14 July 2005 GST/HST Ruling 45299 - S AND INTERPRETATIONS XXXXX

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:

Thank you for your letter seeking further clarification of our previous ruling XXXXX concerning the application of the Goods and Services Tax (GST) in respect of the deemed supply made by way of sale arising from the self-supply described below. We apologize for the delay in providing you with our response.

Statement of Facts

Our understanding of the facts, the transactions, and the purpose of the transactions is as follows:

1. XXXXX (the "Builder") was incorporated XXXXX, and was granted status as a registered charity for income tax purposes XXXXX.

2. One of the purposes of the Builder is to construct XXXXX housing for students who attend XXXXX.

3. XXXXX.

4. The Land-owner owns a parcel of land located at XXXXX, XXXXX (the "Land"), near the XXXXX, on which is situated a building that is used to provide student residences, kitchen and dining facilities, lounge areas and a meeting room (the "Subject Property").

5. The Land is zoned "multi-family" residential permitting condominiums to be built on the Land.

6. On XXXXX, the Builder leased the Subject Property from the Land-owner under the terms of a lease (the "Lease") which provides for a lease term equal to XXXXX years XXXXX (within the meaning of XXXXX the Lease), with no options to renew. The annual rent reserved under the Lease is $XXXXX, and the Builder is required to bear all operating and maintenance costs for the duration of the lease term.

7. The Builder is in the process of raising funds for the construction of a new building on the Land.

8. The Builder proposes to remove the existing building and to construct, at its expense, a new building on the Land (the "Proposed Property"). A part of the Proposed Property will be used as a student residence to provide XXXXX housing for students attending XXXXX.

9. XXXXX.

10. The construction of the Proposed Property will cost approximately $XXXXX, and include an unfinished basement XXXXX.

11. The student residence part of the Proposed Property will be comprised of approximately XXXXX dormitory style rooms, each room being approximately XXXXX square feet in size and having no bathroom. There will be a shared bathroom, shared kitchen and shared recreational area. The Builder intends to supply the rooms to students by way of lease. The monthly lease payments will be below the market value for rental accommodations.

12. XXXXX.

Transactions

Where the proposed student residence is a "multiple unit residential complex" (MURC) as that term is defined in subsection 123(1) of the Excise Tax Act (ETA) and the construction of the MURC is substantially complete, the Builder will be deemed to have made and received a taxable supply by way of sale of the MURC and to have paid as a recipient and collected as a supplier, GST in respect of that deemed supply calculated on the fair market value (FMV) of the MURC provided that the other conditions set out in subsection 191(3) of the ETA are also met. The Builder will incur a GST liability at the later of the time construction of the proposed MURC is substantially complete and possession of the first residential unit in the MURC is given as described in subsection 191(3). In order to calculate this GST liability, the FMV of the proposed MURC must be determined at the later of those times.

Ruling Requested

What is the object of the FMV appraisal for purposes of the self-supply rule in subsection 191(3) of the ETA?

Ruling Given

Based on the facts set out above, we rule that the object of the FMV appraisal for purposes of the GST self-supply rules is that part of the Proposed Property that will be a MURC once constructed. The FMV ^[xxii]Footnote 1 of the proposed MURC will be based upon the highest and best use that can be made of the MURC as constructed and consistent with the definitions of a "multiple unit residential complex" and a "residential complex" in subsection 123(1) of the ETA.

This ruling is subject to the general limitations and qualifications outlined in Chapter 1.4 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 ETA, or to our interpretative policy; and that you have fully described all necessary facts and transactions for which you requested a ruling.

Explanation

For self-supply purposes, the Canada Revenue Agency (CRA) will consider the object to be valued to be the particular residential complex that is deemed to have been supplied. Factors likely to affect the FMV of the part of the Proposed Property that is a MURC include the structural, design and functional attributes of the complex and the applicable provisions of the definition of "residential complex" in subsection 123(1) of the ETA. For instance, since each dormitory style room is a "residential unit" as that term is defined in subsection 123(1) of the ETA and each room will not be a separate parcel or other division of real property (i.e., not a condominium unit), each unit or room can only be supplied by way of lease, licence, or similar arrangement and therefore cannot be owner-occupied. While the definition of residential complex permits residential rental uses other than student housing supplied on a not-for-profit basis, the structural, design and functional attributes of the MURC, including dormitory-style rooms and shared kitchen, bathroom and recreational areas, are likely to limit the MURC's marketability as rental accommodations supplied on a for-profit basis to other market segments.

When transactions of other residential complexes or units are considered for purposes of determining the FMV of the MURC, such residential complexes or units would need to be sufficiently comparable to the MURC. In this case, appropriate comparables may include other MURCs with dormitory-style rooms and shared kitchen, bathroom and recreational areas. However appropriate comparables would exclude "residential condominium units" as defined in subsection 123(1) of the ETA and may also exclude rental housing where each unit is designed with private kitchen, bathroom and living areas and intended for supply on a "for-profit" basis.

Whether parts of the building outside of the residential units and the land are included in a MURC is determined based on paragraph (a) of the definition of "residential complex" in subsection 123(1) of the ETA. For instance, the MURC will include common areas and appurtenances to the building and that portion of 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. As for the land subjacent to the building, the portion of land included in the MURC will be equal to that portion of the building that is included in the MURC. Given that the part of the building that is leased as a XXXXX will be excluded from the part of the Proposed Property that is a MURC, a fair and reasonable method must be used to allocate the Land between the MURC and the XXXXX unless the land immediately contiguous to the building is exclusively for the use and enjoyment of the building as a place of residence for individuals. Even though the Subject Property, which includes the Land, is leased to the Builder, the object of the FMV appraisal is the part of the building and the Land that is the MURC as if both that part of the building and the Land were being sold to the Builder.

We note that in your letter, you stated that in your opinion:

i) the Land as zoned was worth about $XXXXX;

ii) that the FMV of the Proposed Property as a "for-profit" student residence would be less than the cost of constructing the building;

iii) that the FMV of the Proposed Property (taking into account its "highest and best use") would be based on the Land value less the costs of demolishing the proposed building; and

iv) that if a commercial landlord were to purchase the Proposed Property and operate the student residence on a "for-profit" basis in perpetuity, the commercial landlord would not be willing to pay $XXXXX for the Proposed Property as the room rentals could not generate sufficient net rental income to justify such a high purchase price.

In addition, you asked whether the FMV of the Proposed Property for purposes of the GST/HST self-supply rules in light of the opinions you expressed above should be based upon:

(a) XXXXX of the FMV of the Land less the costs of demolishing the proposed building (XXXXX being the portion of the proposed building that is a MURC and excluding the portion that is XXXXX);

(b) the FMV of the MURC (rooms, shared facilities and related land) if sold to a "for-profit" operator (ignoring the lease issue);

(c) the FMV of the MURC (rooms, shared facilities and related land) if sold to a "not-for-profit" operator (ignoring the lease issue);

(d) the cost of constructing the MURC (rooms, shared facilities and excluding the construction costs relating to the clubhouse); or

(e) some other basis.

As you are aware, we are not issuing a ruling with respect to the FMV of the MURC. For further information regarding the determination of FMV, reference should be made to P-165R - Fair Market Value for Purposes of Part IX of the Excise Tax Act, in particular, the methods available to make such a determination (e.g., the cost method and the discounted cash flow or income method) and the information relating to the object of the self-supply. However, as indicated in the ruling provided above, the object of the FMV appraisal in this case is that portion of the Proposed Property that is a MURC. In addition, the FMV will be based on the proposed MURC as constructed. As such, the FMV will not be determined based on the value of the Land less the costs of demolishing the proposed building since the object of the FMV is the MURC itself and not the Land as if it were vacant.

It is noted that reference was made to XXXXX of the FMV of the Land, XXXXX being the portion of the building that is a MURC. As indicated above, the MURC will include a portion of the Land based on a fair and reasonable allocation of the Land between the MURC and the XXXXX. Although XXXXX of the land subjacent to the building may be a reasonable allocation of the subjacent land to the MURC, it is unlikely that it would be fair and reasonable to apply this ratio to determine the amount of land that is contiguous to the building and reasonably necessary for the use and enjoyment of the building as a place of residence for individuals.

Although you indicated at the time of your submission that the Builder does not expect to receive "government funding" (within the meaning of subsection 191.1(1) of the ETA), reference should be made to section 191.1 if at or before the time of the deemed supply, the Builder has received or can reasonably expect to receive government funding in respect of the complex. This section provides for the minimum amount of GST that will be deemed to have been paid and collected by the Builder in respect of the deemed supply.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-8852.

Yours truly,

Daryl J.A. Hooley, CGA
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2005/07/25 — RITS 45512 — [Application of the GST on the Supply of Lease Financing]