This is in response to correspondence from your office of June 1, 1994 concerning the application of the GST to artist live/work studios. We apologize for the delay in our response.
Statement of Facts
The facts upon which we have been asked to comment are as follows:
1. Two non-registered individuals (the "individuals") purchased a strata lot studio apartment from a developer.
2. The strata lot is zoned by XXXXX requiring XXXXX residential use and XXXXX commercial use as an artist's studio.
3. The individuals paid GST on the full purchase price.
4. The individuals intended to use the property 100% as their place of residence.
5. The individuals sold the strata lot to two non-registrant individuals (the "purchasers") before occupying the property as a place of residence or lodging.
Interpretations Requested
1. How much of the strata lot studio apartment qualifies as a residential complex for purposes of the section 254 new housing rebate?
2. What is the GST status of the unit upon resale? Based on the individuals' intentions to use the entire property as their place of residence, does section 190 of the Excise Tax Act (the "Act") apply to have converted the 70% zoned commercial to residential? If so, is a housing rebate available on the 70% portion converted to residential use?
3. If the strata lot apartment unit was not sold and was used by the individuals 70% commercial, but then such business use ceased and the individuals began using 100% of the property as a place of residence, would subsection 190(1) of the Act apply to deem the individuals to have substantially renovated the residential complex and, therefore, be required to self assess under section 191 of the Act? Alternatively, would subsections 190(2) or 207(1) apply in this scenario?
Interpretations Provided
1. Residential Complex
For purposes of GST, a "residential complex" is defined in subsection 123(1) of the Act to include:
(b) that part of a building that is
(i) ... part of a ... residential condominium unit ... that is, or is intended to be, a separate parcel or other division of real property owned, ... and
(ii) a residential unit, ...
(c) ... the whole of the premises described in subparagraph (b)(i), that is owned by or has been supplied by way of sale to an individual and that is used primarily as a place of residence of the individual ...
A residential condominium unit is defined for purposes of that same subsection to mean:
... a residential complex that is, or is intended to be, a bounded space in a building designated or described as a separate unit on a registered ... strata lot plan ... and includes any interest in land pertaining to ownership of the unit.
Paragraph (c) of the definition of "residential complex" indicates that where the premises described in subparagraph (b)(i) is owned by or has been supplied by way of sale to an individual and is used primarily (i.e., more than 50%) as a place of residence of the individual, the whole of the premises is considered to be a "residential complex". This does not, however, preclude the application of a part of a building in paragraph (b) (or (a) for that matter) of the definition of residential complex from being a residential complex where the premises is not primarily used as a place of residence.
Therefore, based on the above, the 30% of the strata lot studio apartment (i.e. the "unit") zoned residential, together with the common areas and a portion of the land that is attributable thereto, would be considered a residential complex within paragraph (b) without reference to paragraph (c). The remaining 70% of the unit and common areas and land related thereto is not part of the residential complex.
Accordingly, where the individuals purchased the unit from a builder and met all the requirements of section 254 of the Act, the individuals will be entitled to apply for the GST new housing rebate on the GST paid on 30% of the consideration paid for the unit. Had the individuals been registered, an input tax credit (ITC) would not have been available in respect of the GST paid on the amount of consideration paid for the 70% commercial use of the unit since there was no intent to use the unit in commercial use and no such use was in fact made.
Had the residential use been more than 50% residential, the whole unit would have been considered a residential complex within paragraph (c) of the definition of "residential complex" and the GST new housing rebate would have been available in respect of the full consideration paid for the unit. No ITC would have been available by virtue of subsection 208(1) of the Act, even if the individuals were registered and using the non-residential portion in commercial activities, as that subsection does not allow an ITC in respect of the acquisition real property acquired primarily for the personal use and enjoyment of individuals.
2. Resale
Subsection 136(2) of the Act provides that where a supply of real property includes a residential complex and other real property, the supply of the residential complex is treated as a separate supply. As such, the GST status of the supply of the residential complex and the other real property must be determined separately.
With respect to the 30% of the strata lot that is considered a residential complex, section 2 of Part I of Schedule V to the Act exempts the sale of a residential complex or an interest therein by a person who is not the builder, unless the person has claimed an input tax credit in respect of the acquisition of or an improvement to the complex. The individuals are not considered to be a "builder" for purposes of subsection 123(1) of the Act since paragraph (f) of the definition excludes an individual who acquires a complex, or an interest therein, otherwise than in the course of a business or an adventure or concern in the nature of trade.
As the remaining 70% of the strata lot is not considered to be a residential complex, section 2 of Part I would not be applicable. However, section 9 of that same Part exempts the sale of real property made by an individual other than capital real property that was used primarily in a business or real property that is sold in the course of a business. As the individuals never occupied the property and never intended to use the unit in commercial activities, and as there is no indication of the re-sale being made in the course of a business, the 70% portion of the strata lot would not be excluded from being exempt pursuant to section 9 and, therefore, could be sold by the individuals as an exempt supply.
If the individuals had used the 70% portion in a business immediately before the sale, or sold the property in the course of a business, section 9 of Part I of Schedule V would not apply and the sale of the 70% would be subject to GST resulting in one of the following scenarios:
(1) If the individuals were GST registrants, they would have been eligible to claim an ITC on the 70% portion and then be required to charge GST on the selling price of the 70% portion (since this portion would be considered capital real property used primarily in a business) with collection and remittance depending on whether the purchaser is a GST registrant and thereby subject to subsection 221(2) of the Act; or
(2) If the individuals were not GST registrants and therefore not eligible to claim an ITC, since the portion would be considered capital real property used in a business, they would still be required to collect and remit GST on the selling price of the 70% portion with collection and remittance depending on whether the purchaser is a GST registrant and thereby subject to subsection 221(2) of the Act. The individuals would than be entitled to claim a general rebate pursuant to section 257 of the Act based on the lesser of the uncredited tax previously paid in respect of the 70% portion of the unit and the amount of GST collected on the sale related to the 70% portion.
Section 190 of the Act would not apply to the 70% zoned commercial on the basis of their intention to use the property as a place of residence. Subsection 190(2) would have applied where the individuals appropriated, for the personal use or enjoyment of the individuals, real property that was previously not a residential complex and was held or used in the individuals' business or commercial activity. However, as previously stated, the individuals never occupied the property and never intended to use the unit in commercial activities, and, therefore, subsection 190(2) would not apply. The change-of-use rules would also not apply (even if the individuals were registered) since there was no change-of-use made of the property.
As there is no deemed supply under subsection 190(2), and the change-of-use provisions do not apply, there is no requirement to treat the 70% portion of the unit as separate from the residential complex as there has been neither a supply nor a deemed supply, subsection 136(2) of the Act would not be applicable. As part of the strata lot property is in fact a residential complex in its own right (the 30%), the property is a residential complex within the meaning of paragraph 190(1)(b). (It is only considered seperate pursuant to subsection 136(2) in respect of the supply or deemed supply of the complex.) As a result, subsection 190(1) of the Act would not apply. (In order for subsection 190(1) to apply, paragraph 190(1)(b) of the Act requires that, "... immediately before that time, the property was not a residential complex, ...".) Further, there is no deemed substantial renovation to the unit to allow a housing rebate on the 70% portion.
3. Conversion to Residential Use
Assuming the individuals had used the 70% portion in commercial activities and the individuals appropriated real property that was used in the individuals' business or commercial activity for the personal use and enjoyment of the individuals, subsection 190(2) of the Act would apply. The individuals would be treated as having sold the 70% portion to themselves and be required to remit GST on the fair market value of the 70% portion with the return for the reporting period in which it had been appropriated for personal use and enjoyment. In other words, the individuals are deemed to have made and received a taxable supply of the 70% portion, and to have paid and collected tax as the supplier.
Since the individuals would be required to remit GST on the fair market value of the 70% portion, they would also be able to claim a general rebate under section 257 of the Act (in lieu of an ITC which may only be claimed by a registrant) based on the lesser of the uncredited tax previously paid on the acquisition of the 70% portion of the unit and the amount of GST collected on the sale related to the 70% portion.
As there exists a deemed supply of real property, subsection 136(2) of the Act would apply. The 70% portion that was capital property being used in the business of the individuals must be considered in its own right for GST purposes. Accordingly, the 70% portion of the property is considered seperately and would not be considered a "residential complex". By virtue of subsection 190(1) of the Act, the individuals would be deemed to be builders and to have substantially renovated the 70% portion. This would generally entitle the individuals to claim a GST new housing rebate under subsection 256(2) of the Act in respect of the 70% portion provided the other requirements for the rebate are met. The self-supply provisions of section 191 would not apply since subsection 191(5) applies as the premises were primarily used as a place of residence for the individuals.
Further, as the individuals were not GST registrants, and therefore ineligible to claim ITC's on the initial acquisition of the 70% commercial portion, section 207 of the Act would not apply to trigger GST on the change-of-use. Any subsequent sale of the unit which is fully used as a residential complex would be exempt pursuant to section 2 of Part I of Schedule V.
Note that if the individuals were GST registrants, and had claimed an ITC with respect to the GST paid on the 70% consideration value that related to the 70% commercial portion of the unit, the individuals would be required under subsection 207(1) of the Act to effectively repay any ITCs that had been previously claimed as a result of ceasing use in commercial activities. In this case, the tax that is deemed to have been collected under subsection 190(2) of the Act is deducted in the formula provided in subsection 207(1) of the Act. As a result, double taxation does not occur.
Should you require further information on this matter, please contact John Bain at (613) 954-8852, or myself at (613) 954-3772.
S. Farber
Manager,
Tax Policy
Real Property
Policy and Legislation
| c.c.: |
J. Bain
S. Farber
Chantal Quesnel
All Regional I&S Managers |
XXXXX Dossier 11950
Réf 169, 25/III/V
Domus 141
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