4 January 2006 GST/HST Ruling 50286 - Application of the GST/HST to the purchases and supplies 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 long-term care facility by AB.

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

Facts

•   AB is a registered charity and a GST registrant.

•   AB intends to construct a new XXXXX bed long-term care facility (the "Facility") in XXXXX.

•   The Facility will be operated by XY.

•   XY is 100% owned by AB. XY will be a non-profit organization engaged in the operation of a long-term care nursing home for seniors with limited physical or mental capacity for self-supervision and self-care whose needs cannot be met through in-home services and who require services that are provided in an institutional setting.

•   AB will incorporate a new wholly-owned for profit corporation ("Newco") to construct the facility.

•   Newco will act as the general contractor and will construct the Facility on lands owned by AB. Newco and AB will enter into a construction contract wherein the consideration payable by AB for construction services rendered by Newco will be equal to approximately cost plus $XXXXX. The value of the construction services will likely be in the $XXXXX range.

•   Upon completion, the Facility will be owned by AB and leased for a period of XXXXX years to XY.

•   XY's main source of revenue will come from government grants/subsidies from the XXXXX, fees paid by the residents of the Facility and cafeteria sales.

•   The fees to be charged to residents of the Facility will be for the provision of various property and services including accommodation, meals, significant nursing, personal and supervisory care on a 24-hour basis under the direction of qualified medical and nursing care staff, supervision and assistance with daily living activities and social/recreational services. It is anticipated that the residents of the Facility will pay one all-inclusive fee for the property and services to be provided by XY.

•   The cafeteria sales are to be made to persons not resident in the home (i.e., visitors, etc.). It is anticipated that XY will earn less than $XXXXX in annual revenues from cafeteria sales.

Assumptions

You have requested that this interpretation be based on the assumption that the Facility meets the criteria under the definition of "health care facility" in paragraph 1(c) of Part II of Schedule V to the ETA and that the property and services provided by XY, as the operator of the Facility, to residents of the Facility will be elements of a single supply that is an exempt supply of an "institutional health care service" ^[xliii]1 under section 2 of Part II of Schedule V).

•   In addition, we have assumed that an individual living at the Facility will be assigned a specific room when they enter the Facility and that they cannot be moved without their consent or the consent of provincial authorities. A resident will not be permitted to enter another resident's room, except by invitation. To the extent of available space, a resident will be able to bring their own furnishings into their room (e.g., a favourite chair or their own bed). It is expected that the individuals will reside at the Facility for the foreseeable future.

Interpretation Requested

You have requested confirmation of the CRA's current position regarding the application of certain provisions of the ETA to the construction and operation of a long-term care facility that is a health care facility that provides exempt supplies of institutional health care services as follows:

1. Is Newco, as provider of construction services to AB, entitled to claim full input tax credits (ITCs) for the GST incurred in order to construct the Facility?

2. Does section 191 apply when a resident moves into the Facility and will AB be required to self-assess GST at the time of substantial completion/first occupancy of the Facility?

3. Since the lease of the Facility by AB to XY would be exempt from GST under section 1 of Part V.1 of Schedule V and AB would not be entitled to claim an ITC for the GST charged by Newco, would AB be entitled to claim a 50% rebate for the GST paid to Newco?

4. If AB makes an election under section 211 with respect to the Facility and the lease to XY becomes taxable, would AB be entitled to claim an ITC for the GST charged by Newco? Further, since GST would now apply to the lease payments billed to XY, would XY be entitled to a 50% rebate of the GST paid in respect of the lease if XY is either a registered charity or a qualifying non-profit organization?

Interpretation Given

Based on the information provided in your written submission and during your telephone discussions with Mrs. Singh and a telephone conversation with myself XXXXX, you concur that an interpretation rather than a ruling be provided considering the fact that the supplies, actions and transactions were being contemplated.

1. Given that the value of construction services to be provided by Newco to AB will be greater than $30,000 annually, Newco will be required to register for GST/HST purposes. As Newco will be a registrant and as the supply by Newco to AB will be made exclusively in commercial activities, Newco will be entitled to claim full ITCs for the GST incurred on goods and services acquired, consumed or used in the provision of taxable supplies of construction services. Newco will be required to collect GST in respect of the construction services provided to CV.

2. Rooms in the Facility in which the individuals will reside will be rooms in a residence for seniors, individuals with a disability or other individuals and will be occupied as a place of residence or lodging. As such, these rooms will be residential units for GST purposes. Further, that part of the Facility in which the rooms will be located, together with any common areas and appurtenances to the building and the land attributable to the building that is reasonably necessary for the use and enjoyment of the building as a place of residence for individuals will form a residential complex and more specifically a multiple unit residential complex since it is not a condominium complex. Subsection 191(3) generally applies where a builder of a multiple unit residential complex (a) gives possession of a residential unit in the residential complex (b) under a lease, licence or similar arrangement entered into (c) for the purpose of the occupancy of the unit by an individual as a place of residence. Although it is unclear whether conditions (a) and (b) are met, it is our view that the residents' primary purpose of occupancy in the Facility will be to receive the "institutional care services" provided by XY. Although the residents will occupy the units in the Facility as their place of residence, it will not be their primary purpose of occupancy. As such, condition (c) will not be met and therefore the self-supply rule in subsection 191(3) will not apply.

3. The supply of the Facility by way of lease from AB to XY will be exempt under section 1 of Part V.1 of Schedule V if AB does not file an election under section 211 in respect of the entire property that includes the Facility. As a result, AB will not be entitled to claim an ITC for the GST payable to Newco for the construction of the Facility but will be entitled to claim a 50% rebate under subsection 259(3) for the tax paid to Newco in respect of the construction services.

4. If AB makes an election under section 211, the supply of the Facility by way of lease will be excluded from the general exemption for charities under paragraph 1(m) of Part V.1 of Schedule V and the supply of the Facility to XY would be taxable.

Please note that the deeming provisions in subsection 211(2) may apply if AB files the election. AB would then be required to remit the tax deemed to have been collected and would be entitled to claim an ITC in respect of the tax deemed to have been paid upon the self-supply based on the extent of use of the entire property in commercial activities. AB would also be entitled to claim an additional ITC pursuant to section 193. Following the election, AB would be entitled to claim ITCs for the GST payable on supplies acquired for consumption, use or supply in the course of making taxable supplies of the Facility.

XY would be required to pay GST on the lease payments made to AB and would be entitled to claim a 50% rebate of the GST paid in respect of the lease payments under subsection 259(3) given that XY would fall within the definition of "charity" under subsection 259(1) ^[xliv]2.

Additional Information

Non-Arm's Length Transactions - Section 155

Subsection 126(2) states that persons are related to each other for GST/HST purposes if they are related to each other by reasons of subsections 251(2) to (6) of the Income Tax Act. The facts provide that XY is 100% owned by AB. As such, the two entities would be related corporations in accordance with subsection 126(2). Therefore, pursuant to subsection 126(1), AB and XY are deemed not to deal with each other at arm's length for purposes of Part IX of the ETA. The same comments apply to Newco and AB, as Newco will be wholly owned by AB.

Subsection 155(1) deals with certain non-arm's length supplies. This provision stipulates that a supply of property or a service that is made for no consideration or for consideration less than the fair market value of the property or service at the time the supply is made shall be deemed to be made for consideration of a value equal to the fair market value at that time provided the supplier and recipient of the supply are not dealing with each other at arm's length and the recipient of the supply is not a registrant who is acquiring the property or service for consumption, use or supply exclusively in the course of commercial activities of the recipient.

AB and XY

Subsection 155(2) provides exceptions to the application of subsection 155(1). Subparagraph 155(2)(b)(iii) provides that subsection 155(1) does not apply to a supply of property or a service by a person where, in the absence of subsection 155(1), the supply would be an exempt supply included in Part V.1 or Part VI of Schedule V. As such, where AB makes an exempt supply of the Facility by way of lease to XY, subsection 155(1) will not apply.

However, where AB makes an election under section 211, the general exempting provision of section 1 of Part V.1 of Schedule V would not apply to the supply of the Facility by way of lease by AB to XY. This supply would become taxable and the exception in subsection 155(2) will not apply. Consequently, subsection 155(1) will apply if the supply of the Facility made by way of lease is made for no consideration or for consideration less than fair market value since XY is acquiring the Facility by way of lease for consumption, use or supply exclusively in the course of its exempt activities. Under these circumstances, tax will be calculated by reference to the fair market value of the supply.

AB and Newco

Subsection 155(1) will apply to supplies of construction services made by Newco to AB if AB does not make an election under section 211 and the supplies are made for consideration less than the fair market value. Although AB is a registrant, it will not be acquiring the construction services for consumption, use or supply exclusively in the course of commercial activities but rather for making exempt supplies of the Facility by way of lease. The exception in subsection 155(2) discussed above does not apply, as the supply made by Newco is not an exempt supply.

The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Goods and Services Tax Rulings, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.

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,

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

2006/01/31 — RITS 51717 — [ITC for Tax on Goods Imported for Consumption, Use or Supply by a "Constructive Importer" of the Goods]