Dear XXXXX:
Thank you for your undated letter received on October 10, 1995, concerning a request for an interpretation in respect of the application of GST to a building that will be used as a residential complex for ten months of the year and will be used in commercial activities for two months of the year.
Facts
1. Two individuals who are in a partnership intend to purchase a building on a tax exempt basis, as a residential complex. They plan to rent the building to an individual for use as a residential complex for ten months of the year. They intend to use the building as an antique store for the remaining two months of the year.
Question
After the partners have used the building in commercial activities and begin to use it as a residential complex again, they will be deemed to be builders pursuant to subsection 190(1) and to have supplied the building to themselves pursuant to subsection 191(1), so will have to remit tax on the fair market value. Do they get to claim input tax credits the next time they are deemed to have received a supply pursuant to subsection 206(2)? Does the phrase "except where the supply is an exempt supply" refer the last acquisition or to the supply deemed to have been received when the owners begin to use the property in commercial activities?
Response
Section 206 of the Excise Tax Act (ETA) does not apply to capital personal property of individuals. When the two individuals cease to use the real property as a residential complex and begin to use it in commercial activity, they would be entitled to claim input tax credits based on the formula in subsection 207(1) of the ETA, except where the supply is an exempt supply.
The phrase "except where the supply is an exempt supply" refers to the self-supply that the owners are deemed to have made when they begin to use the property in commercial activity. However, that deemed self-supply would not be an exempt supply of a residential complex. Since the deeming provision takes effect only when the owners have begun using the property in commercial activities, the deemed self-supply is a taxable supply of real property that is not a residential complex. The owners are therefore deemed to have paid tax equal to the lesser of the tax payable on the last acquisition of the property and on improvements, or the tax payable on the fair market value of the property.
On the first occasion that the building is used for commercial purposes, few or no input tax credits would be available, since no GST was payable on the purchase price, and the fair market value of the building would presumably be less than the value of any improvements. However, on the second occasion that the owners begin to use the building in commercial activities, they could claim input tax credits on the lesser of the tax paid on the deemed self-supply and any subsequent improvements or the tax that would be payable on the fair market value of the property at the time they begin to use the building in commercial activity.
If the tax liability and the eligibility for input tax credits both occur within a reporting period, tax would be payable only on any amount by which the fair market value of the property is less than the fair market value of the last deemed self-supply of a residential complex, and any subsequent improvements. However, if a reporting period occurred during the period of commercial use, the owners of the property would be eligible to claim input tax credits for that reporting period.
The owners would then be required to pay GST on the fair market value of the property during the next reporting period, during which they would have been deemed to have made a supply of a residential complex to themselves.
We have reviewed the incoming letter from XXXXX, and she seems to have the impression that tax is payable when the property is put to commercial use but can be recovered when the property is used as a residential complex. As discussed above, the situation is actually the opposite. No GST will be payable when the building is first purchased and no GST is recoverable when it is first used for commercial purposes, unless there have been improvements in the meantime. However, GST is payable on the fair market value of the property when it is first used as a residential complex. Input tax credits can be claimed when the building is used for commercial purposes.
XXXXX also seems to be of the opinion that, if the two individuals are registered, they can treat the antique business as a separate activity from the ownership of the real property for purposes of the $30,000 limit for registration requirements. However, this is not the case unless the antique business is operated by a separate legal entity, such as a corporation.
If you require any further information concerning this matter, please contact Mr. Don Dawson at 952-9211.
J.A. Venne
Director
Tax Policy
GST Interpretations and Rulings
File #11950-1
Ref. s. 165
(DD)
Document #1523
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