17 February 2005 GST/HST Interpretation 47887 - Application of GST/HST to supplies shipped from supplier directly to recipient's clients

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 requesting clarification on an interpretation issued to you by the XXXXX GST/HST Rulings Centre XXXXX. Your request has been forwarded to us for a response. All legislative references are to the Excise Tax Act.

Background

•   A subsidiary company (the Subsidiary) purchased a used residential condominium unit (the Condominium). The vendor did not charge GST to the Subsidiary.

•   In our telephone conversation XXXXX you indicated that the Subsidiary purchased the Condominium from an individual who had used it as a place of residence.

•   The Subsidiary acquired the Condominium for the purpose of leasing it to its parent company (the Parent) on a long-term lease. The Subsidiary did not substantially renovate the Condominium.

•   The Parent uses the Condominium as a place of lodging for its employees when they are on company business in that city. The employees do not pay for the use of the Condominium.

•   The Condominium is occupied most of the time, but by different employees, all of which are there for less than one month at a time. All employees have other permanent places of residence.

•   The Subsidiary and the Parent are registered for GST/HST purposes and they are not financial institutions.

Interpretation Requested

In your first and second letter, you asked the following questions:

1. Is the Subsidiary required to self-assess on the purchase of the Condominium?

2. Is the supply by the Subsidiary to the Parent subject to GST or is it an exempt supply?

3. Is the Subsidiary required to self-assess due to a change of use of the Condominium?

4. If the supply by the Subsidiary to the Parent is taxable (i.e. the Subsidiary charges the Parent more than $20 per day), is there a change of use (i.e. from exempt use to taxable use) requiring the Subsidiary to self-assess on the fair market value (FMV) of the Condominium? If yes, would the Subsidiary be entitled to claim an equivalent input tax credit (ITC)?

5. If the Subsidiary were to sell the Condominium after a few years, would the sale to individuals for their own residential use be a taxable supply?

6. If the sale of the Condominium by the Subsidiary to an individual is taxable, is anyone eligible to receive a refund of GST under this scenario?

Interpretation Given

You indicated that the Subsidiary purchased the Condominium from an individual who had used it as a place of residence. If the Condominium was last used as a place of residence or lodging for individuals before its acquisition by the Subsidiary, it was, immediately prior to the acquisition by the subsidiary, a "residential complex" as that term is defined in subsection 123(1) ^[xxxv]1. The following responses are based on the assumption that the Subsidiary received a supply of a "residential complex" from the vendor. Further, based on the information provided, it is our opinion that the Condominium also qualifies as a "residential complex" in the hands of the Subsidiary and the Parent. Based on the information provided, the responses to your questions are as follows:

1. The Subsidiary was not required to self-assess on the acquisition of the Condominium if the supply to the Subsidiary was an exempt supply.

Since the Condominium was a "residential complex" when it was sold to the Subsidiary, the supply to the Subsidiary would be exempt pursuant to sections 2, 3, or 4 of Part I of Schedule V if the conditions in these sections were met ^[xxxvi]2.

If the conditions under these sections were not met, the supply to the Subsidiary would be taxable and the Subsidiary would be required to self-assess for tax payable in respect of the supply pursuant to paragraph 221(2)(b).

2. The supply of the Condominium by the Subsidiary to the Parent by way of lease is an exempt supply.

The Parent's provision of temporary lodging to its employees in the Condominium at no charge is an exempt supply pursuant to paragraph 6(b) of Part I of Schedule V. That paragraph exempts a supply of a "residential unit" by way of lease, licence or similar arrangement for purpose of its occupancy as place of residence or lodging by an individual, where the consideration for the supply does not exceed $20 for each day of occupancy. The term "residential unit" is also defined in subsection 123(1).

The supply by way of lease of the Condominium by the Subsidiary to the Parent is an exempt supply pursuant to section 6.1 of Part I of Schedule V because the Parent holds the Condominium for the purpose of making supplies that are exempt pursuant to section 6 of Part I of Schedule V. The supply by the Subsidiary to the Parent is exempt even if the Subsidiary charges the Parent more than $20 per day.

The Condominium need only meet the definition of a "residential unit" in order for these exemptions to apply; it does not need to meet the definition of a "residential complex". However, as stated above, it is our opinion that the Condominium qualifies as "residential complex" in the hands of the Subsidiary and the Parent.

3. There was no change in the use of the Condominium by the Subsidiary, and the Subsidiary is not required to self-assess on the basic tax content or FMV of the Condominium. The provisions that would trigger self-assessment (i.e., sections 196.1, 206 and 191) are not applicable in this case.

Section 196 states that where a person acquires 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. In this case, the Subsidiary acquired the Condominium for the purpose of leasing it to the Parent and the Condominium has been used for that purpose only. Therefore, there was no change in the use of the Condominium and no appropriation to use as capital property. Therefore sections 196.1 and 206 do not apply and the Subsidiary is not required to self-assess under these sections.

Regarding the self-assessment under subsection 191(1), since the Condominium was a "residential complex" when the Subsidiary acquired it, subsection 190(1) does not apply because the Condominium was a "residential complex" immediately before the Subsidiary began to hold it or use it as a "residential complex", and therefore, the Subsidiary is not deemed to have substantially renovated the Condominium and is not deemed to be a "builder" of the Condominium. Since subsection 190(1) does not apply, subsection 191(1) does not apply either, because the Subsidiary is not deemed to be the "builder" of the complex and there was no construction or substantial renovation of a residential complex. Therefore, the Subsidiary is not deemed to have received a supply under subsection 191(1) and would not be required to self-assess on the FMV of the Condominium ^[xxxvii]3.

4. The Subsidiary and the Parent are not entitled to claim ITCs for tax payable on properties and services used or consumed in the course of making the supply of the Condominium by way of lease, licence or similar arrangement.

Since the supplies of the Condominium by the Subsidiary (to the Parent) and by the Parent (to its employees) are exempt supplies, the Subsidiary and the Parent are not entitled to claim ITCs for tax paid on properties or services used or consumed in the course of making these exempt supplies. The Subsidiary would not be entitled to an ITC for tax payable on the purchase of the Condominium if the supply of the Condominium to the Subsidiary were taxable, and the Subsidiary and the Parent are not entitled to ITCs for tax payable on ongoing operating expenses or tax payable on improvements (if any) to the Condominium.

5. If there is no change in the use of the Condominium by the Subsidiary or the Parent until it is sold, the sale of the Condominium by the Subsidiary will be exempt pursuant to paragraph 2(a) of Part I of Schedule V. This paragraph exempts a supply of a "residential complex" where the supplier is not the "builder" of the complex and did not claim an ITC in respect of the last acquisition of the complex or in respect of an improvement to the complex after it was last acquired by the supplier.

As stated in interpretation #3 above, if the Condominium was a "residential complex" when the Subsidiary acquired it, subsection 190(1) does not apply and the Subsidiary is not deemed to be the builder of the Condominium. As stated in interpretation #4 above, the Subsidiary is not entitled to claim ITCs for tax payable on the acquisition of the Condominium (if any) and for tax payable on improvements to the Condominium. Therefore, the conditions in paragraph 2(a) would be met ^[xxxviii]4.

6. As discussed in interpretation #5 above, the sale of the Condominium by the Subsidiary would be exempt pursuant to paragraph 2(a) of Part I of Schedule V. Therefore question #6 is not relevant. However, if the sale of the Condominium by the Subsidiary were taxable because the Subsidiary were deemed to be a "builder" (i.e., the scenario where the Condominium is not a "residential complex" prior to the acquisition by the Subsidiary), the purchaser would not be entitled to the rebate under either of sections 254 or 256 because not all of the conditions in these sections would be met. However, the Subsidiary would be entitled to claim an ITC pursuant to section 193.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9587.

Yours truly,

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

2005/02/25 — RITS 51031 — Agency Relationship and Subsection 177(1)