October 31, 1996
Thank you for your E-mail message of July 10, 1996 concerning the application of the Goods and Services Tax (GST) to the repairs / renovations of a mixed use building by a registrant. We apologize for the delay in our response.
Our understanding of the facts is as follows:
Statement of Facts
1. A registrant owns a building which was used 50% for a single apartment rented long-term to an unrelated individual for use as a residence, and 50% as a convenience store operated by the registrant.
2. There was a fire in the convenience store which also caused some damage to the apartment.
Transactions
1. The registrant converts the convenience store into two apartments and also repairs the damages to the existing apartment at the same time. The registrant has claimed full ITCs on all the repairs / renovations made to the building.
2. All three apartments will be rented by the registrant on a long-term basis as places of residence.
GST Treatment
Based on the facts set out above, our views are as follows:
1. The registrant is not entitled to ITCs on the repairs to the apartment portion of the building.
It is also not entitled to ITCs on the renovations to the convenience store portion of the building, from the time that it began using the building exclusively in non-commercial operations, i.e. in the exempt activity of long-term leasing.
2. Subsection 190(1) of the Excise Tax Act (Act) does not apply to the renovations..
3. At the time when the registrant first begins to use the building exclusively in non-commercial operations, the registrant must self-assess according to the change-in-use formulas described in subsection 207(1) or 206(4) of the Act, (ss. 207(1) if he is an individual; ss. 206(4) if the registrant is not an individual or a PSB that is not a financial institution). In the applicable formulas, A is the tax calculated on the fair market value of the entire building, and B is the extent to which the building was used in commercial activities (50% in the case at hand).
Rationale
1. The repairs to the apartment are made to provide exempt supplies of long-term residential leasing. For purposes of ITCs, subsection 141(5) deems the apartment and the convenience store to each be a separate property. At the time when the registrant is determined to begin using the building exclusively in non-commercial operations, it is engaged in exempt supplies - long-term residential leasing - ITCs will no longer be available and the registrant should apply to be de-registered.
The particular time when the registrant begins to use the building exclusively in non-commercial operations, for purposes of sections 206 and 207 of the Act is a question of fact. Factors which would indicate that the registrant began to use the building exclusively in non-commercial operations (but not conclusive on an individual basis in and by itself) would include:
i) the particular time that the registrant entered into a contract of renovations with a building contractor to convert the convenience store into two apartments and/or required a building permit.
ii) the particular time that construction materials were brought to the building site to be used in the renovations.
iii) the time actual renovations commenced.
iv) the particular time that all operations in respect of the convenience store ceased (e.g. inventory of the convenience store is disposed of).
v) the particular time when the registrant applied for de-registration.
2. Subsection 190(1) does not apply because two conditions are not met:
a) immediately before the time the registrant began to hold or use the building as a residential complex, the building must be held for use as capital property in a business or commercial activity of the registrant.
b) immediately before that time, the building was not a residential complex.
The above conditions are not met because, at that time, half of the building was used as a residential complex.
Should you have any further questions or require clarification on the above, please do not hesitate to contact the undersigned at (613) 952-9587.
Yours truly,
Bao Tran
Policy officer
Financial Institutions and Real Property
GST Rulings and Interpretations
ON OFFICE COPY
Legal References:
Authority:
Reference:
| b.c.c.: |
District Chief, Audit |
| NCS Subject Code(s): |
XXXXX |
b.c.c.: H.Q. Quality Assurance
| b.c.c.: |
hard copy - X/F GST - XXXXX |
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