22 July 1994 GST/HST Interpretation 11870-5/1212 - Supply of Residential Condominium Units (the "Units") in the Residential Condominium Complex

This is in reply to your enquiry of March 14, 1994 regarding the supply of residential condominium units (the "units") in the XXXXX residential condominium complex XXXXX located in XXXXX. We apologize for the delay in our response.

Our understanding of the facts is as follows:

1. XXXXX was formed pursuant to a registered declaration of partnership. The general partner of the XXXXX is XXXXX.

2. According to the sample Partnership Agreement, dated XXXXX, the purpose of the XXXXX was to acquire and develop four apartment buildings containing 30 units. In addition, the sample Partnership Agreement indicated that the capital of the XXXXX would include 30 limited partnership units. Initially, however, only 10 limited partnership units would be created and the remaining 20 units could be cancelled or postponed.

3. The Offering Memorandum, dated September 1, 1991, however, states that the Partnership was "... formed for the purposes of constructing, selling, owning and operating a maximum of 10 condominium and/or apartment suites in the four buildings containing a total of 30 apartments ...." The Offering Memorandum indicated that XXXXX would retain the 10 units on behalf of the XXXXX as rental accommodation and would sell the remaining 20 units.

4. On September 30, 1990, XXXXX entered into an agreement with XXXXX for the supply of the right and option to acquire the land and uncompleted buildings of XXXXX and for the completion of the construction. According to the agreement, XXXXX acquired 10 of the units on behalf of the XXXXX and acquired the remaining 20 units on its own behalf.

5. On or before December 31, 1990, XXXXX transferred ownership and possession of XXXXX to XXXXX pursuant to the Agreement of Purchase and Sale, and XXXXX signed a Trust Declaration declaring a part of the lands to be held on behalf of the XXXXX[.]

6. XXXXX rented the XXXXX units it held on behalf of the Partnership to individuals for terms of one month or more. The units were first rented between March 1, 1991, and August 1, 1993.

7. XXXXX sold the remaining XXXXX units to various individuals under agreements of purchase and sale. Many of these units were rented by XXXXX before the sale and the same tenants continued to occupy the premises as the purchaser's tenant after the sale. These units were first rented between February 27, 1991, and August 1, 1993.

8. The XXXXX condominium complex was registered as a condominium on March 10, 1993.

9. XXXXX collected and remitted GST with respect to the sales of all the units and claimed all input tax credits.

Interpretation Requested

You requested confirmation that XXXXX should have self-assessed tax as soon as each unit was rented. You also wanted to know who should have claimed input tax credits on construction costs and who should have remitted the GST.

Interpretation Provided

Based on the information provided, it appears that the XXXXX owned the 10 units held by XXXXX in trust for the XXXXX. The XXXXX is a "builder" within the meaning of subsection 123(1) of the Excise Tax Act (the "Act") in respect of these 10 units since it had an interest in the property before the comlex was registered as a condominium. Although XXXXX gave possession of the units to individuals under an agreement, it did so on behalf of or as agent of the XXXXX. XXXXX, therefore, should have self-assessed in accordance with subsection 191(1) of the Act on the fair market value of each of the units when the unit was substantially completed and first occupied by an individual as a place of residence under a lease, licence or similar arrangement.

It appears that XXXXX owned the other 20 units (and not the Partnership as specified in the sample Partnership Agreement) and is the person who gave possession or sold these units. As with the XXXXX is a "builder" in respect of these 20 units since it had an interest in the property before the complex was registered as a condominium. XXXXX should, therefore, have self-assessed in accordance with subsection 191(1) of the Act on the fair market value of each of these units which were occupied by an individual as a place of residence under a lease, licence or similar arrang[e]ment.

Where the unit sold by XXXXX was not leased prior to the sale, or where it was rented to a particular recipient under or as a result of an agreement of purchase and sale, pursuant to paragraph 168(5)(a) GST is payable by the recipient on the earlier of the day ownership was transferred to the purchaser under the agreement and the day that is 60 days after the condominium complex was registered as a condominium.

The XXXXX, if registered, would claim the input tax credits (ITCs) for construction work relating to the 10 units held in trust by XXXXX that occurred after ownership was transferred. Similarly, XXXXX (if registered) would claim ITCs for construction work relating to the 20 units that it owned. If not registered, a rebate may be available under section 257 of the Act as of the time of the self-supply under section 191 of the Act.

Construction work and building materials for XXXXX provided by XXXXX to the XXXXX or XXXXX after they became owners would be a GST taxable supply and XXXXX should have collected GST. XXXXX would be entitled to claim ITCs for its costs of supplying construction materials and services to the XXXXX and XXXXX.

Since construction of the units began before 1991, the XXXXX and XXXXX may be entitled to claim an FST New Housing Rebate on the units they own pursuant to subsection 121(3) of the Act. Provided the condominium complex was more than 25% completed before 1991, the XXXXX and XXXXX would be entitled to claim a rebate based on the estimated federal sales tax on the particular units they own provided the rebate was not claimed by any other person entitled thereto.

Analysis

Self-Assessment

While the transfer of XXXXX from XXXXX to XXXXX was a taxable supply, GST was not payable on the supply in accordance with subsection 336(1) of the Act because XXXXX acquired ownership and possession of XXXXX from XXXXX before 1991 pursuant to the Agreement of Purchase and Sale dated September 30, 1990.

XXXXX acquired ownership of XXXXX while the complex was under construction and before it was registered as a condominium.

Subsection 145(1) of the Act provides that an activity engaged in by a person as a member of a partnership is deemed to be an activity of the partnership and not an activity of the person. Since the part of the condominium complex relating to the 10 units was held by XXXXX in trust for the XXXXX, and not on its own behalf, the Partnership and not XXXXX is treated as the builder of that part of the complex.

It is important to note that XXXXX and the XXXXX became owners of the XXXXX lands on December 31, 1990, and not simply purchasers under an agreement of purchase and sale to be completed at a later date. The fact that, under certain circumstances (e.g. failure to obtain condominium registration) XXXXX and the XXXXX would be entitled to transfer their legal title in XXXXX back to XXXXX does not mean that their ownership of the XXXXX lands was delayed until the condominium complex was registered. Therefore, the provision in paragraph (h) of the definition of "builder" in subsection 123(1) of the Act does not apply to exclude XXXXX and the XXXXX from falling within the definition of builder. Even if it did apply, paragraph (d) of the definition of "builder" would apply to XXXXX and the XXXXX which is not excluded under paragraph (h) of the definition.

Pursuant to the terms of the agreements between XXXXX and XXXXX and the XXXXX is to provide rental management services relating to the condominium units both before and after the condominium complex is registered. Pursuant to these agreements, the 10 units owned by the XXXXX were first rented to individual tenants over the period from March 1991 to August 1993 after the completion of each unit. Presumably, these units were rented by XXXXX under the rental management agreement to individuals on behalf of or as agent of the XXXXX which was the actual owner of the 10 units. The provisions of subparagraph 191(1)(b)(i) of the Act apply to require the XXXXX to self-assess on the fair market value of each of the XXXXX [u]nits at the later of the time a residential tenant first took possession of the unit and substantial completion of that unit. A unit can fall under the definition of a "residential condominium unit" in subsection 123(1) of the Act despite the fact that registration of the condominium complex under the provincial "Condominium Act" has not yet taken place, since the definition applies to a residential complex that is or that is intended to be a residential condominium unit.

The XXXXX will not be able claim an ITC for the self-assessed GST because the unit is used only in providing long term residential rents. Subsequent sales of the units without an intervening change of use or substantial renovation would be exempt supplies pursuant to section 4 of Part I of Schedule V to the Act.

While the sample Partnership Agreement indicated that the Partnership would acquire and develop all XXXXX the units, the Offering Memorandum indicated that the XXXXX was only engaged in the construction, ownership and operation of the 10 units. The Offering Memorandum contains additional provisions which support that the assets of the Partnership have been limited to the XXXXX units. For example, one clause in the Offering Memorandum states that "the land has been conveyed to the General Partner XXXXX who has signed a Trust Declaration declaring a part of the lands to be held on behalf of the Limited Partnership" and that 10 of the completed units will be owned by the XXXXX. Another clause says that XXXXX signed the Agreement of Purchase and Sale and Construction Completion Agreement "in part as Declarant and in part as General Partner" Therefore, to determine whether the XXXXX or XXXXX owned these XXXXX [u]nits the auditor should examine:

(a) the Trust Declaration;

(b) the Agreement of Purchase and Sale, especially the portion which shows that XXXXX only bought the 10 units on behalf of the XXXXX[;]

(c) the Construction Completion Agreement, especially the portion which shows the construction of the 10 units was completed on behalf of the XXXXX;

(d) any other evidence that indicates that XXXXX cancelled the remaining XXXXX limited partnership units and that the XXXXX was only engaged in constructing, owning and operating a maximum of XXXXX condominium and/or apartment suites; and

(e) how the sales of the units were accounted for (e.g. did XXXXX show the revenue in its books or in the partnership's books).

Based on the information provided, it appears that XXXXX was the owner of these 20 units which were either rented or sold by XXXXX. Therefore, XXXXX should have self-assessed tax pursuant to subparagraph 191(1)(b)(i) with respect to those of the XXXXX [uni]ts that were rented to residential tenants who did not acquire possession under, or as a consequence of, an agreement of purchase and sale. The same considerations previously outlined as to timing of self-assessment apply.

Where, however, the auditor determines that the XXXXX owned all of the units in the four buildings, the XXXXX, not XXXXX, would be required to self-assess pursuant to subparagraph 191(1)(b)(i) on the units which were occupied by tenants and who did not take possession under, or arising from, an agreement of purchase and sale. As discussed below, the XXXXX would also be required to collect and remit the GST on the sale of the units which were not leased prior to the sale.

GST on Sales

Those sales of condominium units by XXXXX (or the XXXXX if applicable as noted above) that were made prior to first possession for use as a place of residence or where occupation was under or as a consequence of an agreement of purchase and sale were taxable supplies. Even if a buyer under an agreement of purchase and sale of a unit was given possession of the unit between the time when the agreement was finalized and legal title to the unit was conveyed after registration of the condominium complex, the consideration payable for the sale would be subject to GST and XXXXX would not be required to self-assess.

The special rule in paragraph 168(5)(a) of the Act governing timing of liability for GST on sales of residential condominium units applies to the sales of units by XXXXX[.] Therefore, GST is not payable on the taxable supply of these units until the earlier of the day that legal title to a unit is transferred to the purchaser and the day that is 60 days after the day the complex is registered as a condominium (i.e. the tax would be payable on May 9, 1993, unless the legal title is transferred before that date.)

Claiming of Input Tax Credits

Once XXXXX and the XXXXX became owner of the lands on which XXXXX was being constructed they would have become owners of any building materials subsequently affixed to the XXXXX lands.

Construction activities performed by XXXXX on XXXXX after transfer of ownership would be the supply of a GST taxable service. For example, if XXXXX purchased lumber and its employees used that lumber in construction work on XXXXX that work would be a taxable supply. XXXXX would be able to claim an input tax credit for the GST that it paid when it purchased the lumber and would be required to charge XXXXX and the XXXXX GST on the consideration payable for the supply. If XXXXX or the XXXXX were not GST registrants and the supply from XXXXX was not acquired in an arms-length transaction, section 155 would apply to deem the consideration for such a supply to be equal to the fair market value of the supply if the actual consideration is nil or less than fair market value.

We understand that neither XXXXX nor the XXXXX is, or was at any relevant time, actually registered for GST. Therefore, they will not fall under the definition of registrant under subsection 123(1) unless they were required to be registered.

As the XXXXX holds the units for the primary purpose of leasing them, rather than for resale, the units would fall under the definition of capital property. The small supplier threshold does not include sales of capital property, therefore, the XXXXX would not cease to be a small supplier by virtue of its requirement to self-assess on the units pursuant to subparagraph 191(1)(b)(i). Subsection 195.1(1) of the Act, which deems a residential complex not to be capital property until self-assessment occurs does not apply to section 148 of the Act The Partnership would, therefore, not be required to register, unless it or an associated person had other commercial activities that caused it to exceed the small supplier threshold. Taxable sales, including deemed taxable sales of real property by a non-registrant, may, however, trigger the application of section 257 at such time to allow for a rebate of previously unrebated GST relating to acquisition of the real property and improvements to that property to a maximum of the amount of GST applicable to the taxable sale.

XXXXX appears to hold its interest in XXXXX for the primary purpose of resale. Therefore, the consideration for taxable sales of units made by it should be included when determining whether it exceeded the small supplier threshold. The first taxable sale of a unit for consideration in excess of $30,000 will have caused XXXXX to exceed the small supplier threshold, and since the sales would be made in the course of a business, XXXXX would be required to register. Although sales of real property are subject to GST regardless of whether the supplier is a small supplier, exceeding the small supplier threshold triggers the application of section 171 of the Act which generally will then allow an ITC to be claimed for previously unrebated or uncredited GST relating to property on hand and for use in commercial activities. Unlike the rebate under section 257, the ITC arising from section 171 will be limited to the GST applicable to the fair market value of the property on hand at the time of becoming a registrant if the actual GST paid for that property and improvements is greater than this amount. Section 171 can trigger eligibility for ITCs on all property on hand for use in commercial activities whereas the section 257 rebate only applies to GST relating to the particular real property that is sold.

Federal Sales Tax New Housing Rebate

Given that the XXXXX and XXXXX owned residential condominium units prior to 1991 and are considered builders, the FST New Housing Rebate will be available in accordance with subsection 121(3) of the Act provided the rebate was not previously paid to any other person entitled thereto.

(Note that XXXXX, even though it may have continued to be a builder of the complex if it maintained an interest in the complex, would not be entitled to the rebate since it did not have ownership of the complex immediately before 1991.) In this regard, the percentage of completion of the condominium complex on January 1, 1991, for each particular unit must be determined for the particular building in which the unit is located on a building by building basis (see policy statement 087). If a claim for this rebate has not been made, the amount of this rebate should be offset against any tax liability owing on the self-assessment or taxable sale upon the application being filed by the taxpayer. The amount of the rebate, in accordance with the FST New Housing Rebate Regulations (SOR/91-53), is based on either $50 per square metre of interior floor space of the condominium unit and proportionate interior floor space of common areas of the condominium complex or the fair market value of the unit in the case of a self-assessment under section 191 or 4.25% of the consideration payable in respect of a taxable sale of the unit. The choice is that of the taxpayer.

Conclusion

Based upon our analysis, it is our view that XXXXX should not have collected GST for any sales of units and should have collected GST for the supplies of construction materials and services it made to XXXXX and the XXXXX[.] It would be entitled to claim ITCs for the GST paid in providing the construction materials and services.

The XXXXX should have self-assessed for GST on the fair market value of the xx units at the time when they were leased.

XXXXX should have collected GST on the sales of those of the XXXXX units which were not leased prior to sale or were leased pursuant to or as a consequence of an agreement of purchase and sale. XXXXX should have self-assessed on the fair market value of those of the XXXXX [u]nits which were leased otherwise than pursuant to or as a consequence of an agreement of purchase and sale.

The XXXXX would be entitled to claim a rebate under section 257 of the Act for the tax paid to construct the units. XXXXX would be entitled to claim ITCs for the tax paid to construct the units at the earlier of the time of the first sale of the unit or at the time it is required to register in accordance with section 171 of the Act. If the tax liability is only in respect of the self-assessed units under section 191 of the Act, a rebate under section 257 of the Act would be available to XXXXX if it is not registered.

Both the XXXXX and XXXXX would be entitled to claim FST New Housing Rebates in respect of the ownership of their particular units if the building in which the unit is located was more than 25% complete as of January 1, 1991, and no rebate was paid to any other person entitled thereto.

We hope that these comments will be of assistance to you. Should you have any questions, please do not hesitate to contact the undersigned at (613) 954-3772.

Stanley Farber
Manager, Real Property
Tax Policy - Special Sectors
Policy and Legislation