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Subject:
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Construction of a Residential Complex by XXXXX
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This is in response to your facsimile of October 26, 1995, in which you request our comments with respect to the construction of a residential complex by XXXXX (hereafter referred to as XXXXX[.]
Statement of Facts
1. XXXXX is a GST registrant operating a beef feed lot and cash crop farming enterprise.
2. XXXXX (hereafter referred to as XXXXX is the principal shareholder of XXXXX[.]
3. In the Spring of 1994, XXXXX constructed a building on land owned by XXXXX[.] The building was constructed for use by XXXXX as a place of residence as well as for use by XXXXX in commercial activity.
4. It is the contention of XXXXX (hereafter referred to as XXXXX the accountant for XXXXX that XXXXX of the building was intended, and is now used, in the commercial activities of the corporation. The remainder of the premises would constitute a "residential complex" as defined for GST purposes. As per XXXXX and XXXXX the uses of the premises in commercial activities include the following:
• using the telephone to call customers, truckers and suppliers;
• business meetings;
• providing meals to truckers and farm workers;
• storage of farm truck; and
• the house is made available 24 hours a day for farm employees performing various farm duties including equipment repair personnel, veterinarians and truckers.
5. XXXXX, it was determined that XXXXX of the building is considered to be used in commercial activities of XXXXX with the remaining XXXXX being used as a "residential complex" by XXXXX[.] The XXXXX of the building used by XXXXX in its commercial activities consists of an office area equal to approximately XXXXX sq. ft. and XXXXX of the garage that is attached to the building and is used for storing equipment.
6. XXXXX has indicated that XXXXX has an amount included in his income pursuant to section 6 of the Income Tax Act as a result of his using part of the building that is a residential complex for personal use. Confirmation was received from the Income Tax Unit of the XXXXX Tax Services office that the taxable benefit was reasonable and allowable. The amount is based on an estimated lease payment. Subsection 15(1) of the Income Tax Act was discussed but was found not to apply.
7. For purposes of our discussion, it is assumed that XXXXX gave possession to XXXXX of part of the building that is a residential complex under a lease for consideration that is less than fair market value.
8. In April of 1995, XXXXX submitted to the Department an appraisal of the building contending the fair market value to be XXXXX. Again, commercial use was stated to be XXXXX.
9. A Departmental appraisal of the building provided in August of 1995 determines the fair market value of the property to be between XXXXX[.]
Interpretations Requested
The above outlined points of fact raise the following questions:
1. Is XXXXX eligible for input tax credits with respect to the construction of the building?
2. Is XXXXX required to self-supply when possession of that part of the building that constitutes a residential complex is given to XXXXX for use as a place of residence?
3. Is XXXXX eligible to receive input tax credits with respect to the ongoing use of that part of the building that is used in commercial activities; that is, the XXXXX?
4. Is XXXXX eligible for the GST new housing rebate?
Interpretations Given
1. Input Tax Credits on Construction of the Residential Complex
Section 170 of the Excise Tax Act (the "Act") sets out restrictions on input tax credits that may be claimed in respect of purchases by a GST registrant that have a significant consumption element which is not in the course of commercial activity. Paragraph 170(1)(b) specifically precludes from input tax credit entitlement those taxable supplies received by a registrant exclusively for the personal consumption, use or enjoyment of an officer or employee, or related individual, of the registrant, except if:
(i) the property or service is resupplied at its fair market value by the employer to the officer or employee in the reporting period of the registrant in which it was acquired; or
(ii) the benefit to the officer, employee or related individual would not be treated as a taxable benefit under section 6 of the Income Tax Act if the property or service were provided without charge.
Based on the above outlined points of fact, as the building was supplied exclusively for the personal use of XXXXX and XXXXX is subject to a taxable benefit pursuant to section 6 of the Income Tax Act in respect of that use, XXXXX is precluded by paragraph 170(1)(b) of the Act from receiving any input tax credits with respect to the GST paid on the construction of the building.
2. Self-Supply
When the construction of the building was completed, XXXXX gave possession of part of the building, XXXXX of the building, to XXXXX under a lease for use as a place of residence. This part of the building is considered to be a "residential complex" for GST purposes as defined under subsection 123(1) of the Act. Section 6 of Part I of Schedule V to the Act would exempt that supply made by way of lease. However, as XXXXX is a "builder" for GST purposes as defined under paragraph (a) of the definition of "builder" found in subsection 123(1) of the Act, XXXXX would be required to self-supply pursuant to subsection 191(1) of the Act on that part of the building that is a residential complex when possession of that part is first given to XXXXX[.]
The purpose of the self-supply rules under section 191 of the Act is to ensure that GST applies to newly constructed or substantially renovated residential complexes rented or otherwise occupied as places of residences, before being sold, since the subsequent sales of those residences will generally be exempt. In these circumstances, section 191 treats the builder as having sold and repurchased the complex thereby requiring the builder to account for the GST on the fair market value of the complex. Accordingly, when XXXXX first occupied the part of the building that is a "residential complex", XXXXX, XXXXX was required to self-supply on XXXXX of the fair market value of the building. XXXXX was required to remit to the Department in the normal fashion GST equal to XXXXX of the fair market value of the building which Departmental appraisers put at between XXXXX[.]
As previously discussed, XXXXX was precluded from receiving input tax credits with respect to the construction of the building by virtue of paragraph 170(1)(b) of the Act. As such, the building prior to self-supply was in a "tax paid" state. With the application of the self-supply rules to that part of the building that is a residential complex, GST will be applicable to that part of the building a second time.
Section 193 of the Act generally applies where a GST registrant makes a taxable supply of real property (other than a sale considered to have been made under subsection 206(5) or 207(2) as a result of a change in use of the property) that was used as capital property in the registrants commercial activities. The registrant is able to claim an input tax credit, notwithstanding section 170 of the Act, for any tax paid on the property that had not previously qualified for an input tax credit. The amount claimable is calculated by multiplying the proportion of non-commercial use of the property by the lesser of the tax payable in respect of the purchase of the property plus any improvements thereto and the tax payable or deemed to have been collected by the registrant in respect of the sale of the property.
With respect to the case at hand, XXXXX was deemed by virtue of the self-supply rules under subsection 191(1) of the Act to have made a taxable supply of real property by way of sale. As this deemed supply is taxable, it will be considered to have been made in the course of commercial activity. As a result, in order to avoid cascading of GST, subsection 193(1) of the Act will allow a credit of, in all likelihood, the GST paid on the purchase of the land and improvements thereto. Effectively, GST will only be paid once with respect to the whole of the building which consists of the following: (i) that part which is a residential complex (by virtue of the self-supply rule), and (ii) that part that consists of space used in commercial activity (by the denial of input tax credits under section 170 of the Act).
3. Input Tax Credits for Ongoing Expenses Relating to the Building
The supply of that part of the building that is a residential complex by XXXXX to XXXXX will be an exempt supply by way of lease by virtue of section 6 of Part I of Schedule V to the Act. As that supply is an exempt supply and not made in the course of commercial activity, no input tax credits will be available to XXXXX with respect to the GST paid on inputs relating to that supply.
But the remainder of the building, XXXXX, is used by XXXXX in the course of its commercial activities and subsection 141(5) of the Act will enable XXXXX to view that part of the building that is a residential complex as separate from the part that is used in the course of commercial activities. As a result, the GST paid on inputs relating to that part of the building that is used in commercial activities may be available where all necessary requirements in respect of claiming those credits are satisfied.
4. GST New Housing Rebate
A GST new housing rebate is available where an individual purchases from a builder, or constructs or engages another person to do so, a residential complex for use as their primary place of residence. Only an individual is eligible for the GST new housing rebate.
In the above scenario, XXXXX is the recipient of a supply by way of lease of that part of the building that is a residential complex from XXXXX has not purchased a residential complex, nor has he constructed one. Accordingly, no GST new housing rebate is available with respect to this particular fact situation.
Should have any questions regarding any of the above, please contact John Bain at (613) 954-8852.
J.A. Venne
Director
Special Sectors
GST Rulings and Interpretations
Paul Lafond
ITC Unit
General Applications Division
Serge Bernier
Taxing Provisions Unit
General Applications Division
11870-4-2
c.n. 1535(JB)
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