4 May 2005 GST/HST Ruling 57221 - Application of the GST/HST to the activities of the 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 XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the construction of a replacement house.

All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.

Statement of Facts

Based on your letter and your telephone conversation XXXXX with XXXXX of our XXXXX office, our understanding of the facts is as follows:

1. You and your husband XXXXX owned a single unit detached house in XXXXX. It was you and your husband's principal residence. The property also included a detached garage of approximately XXXXX square feet.

2. You operated a home-based business with a reasonable expectation of profit in a part of the main house (less than 50%) and in the entire garage. You are registered for GST/HST purposes. The home-based business consisted of XXXXX for sale to retailers.

3. GST was not payable on the acquisition of the residence (main house and garage). As such, you did not claim any input tax credit with respect to the acquisition of the residence. In addition, there were no improvements to the main house or the garage that related to the business and for which an input tax credit may have been available.

4. In XXXXX, the residence burned down to its foundation and could not be repaired.

5. All of the contents of the residence including the assets necessary to carry on the business were destroyed. You did not get all of the contents destroyed in the fire replaced, as you had no place to store them. Furthermore, the insurance company did not replace the assets that were used in carrying on the business.

6. As a consequence of the fire, you were unable to continue to earn a living in your field in XXXXX and you and your husband moved to XXXXX shortly after the fire.

7. Your insurance company told you that you and your husband could not sell the vacant land without rebuilding a house on the property. You both have settled on an amount in terms of damages with your insurance company to build a replacement house. However, your insurer informed you that they would not cover the GST payable on the construction costs of the replacement house.

8. XXXXX. After reconstruction, you expect to sell the house for an amount in excess of $450,000.

Ruling Requested

You would like to know whether you are entitled to a rebate or input tax credit for the GST incurred on the construction costs of the replacement house.

Ruling Given

Based on the facts set out above, we rule that:

1. You are not eligible for a GST new housing rebate in respect of the GST you paid on the construction costs incurred to rebuild the house and the garage.

2. You are not entitled to claim input tax credits for the GST payable on the construction costs incurred to rebuild the house and the garage.

This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Goods and Services Tax Rulings. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.

Explanation

1. The ETA generally allows a new housing rebate to an individual who builds or substantially renovates a residential complex for use as the primary place of residence of the individual or a relation of that individual. One of the reasons that you are not eligible for the rebate is that you do not meet the eligibility criteria because you intended to construct the house for sale and not for use as your primary place of residence or as a primary place of residence of an individual related to you. Moreover, the new housing rebate is not available where the fair market value of the residential complex is $450,000 or more.

2. For GST/HST purposes, the construction of the replacement house and the garage is not a commercial activity since you did not construct the house and the garage in the course of a business or an adventure or concern in the nature of trade. The construction of the house and the garage was undertaken at the direction of the insurer in accordance with the terms of the insurance policy. Therefore, you are not entitled to claim input tax credits for the tax incurred on the construction costs for the replacement house and the garage.

Additional information

For GST/HST purposes, you are not considered to be the builder of the replacement house since you did not construct the house and the garage in the course of a business or an adventure or concern in the nature of trade. Because you are not the builder and you are not entitled to claim input tax credits for the tax incurred on the construction costs, the sale of the replacement house and the garage will be exempt of tax.

As indicated above, you stated that the insurer would not cover the GST incurred with respect to the construction costs. The terms of the insurance policy should provide information with respect to the extent of the indemnification provided under the policy. As for the application of the GST, please find enclosed Chapter 17.16 of the GST/HST Memoranda Series entitled GST/HST Treatment of Insurance Claims. You may wish to refer to this publication, in particular paragraphs 13 to 19, for further information.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 952-9587.

Yours truly,

Béatrice Mulinda
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2005/04/28 — RITS 59839 — Park Lot Lease and Development Fees