As you requested, we are providing the following comments concerning the lease agreement between XXXXX. We appreciate your patience in awaiting our reply.
Summary of Facts
• XXXXX leases land from XXXXX constructs a residential complex, then leases the complex back to the XXXXX then supplies long term residential leases to its employees.
• Under the lease back agreement, XXXXX charges a "base rent" plus "additional rent." The additional rent is based on actual operating costs (taxes, insurance, office, repairs, etc.), plus a management fee earned by XXXXX for its services of dealing with tenant concerns, inspections, retaining on-site manager etc.
Issue
(i) Is the supply of management services a separate supply from the exempt supply by way of lease of the residential complex?
(ii) What is the tax status of the other fees charged as "additional rent", which represent reimbursements for property taxes, insurance, repairs and maintenance, office supplies etc.
Reply
(i) The supply of management services provided by XXXXX to XXXXX is a taxable supply and is a separate supply from the exempt supply by way of lease of the residential complex.
(ii) The other fees charged as "additional rent" represent consideration for a long term lease of real property and, as such, are consideration for an exempt supply of real property.
Reasons
We have reviewed the policy statement on Single and Multiple Supplies (P-077) and several previous rulings on this issue in preparing our reply. The following supports our finding that the management services are separate supplies, and not part of a single supply of a residential complex. The following criteria are outlined in Policy Statement P-077.
• Are management services inputs to another supply?
The management services are not inputs that are consumed by the supplier in providing other property or services; rather, the supply of management services are services that are themselves provided to the recipient.
• Number of suppliers
Although there is only one supplier in the situation at hand, it would be quite possible that a supplier other than XXXXX could have provided the management services. This indicates that the management services are a separate supply.
• Provisions of the Agreement and Invoicing
The provision of management services is explicitly and distinctly described in the agreement between XXXXX and XXXXX[.] Further, the actual consideration for the management services is determined and itemized in the agreement and the amount charged by XXXXX[.] This indicates that the management services are a separate supply.
The following "additional factors", as outlined in the policy statement were also considered. The recipient XXXXX is quite aware of the specific elements of what is being supplied by XXXXX[.] This is an indication that the supply of management services is a separate supply. The supply of the residential complex is not contingent upon the supply of management services; however, the supply of management services is contingent upon the supply of the residential complex. Accordingly, this factor is not conclusive.
On the basis of the above, it is our finding that the supply of management services provided by XXXXX to XXXXX is a taxable supply and is a separate supply from the exempt supply by way of lease of the residential complex.
When replying to any of the parties concerned with this issue, you should make clear that this ruling addresses the supply of management services provided by XXXXX to XXXXX and does not address any possible charges that XXXXX makes to its tenants (i.e. the residents) for management services. It is probable that these charges, if any were made, would be treated as consideration for the lease of the premises.
With respect to the other items set out in the agreement (property taxes, insurance, minor repairs and maintenance etc.), we agree with your view that these activities represent inputs into the supply of the leased property. Accordingly, the payments by XXXXX with respect to these amounts represent consideration for an exempt supply of real property (i.e., a long term lease). This position conforms with previous policy decisions concerning "additional rents".
If you have any further requests, please contact Michael Place at (613) 954-7936.
J.A. Venne
Director
Special Sectors
GST Rulings and Interpretations
File: 11865/1/5/10(lgd)
CN: 1620
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