4 February 2008 GST/HST Interpretation 97492 - Paragraph 97 of GST/HST Memorandum 4.3, Basic Groceries

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 XXXXX's eligibility to claim input tax credits (ITCs) in respect of the construction of a XXXXX facility.

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

We understand as follows:

1. XXXXX (the Corporation) is a "charity" and a "public service body" as those terms are defined in subsection 123(1). The Corporation is registered for the GST/HST.

2. The Corporation has purchased certain real property in a XXXXX development that contains both commercial and residential premises. The real property purchased by the Corporation was XXXXX referred to in the agreement of purchase and sale as the XXXXX. Extensive work was required to make the space suitable for the Corporation's intended use.

3. The XXXXX has its own legal description, separate from other units in the XXXXX development. We understand that the XXXXX is all within one legally described parcel of land. The Corporation used the XXXXX to construct XXXXX (the Centre).

4. Construction costs for the Centre include "hard costs" for supplies made by general and mechanical contractors and electricians, and "soft costs" for supplies such as construction and lighting consulting and architectural and legal services. The Corporation has also purchased furniture and equipment XXXXX for use in the Centre. All these expenditures have been capitalized for accounting purposes.

5. The Corporation operates a XXXXX program with single ticket prices for each performance ranging from $XXXXX to $XXXXX including the GST. XXXXX.

6. The Corporation will also rent XXXXX space in the Centre to third parties.

7. The Corporation also leases space XXXXX to a third party who operates XXXXX.

8. The Corporation uses the net tax calculation method for charities as set out in subsection 225.1(2). The Corporation has not filed an election under subsection 225.1(6).

9. The Corporation has not filed an election under section 211 in respect of the XXXXX.

Interpretation Requested

You would like to know whether the Corporation is entitled to claim ITCs in respect of the GST/HST payable on:

•   construction costs of the Centre, both "hard costs" (e.g., supplies made by general, mechanical and electrical contractors) and "soft costs" (e.g., supplies made by construction and lighting consultants, architectural services, legal representation),

•   furniture and equipment,

•   future improvements to the Centre, and

•   maintenance costs for the Centre.

Interpretation Given

Under the provisions of section 225.1, charities are generally not entitled to claim ITCs on their non-capital inputs. Subject to the general provisions of the ETA, charities can claim full ITCs on purchases of capital property and real property, and improvements thereto, used primarily in commercial activities.

In determining whether capital property and real property of the Corporation is used primarily in commercial activities, it is necessary to determine the GST/HST status of all the supplies made by the Corporation and the percentage of supplies made in commercial activities.

Status of supplies

Paragraph 1(e) of Part V.1 of Schedule V to the ETA excludes from the general exemption for supplies by a charity, "an admission in respect of a place of amusement unless the maximum consideration for a supply by the charity of such an admission does not exceed one dollar". A "place of amusement" includes a place at which a musical, theatrical or other performance is held. Accordingly, supplies of admissions by the Corporation to the XXXXX performances identified above are excluded from the general exempting provision in section 1.

No information was provided with respect to the consideration charged to XXXXX performances XXXXX and we are unable to determine the status of such supplies. If admissions to the XXXXX are supplied by the Corporation and for consideration exceeding one dollar, these supplies would also be excluded from the exemption in section 1.

Supplies by a charity that are not exempt under section 1 of Part V.1 of Schedule V to the ETA may be exempt under another provision in Part V.1 ^[i]Footnote 1. If such supplies are not exempt under any of those other provisions, the admissions supplied by the Corporation will be taxable supplies made in a commercial activity and the Corporation is charging and collecting GST in respect of the admissions. You have not provided any indication that the supplies of admissions are exempt under another provision.

The Corporation's supply of the Centre or parts of the Centre by way of lease, licence or similar arrangement is an exempt supply under section 1 of Part V.1 of Schedule V to the ETA. As such, the Corporation's supply of XXXXX space by way of lease, licence or similar arrangement and the supply of space XXXXX by way of lease to the operator of XXXXX are exempt supplies.

Based on the foregoing, the Corporation likely makes both taxable supplies in a commercial activity and exempt supplies. Any other supplies made by the Corporation must also be considered in determining whether property and services are acquired primarily for consumption, use or supply in commercial activities.

ITC treatment

Purchases of capital property and real property

With respect to the tax paid or payable by the Corporation on purchases of capital property (other than improvements to capital property, the treatment of which is discussed below) and real property ^[ii]Footnote 2, the ITC eligibility will depend on whether the property is used primarily in the Corporation's commercial activities. Under the provisions of subsection 199(2), where capital property is acquired or imported by a registrant for use primarily in its commercial activities, the registrant is deemed to use that property exclusively in such activities. Accordingly, the registrant will be eligible to claim an ITC equal to the total amount of GST/HST paid or payable on that property provided that all the other ITC criteria are satisfied. Conversely, where capital property is not for use primarily in the course of the registrant's commercial activities (i.e., it is used 50% or less in commercial activities), there is no ITC eligibility in respect of that property.

The acquisition of the XXXXX by the Corporation from the vendor is a purchase of capital real property and if that property is for use primarily in the Corporation's commercial activities, the tax payable on the purchase will qualify for a full ITC. Similarly, tax payable on the purchase of furniture and equipment, if it is capital property used primarily in commercial activities, will qualify for full ITCs.

Improvements

The rules respecting ITCs for the tax payable on improvements to capital property are set out in paragraph (b) of the description of element B in subsection 169(1). That paragraph provides that the ITC eligibility for the tax payable on an improvement to capital property is based on the extent to which the capital property was used in commercial activities immediately after that capital property, or a portion of it, was last acquired.

If, immediately after purchasing the XXXXX, that real property was for use primarily in the Corporation's commercial activities, the Corporation is deemed to use that property exclusively in commercial activities. Accordingly, the tax payable on improvements to the XXXXX will give rise to full ITCs. If the XXXXX is used other than primarily in the Corporation's commercial activities, no ITC will be available to the Corporation with respect to the tax owing on the improvements.

"Improvement" is defined in subsection 123(1) as any property or service supplied to a person for the purpose of improving particular property of the person to the extent that the consideration payable for the property or service would be included in determining the cost (or in the case of capital property, the adjusted cost base) of the particular property for purposes of the Income Tax Act.

A number of factors must be considered in determining whether a property or service constitutes an improvement and each case must be examined in light of the particular facts. The factors that would ordinarily be considered include all of the facts surrounding the acquisition of the property and its intended use; the person involved in the activities (e.g., whether an individual, corporation, etc., their history of property development, and the frequency of such activities), and generally accepted accounting principles.

Outlays and expenses incurred in respect of the acquisition of construction services for the Centre will generally constitute part of the cost of the property to which the amount relates. For example, amounts paid to general, mechanical, and electrical contractors that relate to the development of the Centre would ordinarily be in respect of the construction of the Centre. If that is the case, the cost of acquiring such services would form part of the cost of the property and hence an improvement thereto. Certain amounts incurred in respect of the acquisition of land and construction of the Centre, which may otherwise be added to the cost of the property, may, in certain circumstances, be deducted in determining the Corporation's income from a business or property. Where such amounts are deducted from income, the amounts will not form part of the cost of the property and hence will not be an "improvement" for GST/HST purposes. For example, in some cases the following costs may be deducted from income from a business where such costs would otherwise form part of the cost of a property:

•   amounts paid for expenses of representation ^[iii]Footnote 3, and

•   amounts paid for site investigation ^[iv]Footnote 4.

Maintenance costs

Under the provisions of section 225.1, the GST/HST payable by a charity on acquisitions of property and services that are not capital property and not improvements to property (e.g., maintenance costs) will generally not give rise to an ITC.

Public Service Body Rebate

Under section 259, a charity may claim a public service body rebate of 50% of the GST, or the federal portion of the HST, paid or payable on eligible purchases for which it cannot claim an ITC. The Corporation may claim a 50% rebate of the GST/HST payable in respect of the maintenance costs. If the capital property is not used by the Corporation primarily in its commercial activities, the Corporation may claim a 50% rebate in respect of the GST/HST payable on the acquisition of the property and the improvements thereto.

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, Excise and GST/HST Rulings and Interpretations Service, 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.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 954-4393. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.

Yours truly,

Hugh Dorward
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2008/01/22 — RITS 97602 — Wash Transactions Policy