4 April 2005 GST/HST Interpretation 52246 - The eligibility of a daycare activity for the self-government refund

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 (with attachments), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the conversion XXXXX from a long-term care facility into XXXXX self-contained seniors' apartments.

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

Statement of Facts

Our understanding of the facts from your letters XXXXX and telephone discussions with XXXXX of your office is as follows:

1. XXXXX (the "Region") is the owner and operator of a long-term care facility located at XXXXX, known as the XXXXX. The XXXXX is a not-for-profit long-term care facility funded by the Ministry of XXXXX. The XXXXX is responsible for the operation of the XXXXX.

2. The XXXXX has undergone extensive redevelopment. The initial part of the redevelopment, which involved renovations of the long-term care facility, was completed in XXXXX. In addition, a separate part of the redevelopment involved the conversion of XXXXX vacant wings (the "XXXXX wing"), formerly part of the long-term care facility, into XXXXX self-contained seniors' apartments. The conversion of the XXXXX wing to a seniors' residence commenced in XXXXX and was completed in XXXXX.

3. The seniors' residence consists of one-bedroom and two-bedroom apartments. Each unit is a self-contained apartment consisting of a full kitchen with appliances, a living area, bedroom(s) and bathroom. The seniors' residence, which is known as XXXXX (the "Residence"), has a separate municipal address XXXXX.

4. The property on which the XXXXX and the Residence are located consists of one legal description; XXXXX.

5. The redevelopment and conversion of the XXXXX wing consisted of the removal and reconstruction of nearly the entire interior structure of the Residence, and included extensive renovations of the exterior building envelope and surrounding grounds. The interior of the Residence was essentially gutted. This included the removal and replacement of all interior walls (except for structural supporting walls), flooring, ceiling, all plumbing and electrical wiring. The building envelope was completely reclad, and all windows and roof were replaced.

6. On XXXXX, the XXXXX issued the occupancy permit. The conversion of the Residence was completed before the first unit was rented out on XXXXX.

7. The land attributable to the Residence comprises approximately XXXXX hectares. Approximately XXXXX of the land is required for parking in order to meet the municipal zoning requirements. The remaining land is for the personal use and enjoyment of the residents (e.g. landscaping and recreational areas).

8. Financing of the $XXXXX million cost of the renovated Residence includes $XXXXX million federal funding under the Residential Rehabilitation Assistance Program ("RRAP"); $XXXXX in funding from the Province of XXXXX; $XXXXX million from the XXXXX Program XXXXX; and a $XXXXX Regional grant.

9. The federal RRAP funding stipulated that funds were to be used for the conversion of property to affordable residential use, ^[xxvi]1 and to provide design features to allow seniors to overcome disabilities and remain independent. The XXXXX is a cost-sharing program among the federal, provincial and municipal governments designed to facilitate the construction of affordable housing.

10. Both RRAP and XXXXX require the rent for the units to be restricted to an amount that is below the market value for new accommodations of a similar nature. In addition, the Region provides a rent supplement to further reduce the rent on XXXXX of the XXXXX units such that tenants do not pay any more than 30% of their gross income.

11. XXXXX, a non-profit housing corporation and wholly owned subsidiary of the Region, was created in XXXXX. XXXXX is responsible for the management and operation of the Region's non-profit housing units.

12. XXXXX entered into a lease of the Residence and ancillary land. A lease agreement (the "Head Lease") between the Region as Landlord and XXXXX as Tenant was entered into XXXXX for a XXXXX year term commencing XXXXX.

13. The Head Lease describes the "Premises" as, XXXXX. The term "Building" is described as XXXXX. The permitted use of the Premises under the Lease is to provide residential rental housing for seniors and for persons with disabilities.

14. The non-profit housing units at XXXXX are leased to seniors in low-income households on a rent geared-to-income basis. Eligibility for occupancy of units or for reduced lease payments is dependent on a means or income test. Seniors XXXXX are fully independent. No nursing or personal care services are available at the residence.

15. Rent geared-to-income assistance, also known as subsidized housing, is for eligible households who do not have enough income and/or assets to pay market rent. Households eligible for rent geared-to-income assistance pay a rent amount based on income.

16. The tenancy agreements between XXXXX as Landlord and residents XXXXX are governed by the XXXXX. XXXXX the sample tenancy agreement provided identifies XXXXX as the "Building". XXXXX further stipulates, XXXXX.

17. Under XXXXX the sample tenancy agreement, the tenant is required to pay rent on a rent-geared-to-income basis as calculated there under. The monthly rent payable by the tenant takes into account a rent subsidy payable by the Region to third-party housing providers XXXXX pursuant to the XXXXX.

18. A sample "Rent Supplement Agreement" entered into between XXXXX (the "Region") and the third-party housing provider (the "Owner") has been provided. Under the agreement, the Owner XXXXX, as a housing provider, agrees to provide rental accommodation, on the condition that the Region pays to it rent supplement payments, being the difference between the full monthly rent for the units and the geared to income portion of the rent payable by the tenant.

19. By way of letter XXXXX, confirmation is provided that the Residence and the XXXXX are functionally independent. There are no shared mechanical systems (e.g. heating, cooling, electrical), and there are now separate municipal addresses for each.

20. The site plan provided shows a structure of irregular configuration. While the site plan shows that the XXXXX and the Residence adjoin, in part, the interior of the structure does not provide for access between the two, except for limited emergency exit (e.g. fire).

21. The seniors' apartments, the Residence, are operated by XXXXX under the authority of the XXXXX, while the health care facility, the XXXXX, is operated by the Region under the XXXXX and the XXXXX. In addition, for municipal tax purposes, that part of the structure that is the XXXXX is not subject to property tax, while the Residence will be subject to municipal property tax.

Ruling Requested

1. The renovation of the XXXXX wing constitutes a "substantial renovation". The Region is deemed, under subsection 191(3), to have made and received a taxable supply of a multiple-unit residential complex, the Residence.

2. The Region is deemed, under section 191.1, to have paid and collected tax on the self-supply of the Residence equal to the greater of the tax calculated on the fair market value of the Residence and the tax paid on the substantial renovations and improvements of the Residence.

3. The land comprising approximately XXXXX hectares, which is subjacent and immediately contiguous to the Residence, forms part of the residential complex.

Ruling Given

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

1. The subject property was substantially renovated pursuant to the meaning of "substantial renovation" in subsection 123(1). The Region is required, under subsection 191(3), to self-supply on the fair market value of the Residence at the time possession of a unit in the Residence is given to a person under a lease, licence or similar arrangement for purpose of occupancy of the unit as a place of residence. Pursuant to subsection 191(10), the Region is deemed to have given possession of the complex or unit for purposes of 191(3) on XXXXX, the date on which the Region made a supply of the Residence by way of lease to XXXXX.

2. The Region is required, under subsection 191.1(2), to pay tax in respect of the self-supply under subsection 191(3) equal to the greater of the fair market value of the Residence on XXXXX, and the cost of the substantial renovations and improvements of the Residence.

3. The land, comprising approximately XXXXX hectares, subjacent and immediately contiguous to the Residence forms part of the "residential complex", as that term is defined under subsection 123(1).

Other GST/HST Implications of Transaction

4. The supply by way of lease of the Residence by the Region to XXXXX is an exempt supply of real property under section 6.1 of Part I of Schedule V, throughout the period during which XXXXX makes, or holds the Residence for the purpose of making an exempt supply of the residential units in the Residence under section 6 of Part I of Schedule V.

5. The supply by way of lease by XXXXX of a residential unit in the Residence to an individual for occupancy as a place of residence or lodging for a continuous period of at lease one month is an exempt supply of real property under section 6 of Part I of Schedule V.

6. The Region is deemed to make a taxable supply of the Residence at the time the Region is required to self-supply under subsection 191(3). The Region is therefore engaged in a commercial activity and, as a registrant, is eligible for ITCs for the tax payable by the Region on the substantial renovations of the Residence up to the time of the self-supply.

7. As a municipality, the Region is eligible for the public service body rebate under subsection 259(3) in respect of the tax payable on the self-supply of the Residence under subsection 191(3).

8. The Region is not eligible to the New Residential Rental Property Rebate.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 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 Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

The main issue in this case is whether the Region has carried on a construction or "substantial renovation" of a "residential complex"; more specifically, whether the redevelopment and renovation of that part of the structure that now houses the XXXXX seniors' apartments known as XXXXX (the "Residence") constitutes a building, separate and apart from that part of the structure that houses the XXXXX.

Pursuant to subsection 123(1), the term "substantial renovation" of a residential complex means:

the renovation or alteration of a building to such an extent that all or substantially all of the building that existed immediately before the renovation or alteration was begun, other than the foundation, external walls, interior supporting walls, floors, roof and staircases, has been removed or replaced where, after completion of the renovation or alteration, the building is, or forms part of, a residential complex.

Whether a substantial renovation has occurred is determined on a building-by-building basis. The term "building" is not defined in the ETA. As such, the general meaning of the term is applied.

In the subject case, the site plan provided shows a structure of irregular configuration. The XXXXX and the Residence are adjoining, in part. Determining whether adjoining structures constitute one building or more than one building is a question of fact. Such determination must be made on a case-by-case basis, in view of the particular circumstances. No one factor alone is conclusive in making a determination.

While the site plan shows that the XXXXX and the Residence are partly adjoined, the degree of structural connectivity is limited to only part of a wall. The interior of the structure does not provide for access between the two, except for limited emergency exit (e.g. fire). The XXXXX and the Residence each have separate municipal addresses with independent external exits/entrances, and each is functionally independent (separate mechanical systems for heating, cooling, electrical, etc.)

The particular facts in the subject case, including the limited degree of structural connectivity between the XXXXX and the Residence, support the view that the Residence is a separate building from the XXXXX, and a separate residential complex within the meaning under subsection 123(1). The facts, as set out in paragraph five above, indicate that the Residence has undergone a "substantial renovation" as defined under subsection 123(1) of the ETA. As such, under subsection 191(3), the Region is deemed to have made and received a taxable supply of the Residence on XXXXX, at the time the Region gave possession of the complex under a lease to XXXXX.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 952-9212.

Yours truly,

Carmela Antonelli
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2005/04/22 — RITS 52982 — GST Treatment of Personal Care Services