30 March 2007 GST/HST Interpretation 81675 - Sections 6, 7 and 8 of Part III of Schedule V

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.

Thank you for your XXXXX in which you enquired as to what impact setting rent above market prices might have on the expectation of making taxable supplies of a high-end ski condominium unit located XXXXX. We apologize for the delay in responding to your question.

You have stated: The reason it [the ski condo] has low bookings is because the rental price is quite high, additionally whenever XXXXX [the non-resident owner of the ski condo who is registered for GST/HST purposes] is in XXXXX stays at the ski condo (a couple of weeks per year max).

You have asked: Should I be making an assessment on this based on the fact that the registrant has set the rent above market prices so that it is not reasonable for XXXXX to have it rented out every night?

In determining the extent to which a vacation property is used by an individual for the purpose of making taxable supplies one must use a fair and reasonable method and apply this method consistently throughout the year. Our position is that all of the relevant factors should be considered when determining the extent of use in commercial activities at the time an ITC is being claimed.

Actual rental data (i.e., days of rental occupancy or rental revenue) for the subject ski condo, the condominium complex in which it is situated and other similar complexes in the same area is an important factor in determining whether it is reasonable to expect that the ski condo will be rented out. Other relevant factors include: the terms of the rental agreement in force and the parties compliance with those terms; the extent to which the ski condo is fit and maintained for rental use; the extent to which the ski condo is blocked or set aside for personal use; the impact that particular days of personal use has on the availability and expectation of rental use; and the viability of the ski condo's rental market on a year-round basis. This list of factors is not meant to be exhaustive and other relevant factors may also be used. These factors can also be considered in determining whether the change-in-use rules apply to provide for an additional ITC, or a recapture of ITC. Refer to GST/HST Info Sheet GI-025 - The GST/HST and the Purchase, Use and Sale of Vacation Properties by Individuals, for more information on determining extent of use and change-in-use.

Whenever there is a mix of personal and taxable short-term rental use of a vacation property (such as a ski condo), it is open to Audit to determine whether the method used by the owner is fair and reasonable, in compliance with subsection 141.01(5) of the Excise Tax Act (ETA). Audit should determine, based on the factors listed above, whether it is reasonable to expect that the ski condo would be rented out for all, some, or none of the days that the ski condo was not occupied for personal use. Whether there is a reasonable expectation of rental to claim an ITC at the time of purchase or whether, subsequent to the purchase, there is a decrease in that expectation or a loss of that expectation causing a change-in-use, is a question of fact that depends on the circumstances of each case. If Audit determines that the method used by the owner of a vacation property is not fair and reasonable, Audit could decide to assess using an actual occupancy method to deny some or all of the ITC claimed in respect of the purchase provided that the actual use is reflective of the information that would have been available to the owner at the time of purchase. Alternatively, where the extent of use method used was fair and reasonable at the time of purchase, actual occupancy levels in a subsequent reporting period could trigger a change-in-use resulting in a recapture of all or a portion of the ITC claimed at the time of the purchase.

For the purchase of a ski condo at XXXXX (compared to other ski hills with lesser rental occupancy) it may be reasonable to expect that the ski condo will be rented on those days when it is not occupied for personal use due to the high levels of rental occupancy in the area and the viability of a year-round rental market. However, if the high-end rental market is not as viable as the medium and low-end markets at XXXXX, then perhaps the expectation of rentals being made on unoccupied days will decrease. One of the advantages of using an actual occupancy method to calculate the extent of use of a ski condo in commercial activities is that a less viable rental market will generally be reflected in lower rental occupancy rates and therefore lower ITC entitlements.

In your case, using an actual occupancy method and the data you have provided, the extent of commercial use for XXXXX would be calculated as XXXXX%.

I would caution against concluding that the rent for the ski condo has been set above fair market value or that levels of rental occupancy for the ski condo have been reduced as a direct result of setting the rental rates above market prices. The rental rate set by the registrant may be appropriate for the high-end market. In fact, based on the data you have provided, there appears to be a trend towards increasing levels of rental occupancy XXXXX, which would tend to support that there is a growing market and a reasonable expectation of rental for some of the time.

Finally it should be noted that there is no reasonable expectation of profit test for such supplies of real property in the ETA so the distinction between a "reasonable expectation of supply" and a "reasonable expectation of profit" must be respected.

We trust this information will assist you. Should you wish to discuss this response or have any further queries related to this matter, please contact me at (613) 954-8852.

2007/04/04 — RITS 82751 — Application of the GST/HST to XXXXX Leases and Trade-Ins