|
11950-2, 11950-5
|
c.n. 967(JB)
|
This is in response to your memorandum of November 17, 1994, addressed to XXXXX, XXXXX, which you submitted for our review and comment. We apologize for the delay in responding.
Statement of Facts
1. Company A is a GST registrant and owns a building for supply in the course of commercial activity.
2. Company A makes a taxable supply by way of lease of the entire building to Company B.
3. Company A is claiming full input tax credits with respect to the GST paid on the inputs related to the building.
4. Company B is a GST registrant and initially used the entire building in its commercial activity. Company B is claiming full input tax credits with respect to the GST paid on its inputs related to the building.
5. Company B later began to sublease a part of the building to an individual for use as a place of residence for a period in excess of one month. That part qualifies as a "residential unit" as defined for GST purposes. This was done without the prior knowledge of Company A.
6. Company B is not charging GST on the lease payments made by the individual. Company B has continued to claim full input tax credits with respect to the GST paid on its inputs related to the entire building.
Interpretations Requested
1. Is the part of the building being used by the individual a "residential complex" for GST purposes as defined in subsection 123(1) of the Excise Tax Act (the "Act")?
2. If so, which party, Company A or Company B, would be required to self-supply when the residential complex is first occupied by an individual as a place of residence?
3. How will the lease of the building by Company A to Company B be treated for GST purposes as a result of part of the building being used for residential purposes?
Interpretations Given
1. The part of the building that contains the residential unit together with that part of any common areas and other appurtenances to the building, and the part of the land reasonably necessary for the use and enjoyment of the building as a place of residence for individuals, would be considered a "residential complex" for GST purposes as defined in subsection 123(1) of the Act.
2. Company B would be deemed to be a builder and to have substantially renovated the residential complex by virtue of subsection 190(1) of the Act and, therefore, is required to self-assess pursuant to subsection 191(1) of the Act on the fair market value of the part of the building that is a residential complex when that part is first occupied as a place of residence by an individual under a lease, licence or similar arrangement. The lease by Company B to the individual would be an exempt supply by virtue of section 6 of Part I of Schedule V to the Act.
3. The supply by way of lease of the part of the building that is a residential complex by Company A to Company B would no longer be considered a taxable supply but rather an exempt supply. As subsection 136(2) of the Act requires that a combined supply of a residential complex and other real property be viewed separately, the lease payments in respect of that part of the property that is a residential complex would be exempt under section 6.1 of Part I of Schedule V to the Act while the remainder would continue to be subject to GST.
Analysis
1. For purposes of the GST, subsection 123(1) of the Act defines a "residential complex", in part, to be:
... that part of a building in which one or more residential units are located,together with
(i) that part of any common areas and other appurtenances to the building and the land immediately contiguous to the building that is reasonable necessary for the use and enjoyment of the building as a place of residence for individuals, and
(ii) that proportion of the land subjacent to the building that that part of the building is of the whole building, ...
Therefore, the part of the building which is a residential unit and is supplied by way of a lease in excess of 60 days would be considered a "residential complex" for GST purposes.
2. Section 190 of the Act deals with situations where real property is converted for use, or begins to be used, for residential purposes. Subsection 190(1) of the Act applies where a person converts non-residential real property into a residential complex without constructing or substantially renovating the complex. In the fact situation outlined above, non-residential real property was converted for use as residential real property. The issue, however, is which party has converted the property and is subject to subsection 190(1).
Although Company A owns the property, it was Company B that began to use the property for residential purposes. Furthermore, Company B satisfies all of the conditions of subsection 190(1) of the Act so that, pursuant to that provision: (a) Company B is deemed to have substantially renovated the complex; (b) the renovation is deemed to have begun at the time the property is first used for residential purposes and to have been substantially completed at the earlier of the time the complex is occupied by any individual as a place of residence or lodging and the time the person transfers ownership of the complex to another person; and (c) Company B is deemed to be a builder of the complex.
As Company B is deemed to be a builder and to have substantially renovated the complex, subsection 191(1) of the Act will apply. This subsection will require Company B to self-supply when possession of the complex was given to the individual under a lease, licence or similar arrangement entered into for the purpose of its occupancy as a place or residence. Company B shall be deemed, at the time possession is given, to have made a supply by way of sale and to have paid, as a recipient, and to have collected as a supplier, tax in respect of the deemed supply calculated on the fair market value of the complex.
The lease payment from the individual to Company B in respect of the part of the building that is a residential complex would be exempt from GST under section 6 of Part I of Schedule V to the Act. As the lease of the residential complex by Company B to the individual is an exempt supply, no input tax credits would be available in respect of the inputs related to that part which is a residential complex. Input tax credits in respect of the inputs relating to the part of the building supplied in the course of commercial activity would still be available provided the requirements for such credits are met pursuant to subsection 141(5) of the Act.
3. Company B changed the use of part of the building that forms a residential complex from commercial to non-commercial (long-term lease of a residential complex). Accordingly, the tax status of the original lease entered into with Company A in respect of that part would also change. The part of the lease pertaining to the residential complex must be viewed separately pursuant to subsection 136(2) of the Act which requires that where a supply of real property includes a residential complex and other real property, the supply of that part that is a residential complex is deemed to be a separate supply from the supply of the part that is other real property.
Section 6.1 of Part I of Schedule V to the Act exempts a supply of part of a building that forms a residential complex to a person who in turn leases the property on an exempt basis under either section 6 or section 7 of that same Part. Under section 6.1, and in conjunction with subsection 136(2.1) of the Act, the exemption in section 6.1 applies to a lease interval rather than the full lease and only if, throughout the lease interval, the recipient lessee or any sublessee is making, or intends to make, an exempt lease of the land or building under section 6, 6.1 or 7 of Part I of Schedule V to the Act. A lease interval is described in subsection 136(2.1) of the Act as a part of a lease for which two or more payments are attributable to successive parts of the lease. (Note that subsection 136(2.1) of the Act comes into effect January 1, 1993.)
Company B, the lessee, begins to make an exempt supply of the residential complex to an individual, the sublessee, under section 6 of Part I of Schedule V to the Act at a particular time. Unless that particular time begins on the first day of a lease interval of the head lease between Company A and Company B, the consideration with respect to that lease interval of the head lease will remain taxable until the beginning of the first lease interval following the particular time. That is, as indicated above, section 6.1 of Part I of Schedule V to the Act would only apply where the sublease by Company B to the individual was exempt throughout the entire lease interval of the head lease.
As subsection 136(2) of the Act will require that the supply of that part of the building that is a residential complex be viewed as a separate supply from the other real property, section 6.1 of Part I of Schedule V to the Act will apply to exempt the supply under the head lease of that part at the beginning of the appropriate lease interval (i.e., the lease interval in which the supply made by Company B to the individual is exempt throughout the entire interval). At such time, subsection 136(2.1) of the Act will deem the supply of the part of the building that is a residential complex to be a separate supply for each lease interval and deem a portion of the consideration that makes up the periodic rent payment reasonably attributable that part to be separate from the consideration in respect of the other part.
As the lease by Company A to Company B of the part of the building that is a residential complex is an exempt supply pursuant to section 6.1 of Part I of Schedule V to the Act, Company A will no longer be able be able to claim input tax credits in respect of the GST paid on its inputs relating to that part. Input tax credits in respect of the inputs relating to the part of the building supplied in the course of commercial activity would still be available provided the requirements for such credits are met pursuant to subsection 141(5) of the Act.
Comment
In the above scenario, part of the supply by way of lease of the building by Company A is commercial activity while the supply of the other part (i.e., the residential complex) is exempt. As Company A was at one time supplying the entire building in the course of commercial activity, it would have been eligible to claim ITCs in respect of the GST paid on its last acquisition of the entire property and any improvements thereto. Normally, where a GST registrant begins to use capital property otherwise than in the course of commercial activity, a change-in-use rule will apply (e.g., section 206 of the Act).
However, in the above fact scenario, the application of a change-in-use rule may cause GST to be remittable by Company A in respect of that part of the building which is a residential complex and is being supplied by way of exempt lease under section 6.1 of Part I of Schedule V to the Act, a part of the building which has already been subject to a self-supply by Company B. As a result, we are seeking clarification from the Department of Finance as to whether Company A is subject to the change-in-use provisions and will advise you at the earliest opportunity of our findings.
While we regret that we are unable to provide you with a complete response, we trust that in the interim the above will be beneficial. If you require clarification of any of the points raised in this letter, please contact John Bain at (613) 954-3772.
J.A. Venne
Director
Special Sectors
GST Interpretations and Rulings
11870-4-2
c.n. 971(JB)
Email this Content