XXXXX
This is in response to a letter of August 18, 1994, from XXXXX regarding the availability of the GST new housing rebate with respect to homes constructed by individuals for both residential and business use.
A - Review of Drafted Letter
Our comments relating to a draft letter provided by XXXXX addressed to XXXXX, accompanying his submission are attached. Changes to the draft letter are in bold and comments for internal use only are in italics.
B - Perceived Inequities - Bed and Breakfasts and the GST New Housing Rebate
With the increasing shortage of both short and long term accommodations around the XXXXX area, there is a growing number of new home purchasers and builders setting up bed and breakfast facilities and basement suites in their newly constructed homes.
You present two scenarios for our consideration and request that we comment on the eligibility of each individual to claim the GST new housing rebate.
Statement of Facts
Scenario 1
1. The newly constructed building is a detached house.
2. The house is the primary place of residence of the individual owner.
3. XXXXX rooms are used on a year round basis to carry on a bed and breakfast business which takes up 35% of the total area of the home.
4. The home is used primarily as the individual's place of residence (65% residential, 35% commercial).
Scenario 2
1. The newly constructed building is a detached house.
2. The house is the primary place of residence of the individual owner.
3. One room plus common areas are used year round to carry on a taxable law practice which takes up 35% of the total area of the home.
4. The home is used primarily as the individual's place of residence (65% residential, 35% commercial).
Interpretation Requested
Are the individual home owners eligible for the GST new housing rebate?
Interpretation Given
1. In the first scenario, the individual owner would not be eligible for the GST new housing rebate as the house is not considered to be a "single unit residential complex" as defined in sections 254, 254.1 and 256 of the Excise Tax Act (the "Act"). Since the house is used primarily for personal use of the individual owner, where the owner is a GST registrant no ITCs are available in respect of the acquisition or construction of the house pursuant to subsection 208(1) of the Act. Notwithstanding, ITCs in respect of operating costs and personal property related to the commercial activity of the bed and breakfast may be available to a registered individual.
2. In the second scenario, the individual owner would be eligible for the GST new housing rebate as the home is considered to be a "single unit residential complex" for purposes of sections 254, 254.1 and 256 of the Act.
As above, no ITCs would be available in respect of the acquisition of the house, although ITCs in respect of operating costs and personal property related to the commercial activity are available where the lawyer is a GST registrant.
Analysis
Based on paragraph (c) of the definition of "residential complex" in subsection 123(1) of the Act, each of the entire houses in question would be considered a "residential complex" for purposes of the GST as they are primarily (more than 50%) used as a place of residence of each individual owner (each house is determined to be 65% residential).
However, in order for the individuals to be eligible to claim the GST new housing rebate, a house must be considered a "single unit residential complex" for purposes of sections 254, 254.1 or 256 of the Act, and meet all other requirements under those sections. These sections define a "single unit residential complex" to include a multiple unit residential complex that does not contain more than two residential units.
For purposes of GST, subsection 123(1) of the Act defines a "residential unit" to include:
(b) ... a suite or room in a hotel, a motel, an inn, a boarding house, a lodging house ..., or
(c) any other similar premises, or that part thereof that
(d) is occupied by an individual as a place of residence or lodging,
(e) is supplied by way of lease, license or similar arrangement for the occupancy thereof as a place of residence or lodging for individuals, ...
The effect of the definition of "single unit residential complex", for purposes of sections 254, 254.1 and 256 of the Act, is that an individual who newly constructs or substantially renovates a residential complex containing not more than two residential units for use as the primary place of residence of the individual or qualifying related individual is eligible to apply for a GST new housing rebate.
If we consider the first scenario, it can be established that the house is a "residential complex" as it is used primarily as a place of residence of the individual owner. Further, the primary place of residence of the individual is considered to be a "residential unit". However, this house consisting of the "residential unit" and the bed and breakfast rooms which are "residential units" in their own right, does not meet the definition of "single unit residential complex" pursuant to sections 254, 254.1 and 256 of the Act. Therefore, the individual will not be eligible for the GST new housing rebate.
In the second scenario, the home is considered to be a "residential complex" even though 35% of the home is being used in the course of the individual's commercial activity (the law practice). However, in this scenario, the house is considered to be a "single unit residential complex" as it contains only one residential unit. The individual would be eligible to apply for the GST new housing rebate.
In both scenarios, where the individuals are GST registrants, there would be no input tax credits (ITCs) claimable with respect to the GST paid on the portion of the acquisition or construction costs that relate to the 35% being used in the course of commercial activities. Subsection 208(1) of the Act denies ITCs where real property for use as capital property is acquired primarily for the personal use and enjoyment of the individuals as is the case in both of the scenarios outlined above. However, ITCs may be available in respect of operating costs and personal property related the commercial activities of the individuals.
Finally, the subsequent resale of each complex will be exempt from the GST pursuant to section 2 of Part I of Schedule V to the Act provided neither individual has claimed an input tax credit in respect of any improvement to the complex even though portions of the residential complexes (35% in each scenario) were used in commercial activities.
It should be noted that if the complex (including the applicable proportion of the common areas, appurtenances, land, etc.), was not being used primarily for personal use, then the properties could be separated into two separate properties pursuant to subsection 136(2) of the Act, the personal portion being a residential complex and the business portion being considered commercial real property. In such case, a GST new housing rebate may be available in respect of the GST attributable to the residential complex and ITCs in respect of the GST attributable to the commercial real property. Further information in this regard would be required to provide a detailed response.
The treatment of rebate availability and ITCs as discussed herein has been brought to the attention of the Department of Finance for their consideration and we will keep you advised of any legislative changes in this area. Should you require further clarification of the above, please contact John Bain at (613) 954-8852.
Stan Farber
Manager, Tax Policy
Real Property
Policy and Legislation
ATTACHMENT
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Stan Farber
John Bain
All Regional I&S Managers
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