27 September 1994 GST/HST Interpretation 11870-4-2[7] - Construction of a Residence by a Charity for its Volunteers

XXXXX

This is in response to your letter of September 27, 1994, in which you ask for our comments regarding the construction of a residence by a charity for its volunteers. We apologize for the delay in responding.

Statement of Facts

1. A multiple unit residential complex was constructed for the volunteers of the XXXXX[.]

2. The complex was built on land owned by a GST non-registrant bare trust entitled The XXXXX. XXXXX acted as agents in acquiring the land piecemeal between XXXXX using funds donated to the XXXXX. The XXXXX became the beneficial owner of the residential complex on October 1, 1992.

3. The XXXXX constructed a XXXXX room residence with a living area of XXXXX sq. ft. and a basement of XXXXX sq. ft. containing the air conditioning plant, boilers, mechanical room and storage cubicles for the residents. The residence contains XXXXX floors of which two have been completed and occupied. The XXXXX floor was drywalled, but not painted. Nor was there any carpeting or plumbing fixtures. The floor is determined to be 68% to 75% completed and will remain this way until the extra rooms are needed.

4. The XXXXX is a registered charity for purposes of the Income Tax Act.

5. The XXXXX is not registered for purposes of the GST.

6. The residence is called XXXXX, which means XXXXX, and residents are volunteers who are required to take a vow of perpetual poverty. The average stay in XXXXX is XXXXX years. XXXXX reserves the right to end their relationship with the volunteer at any time for any reason. No rent is charged. No formal written lease or licence agreements are entered into.

7. The residence was first occupied on October 1, 1992, as a place of residence by the volunteers. Each room houses XXXXX volunteers and is roughly XXXXX square feet in size.

8. In a report, an appraiser stated that the total overall project would be considered to be 90% complete and carried out an appraisal on that basis. Based on the 90% degree of completion, the fair market value of the residence was XXXXX on October 1, 1992.

9. Legal title to the property was transferred from XXXXX to the XXXXX on May 28, 1993, for no consideration. XXXXX and the XXXXX shared essentially the same board of directors.

Interpretations Requested

The forgoing points of fact raise the following questions:

1. Is the XXXXX considered a "builder" for purposes of the GST as defined in subsection 123(1) of the Excise Tax Act (the "Act")?

2. Is the XXXXX required to register pursuant to section 240 of the Act?

3. Is the XXXXX required to self-supply pursuant to subsection 191(3) of the Act?

4. Is the XXXXX entitled to claim input tax credits (ITCs) or a rebate pursuant to section 257 of the Act?

5. Is the XXXXX entitled to claim a public service body rebate pursuant to section 259 of the Act in respect of the GST amount arising from the self-supply of the multiple unit residential complex? Is the XXXXX entitled to claim a rebate under that same section in respect of the GST amounts arising from the operating costs of the complex and any future improvements thereto?

Interpretations Given

1. The XXXXX would be a "builder" for GST purposes as defined in subsection 123(1) of the Act.

2. The XXXXX is not required to register for GST purposes under subsection 240(1) of the Act. However, the XXXXX may choose to register voluntarily pursuant to paragraph 240(3)(a) of the Act.

3. The XXXXX is required to self-supply on the fair market value of the complex under subsection 191(3) of the Act which deems it to have made a taxable supply by way of sale of a multiple unit residential complex, XXXXX.

4. Where the XXXXX is not registered for GST purposes, a general rebate under section 257 of the Act may be available in respect of the GST incurred on improvements to the property (e.g. construction costs) and any tax that was payable in respect of the last acquisition of the property. Such a rebate would be available at the time of the deemed taxable sale of the complex. If the XXXXX is registered for GST purposes, ITCs are available in respect of the GST paid in respect of improvements to the property including any tax that was payable in respect of the last acquisition of the property.

5. As a registered charity, the XXXXX is entitled to a 50% rebate of the self-supplied amount pursuant to section 259 of the Act. In addition, the XXXXX is entitled to a 50% rebate of the GST paid in respect of amounts relating to operating expenses and any improvements to XXXXX after self-supply. In this regard, XXXXX is not considered to be prescribed property for purposes of subsection 259(3) of the Act and, therefore, the XXXXX is not precluded from claiming a rebate in respect of such expenses.

Analysis

1. A person who has an interest in real property and constructs a residential complex on said property, or engages someone to construct the complex, is considered to be a "builder" for GST purposes as defined in subsection 123(1) of the Act. Although the XXXXX did not obtain legal title to the property until May 28, 1993, it did have an equitable interest in the land and improvements thereto (i.e. the residence) prior to XXXXX being occupied as a place of residence by individuals. By virtue of this interest in XXXXX, the XXXXX is considered to be a "builder" for GST purposes.

2. Section 240 of the Act requires that every person who makes a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada is required to be registered except where the person is a small supplier or the only commercial activity of the person is the making of supplies of real property by way of sale otherwise than in the course of a business. (The third exclusion dealing with non-residents is not relevant to this discussion.)

Where a person constructs a residential complex without the primary or secondary intention of resale, the complex will normally be considered "capital property" within the meaning of subsection 123(1) of the Act. As a result, the XXXXX will not be required to include the consideration from the deemed taxable sale of the complex when determining whether the small supplier threshold was exceeded. Therefore, the XXXXX will not be required to register unless it otherwise exceeded the small suppliers threshold in respect of the deemed sale when required to self-supply.

In addition, the XXXXX is not required to register for GST purposes as the deemed supply, while a "commercial activity" by virtue of being a supply of real property by way of a deemed sale, can not be considered to have been made in the course of a business. While the construction of the residence would be considered a "business" of the XXXXX, it is not in the ongoing business of constructing residential complexes or other structures for sale. XXXXX was constructed for use only as a residence. Thus, where the only supply of real property by way of sale has been made otherwise than in the course of a business (e.g. a deemed sale), while said supply may be taxable, there exists no requirement under section 240 of the Act for the supplier to register.

Notwithstanding the above, paragraph 240(3)(a) of the Act permits registration for GST purposes for any person who is not required to register under any other subsection of section 240 provided the person is engaged in a commercial activity in Canada. Note that paragraph (c) of the definition of "commercial activity" considers the making of a supply of real property, other than an exempt supply, and anything done by the person in the course of or in connection with the making of the supply to be a commercial activity. Therefore, by virtue of the deemed supply being considered a commercial activity, the XXXXX may voluntarily register in respect of that commercial activity.

3. Where a person is considered a builder of a "multiple unit residential complex" within the meaning of the Act, the person would be required to self-supply under subsection 191(3) of the Act at the later of the time the construction was substantially complete and the time possession of a unit is so given to a particular person. The effect of this provision is to deem the person to have made a taxable supply by way of sale of the entire complex. Further, the person is deemed to have paid as recipient and to have collected as supplier, at the later of those times, tax in respect of the supply calculated on the fair market value of the complex at the later of those times. As discussed subsequently, since XXXXX was substantially completed on October 1, 1992, and was first occupied as a place of residence on that same date, the XXXXX would be required to self-supply on that date. Where the XXXXX is not a GST registrant, the tax would be remittable no later than one month after the end of the month in which the deemed supply occurred, or November 30, 1992. Where the XXXXX is a GST registrant, the tax would be remittable in the course of the filing of normal GST returns.

Two issues were specifically raised in your correspondence regarding the requirement to self-supply and warrant further discussion. Firstly, was the construction of XXXXX substantially complete prior to being occupied as a place of residence by the volunteers?

When determining whether or not XXXXX is substantially complete, it is necessary to look at the whole of the building not just those parts which may be considered residential in nature. In other words, the fact that only two of the three residential floors are complete and being used as a place of residence for volunteers is a factor but not decisive in determining whether or not the whole of the building is substantially complete. Based on the degree of completion of the whole building attested to by the appraiser, it is reasonable to assume that the whole of the building was substantially complete at the time it was first occupied as a place of residence. As well, it is unlikely that a municipal government or similar body would grant an occupancy permit for the use of the complex where the complex was not substantially completed. In fact, it is probable that such a body might require a greater degree of completion than that currently required by the Department. Accordingly, the self-supply rules under subsection 191(3) of the Act would apply.

The second issue is in regard to the nature of the right given to the volunteers to occupy a unit as a place of residence. A requirement under subparagraph 191(3)(b)(i) is that possession of a residential unit in a residential complex be given to a person under a lease, licence or similar arrangement. As mentioned above in the points of fact, the volunteers do not enter into a formal written lease or licence agreement with XXXXX for the right to use a unit as a place of residence; certainly, there exists no sale of real property. Thus, the question arises, if there is no lease or licence, does a "similar arrangement" exist between the volunteers and XXXXX[.]

For GST purposes, all supplies of real property are normally made either by way of "sale" or by way of "lease, licence or similar arrangement". As a sale does not exist, there must be a supply by way of lease, licence or similar arrangement. Assuming there is no lease and licence of the units, attention must be focused on the term "similar arrangement".

The term "similar arrangement" is not defined in the Act. It can, however, reasonably be interpreted as an "arrangement" which, for some reason or another, cannot be considered a "lease" or a "licence" but much like the two offers the possession and use of real property to an individual. It can, therefore, be said that a "similar arrangement" can be defined as that arrangement whereby one of the parties is either granted, imposed or deprived of something for a period of time. Thus, based on the above, it is our view that there does exist a "similar arrangement" between the volunteers and XXXXX for purposes of subparagraph 191(3)(b)(i) of the Act.

4. Where the XXXXX is not required to register and does not voluntarily register, but is required to self-supply under section 191 of the Act, as a result of this deemed sale of real property, section 257 of the Act will apply at the time of the deemed sale to allow for a rebate of previously unrebated GST equal to the lesser of the total tax payable on the acquisition of and improvements to the complex (i.e. construction costs) prior to the deemed sale and tax on the consideration applicable to the deemed sale. (The purpose of this provision is to avoid double taxation on the construction costs and on the deemed sale). The rebate under section 257 is limited to the GST relating to the construction of the residential complex.

Where the XXXXX voluntarily elects to register under subsection 240(3) of the Act (because the deemed sale is a commercial activity), the XXXXX will be entitled to claim ITCs in respect of the construction costs of the complex. Where the individual has not registered until after the commercial activity began, section 171 of the Act will apply to allow ITCs to be claimed for previously unrebated or uncredited GST relating to the construction of the residential complex and other amounts paid in relation to such commercial activity. Under section 171, the ITCs can not exceed the GST otherwise payable on the fair market value of the property at the time of becoming a registrant.

Note that if the XXXXX voluntarily chose to register, ITCs would only be allowed up until the time of self-supply. In other words, if additional costs are incurred in respect of the complex after the self-supply (e.g. finishing the third floor), no ITCs will be available as the GST incurred would not be in respect of any commercial activity.

5. As a registered charity, the XXXXX would be entitled to a 50% rebate in respect of any non-input-tax-creditable GST paid on their purchases relating to their charitable activities under section 259 of the Act. Such a rebate would be available to the XXXXX in respect of the self-supplied amount. Further, a rebate may be available in respect of operating expenses (e.g. general repairs and maintenance, utilities, etc.) and any improvements (e.g. finishing the third floor) to the complex after the self-supply.

Specifically, subsection 259(3) enables a charity to claim a rebate equal to 50% of the non-creditable tax charged in respect of property or a service, other than a prescribed property or service. For purposes of determining what is meant by a prescribed property, subsection 4(1) of the Public Service Body Rebate (GST) Regulations includes a property that is primarily for supply by the particular person in the course of making supplies by way of lease, licence or similar arrangement of a multiple unit residential complex other than exempt supplies under paragraph 6(b) of Part I of Schedule V to the Act.

Where the rental is not exempt under paragraph 6(b) of Part I of Schedule V to the Act, to be eligible for the rebate the supplies must be primarily restricted to elderly individuals, youths, students, mentally of physically disabled individuals (including individuals in distress or in need of assistance), individuals whose eligibility for occupancy is dependent on a means or income test, individuals for whose benefit no other persons, other than public sector bodies, pay consideration (either no consideration or amounts not reasonably expected to constitute the fair market value of the supply) for the supplies of the accommodation or any combination of the individuals described above.

While supplies of the units provided by XXXXX are exempt, it is a question fact as to whether they are exempt under paragraph 6(b) of Part I of Schedule V. However, the supplies are exempt under paragraph 6(a) of Part and the restrictions found under subsection 4(1) of the Public Service Body Rebate (GST) Regulations are met. Accordingly, the residence will not be considered prescribed property for purposes of subsection 259(3) of the Act and a rebate under section 259 of the Act will be available to the XXXXX in respect of the GST paid on operating expenses (e.g. utilities), repairs, maintenance and improvements to the complex.

It should be noted that subsection 4(1) of the section 259(4) of the Act not yet recognizing the past amendments to subsection 259(3) and subsection 259(4). We would, however, advise that draft regulations to correct this change have been prepared and will make reference to section 259 as a whole and not a specific subsection.

We hope the above will be of assistance. Should you require further information on this matter, please contact John Bain at (613) 954-8852.

Stan Farber
Manager, Tax Policy
Real Property
GST Policy and Legislation

11870-4-2        c.n. 897(JB)