as "improvements") of a university or college. XXXXX the essential differences between paragraphs (b) and (c) in subsection 169(1).

In our view there are significant differences between the conditions set for claiming ITCs in paragraphs 169(1)(b) and (c). If this were not the case and these paragraphs employed essentially the same methodology to achieve the same ITC result, there would be no need for the ETA to set out separate ITC provisions for improvements to capital property and for all other inputs. We also note that paragraph 169(1)(c) begins with "in any other case" and as a result paragraph (c) is clearly intended to apply only in cases where paragraph 169(1)(b) does not apply.

Insofar as paragraph 169(1)(c) is concerned, we largely concur with your XXXXX. ITCs can be claimed under paragraph (c) to the extent that various inputs are acquired for use in commercial activities of the registrant. Typically this "extent of use" condition is met using a fair and reasonable method of matching direct inputs to commercial and non-commercial activities and allocating indirect inputs between such activities.

XXXXX paragraph 169(1)(b) sets out an "extent of use" condition that measures the extent to which a registrant is using capital property (CP) in the course of its commercial activities. Thus, unlike paragraph 169(1)(c), the "extent of use" in paragraph (b) is expressed only in terms of one input, that being the CP of a registrant. This expression of "extent of use" is then applied to all inputs acquired as improvements to that same CP. In doing so, paragraph (b) codifies a particular "indirect method" of determining ITCs for improvements to CP.

XXXXX.

The particular measure of "extent of use" used in paragraph 169(1)(b) is uniformly applied to determine ITCs for all improvements to a particular CP. Thus, for purposes of paragraph (b), it does not matter whether improvement to the CP can be attributed: entirely to a commercial activity; to the making of exempt supplies; or some combination thereof. Essentially, paragraph (b) treats all improvements acquired in respect of CP as though they relate to every part of the CP equally and requires that the "extent of use" percentage used for ITC purposes be based solely on how much the CP, as a single input, is used in commercial activities. In this way paragraph (b) represents a departure from the matching of inputs to outputs, espoused in paragraph 169(1)(c).

For instance, consider Buildings A and B located on the same parcel (i.e., with one legal description ^[xviii]footnote 2 where Building A is used exclusively for making taxable supplies and Building B is used exclusively for making exempt supplies. Under paragraph 169(1)(b), a window installed in Building A is given the same ITC treatment as a window installed in Building B.

Applying paragraph 169(1)(b) requires a "yardstick" (i.e., a standard unit of measure) that accurately measures the extent to which CP is used in commercial activities, expressed as a percentage, at the time of the CP's last acquisition (which would include any deemed acquisition resulting, for example, from a change-in-use).

The most obvious and commonly used "yardsticks" for expressing the extent of use of real property that is capital property (CRP) in commercial activities are: square footage/meters of floor space, square yards/meters of land and acres/hectares of land. The ITC allocation methods that use these measures are referred to in this memorandum as "space-based" methods. We acknowledge that these yardsticks may not always provide an accurate measure of the extent to which CRP is used in commercial (versus non-commercial) activities. Where this is the case, a "space-based" method may not be a fair and reasonable method of determining the extent of use of CRP in commercial activities, as required in subsection 141.01(5). However, as a general rule, a "space-based" method is often the starting point for determining the extent of use for CRP.

The CRA's published policy for determining if CRP is used primarily in a business for purposes of paragraph 9(2)(a) of Part I of Schedule V ^[xix]footnote 3, sets out a multi-factor approach to determining the extent of use of CRP. A "space-based" method is recognized as being applicable particularly where certain portions of the CRP are dedicated exclusively to either commercial or non-commercial activities. The policy also recognizes that in some cases other (non-space-based) factors may need to be introduced to arrive at a fair and reasonable method of measuring the extent of use of the CRP. For example, this would occur where all square meters of the CRP are not equal in terms of expressing the extent of use of the CRP in commercial activities or where there are time-based considerations. In this case, the CRA's policy is to permit the use of additional factors necessary to provide an accurate measurement of the extent of use of the CRP in commercial activities. Some of the additional factors mentioned include: time spent, value of unimproved land used, value of improvements previously made, (etc.). However, we wish to caution against the use of factors (yardsticks) that provide a measure of commercial activity but that are not proportionately related to the extent that the CRP is used in that commercial activity.

For example, consider where a single parcel of CRP owned by the university comprised of Building A, Building B and a parking lot. Building A is used 100% in a commercial activity, Building B is used 100% in making exempt supplies and the parking lot is used 100% in making taxable supplies of parking spaces. Building A and B are situated on 50% of the total land area in the parcel, both buildings are equal in size, with each having 10 floors of useable space and each building is approximately equal in terms of its value as an improvement to the CRP. Thus, in terms of size, value of improvements and time spent, the extent of the CRP used in Building A and B are equal. However, two significant differences exist between the activity carried on in Building A and Building B. The costs of labour and electricity inputs for the activity in Building A are twice as great as that required in Building B. The parking lot comprises the remaining 50% of the land area included in the parcel. What is the extent (expressed as a percentage) to which the university is using this CRP in commercial activities for purposes of paragraph 169(1)(b)?

Since there are distinct areas of the parcel used in commercial activities and non-commercial activities and there are no time-based considerations (i.e., the distinct areas of the parcel are dedicated exclusively to one use at all times), the space-based method cannot be considered unreasonable unless it can be shown that a unit of space is not a consistent measure of the extent to which the parcel is used in commercial activities.

While the land area where two 10-floor buildings are situated is equal to the land area included in the parking lot, these portions of the CRP are not equal in terms of the extent to which each portion has been improved. Where certain portions of a parcel dedicated to commercial use are not improved to the same extent as other portions dedicated to non-commercial use, the space-based method must measure not only the horizontal plane (i.e., land areas) but also the vertical plane (i.e., the floors above ground level). In this case, suppose the total space dedicated to commercial use (i.e., the land area necessary for Building A, the 10 floors in Building A and the land area in the parking lot) is 45% of the total space in the parcel. In this case, the only other factor to consider would be the relative values of the improvements within the areas dedicated to commercial and non-commercial use, respectively.

The fact that the labour and electricity inputs for Building A and B are not equal may be relevant for purposes of matching inputs to outputs in paragraph 169(1)(c), however this is irrelevant for purposes of paragraph 169(1)(b) unless there is a consistent relationship between these inputs and the CRP used in commercial activities. The task in paragraph (b) is to find proportionality between the use of the CRP, as the singular input, and the commercial activities taking place on that CRP. The fact that one activity is more input intensive than another, does not necessarily mean that the extent of CRP used in each activity also differs in a proportionate way.

For example, if the total inputs required to produce taxable widgets in Building A is 5 times greater than the total inputs required to produce exempt gadgets in Building B, this does not necessarily mean that 5 times more of the CRP is used to make widgets than to make gadgets.

Similarly, if the total output (or revenue) from producing widgets is 5 times greater than the total output (or revenue) from producing gadgets, this does not necessarily mean that 5 times more of the CRP is used to make widgets than to make gadgets. In paragraph 169(1)(b) all units used to measure commercial activity must find their expression in terms how much of the CRP is used as an input into the making of taxable supplies.

In determining whether a unit (e.g., a square meter) of floor space is equivalent to a unit of parking space as a measure of the extent of use of CRP, one approach is to compare their respective "values as improvements" to the CRP at the time the measurement is taken. Where each square meter of space is equal in terms of its "value as improvements", then the "space-based" method is likely to be accepted as a reasonable method for purposes of paragraph 169(1)(b). If this is not the case, because one space is improved to a significantly greater extent than the other, then the space-based method may be considered unreasonable on its own, justifying the introduction of their relative "value as improvements" as a factor to modify the space-based method.

(2) Using time available for rent as a basis for determining the extent to which university residences are used in commercial activities.

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In our view XXXXX a restrictive or narrow interpretation of "use" or "for use" (or its derivatives) XXXXX is contrary to the intended meaning of the term in Part IX of the ETA and its Schedules and to the CRA's published policy. XXXXX.

XXXXX GST/HST Memorandum Series Chapter 19.5 Land and Associated Real Property - Appendix A - paragraph 1 states:

"Capital real property must be used, or held for use, for one or more purposes at all times. In other words, capital real property of an individual or personal trust cannot be regarded as having no use".

While this statement was written in the context of interpreting paragraph 9(2)(a) of Part I of Schedule V, in our view it applies equally to all capital real property of any person.

In addition subsection 196(1) states that:

196. (1) Intended and actual use - For the purposes of this Part, where a person at any time acquires, imports or appropriates property for use as capital property of the person to a particular extent in a particular way, the person shall be deemed to use the property immediately after that time to the particular extent in the particular way.

This provision expands the concept of "use" to encompass the "intended use" or "purpose" for which a CRP is acquired and held by a person.

XXXXX. In the Navaho Inn decision ^[xx]footnote 4, Judge Rip agreed with the Respondent's (our) submission that "it is unreasonable to ignore the significant amount of the appellant's business that is derived from the making of exempt supplies. Rooms are not designated as either long-term or short-term and thus it is impossible to determine the use of rooms in advance. Consequently, says the Minister, it is unreasonable to assume that all unoccupied rooms were for taxable supplies, as alleged by the appellant."

For the same reason, in our view it would be equally unreasonable to have concluded in Navaho Inn that all unoccupied rooms were held for a singular purpose, whether that be the making of exempt (long-term) supplies or for personal use.

In the university cases that we are familiar with, student residences are often dedicated (i.e., set aside, prepared and held exclusively for) short-term rental during the non-academic portion of the year (e.g., from May - August). However, in any particular case, whether rooms in a student residence are dedicated for supply as short-term accommodation is a question of fact that should be corroborated with the facts of the case. For instance, if the university says the student residence is dedicated for short-term rentals for 4 months each year and there is evidence of long-term rentals during those 4 months, then an approach similar to that accepted by the TCC in Navaho Inn should be used. Note however, blocks of rooms can be dedicated for short-term rental rather than the whole residence, thus permitting both long and short-term rentals during the same time period.

CRA's published policy on whether the third exclusionary provision in the post-amble of the definition of residential complex (RC) is met (i.e., the so-called "all or substantially all" test) is set out in Policy Statement P-053. For purposes of student residences (and other forms of accommodation) that are supplied or held for supply on a mixed-use basis, the rationale and methodology in P-053 (with certain modifications ^[xxi]footnote 5) should also be used to determine the "extent of use" in commercial activities for ITC entitlements and the change-in-use rules.

We trust these comments will be of assistance to you XXXXX. Should you wish to discuss these comments or any related matters please feel free to contact me at (613) 954-8852.

2005/08/31 — RITS 63332 — Temporary Importation of Amusement Rides