|
XXXXX
|
September 6, 1995
XXXXX
|
Dear XXXXX
This concerns your undated memo to Don Gagnon received on June 28, 1995, concerning the eligibility of XXXXX to claim input tax credits and federal sales rebates on an addition to a building. Our response to that memo and to your facsimile message of August 25, 1995, is as follows.
Facts
XXXXX owned a multiple unit residential complex consisting of three wings, each wing being two stories in height. (We understand that the original reference to there only being two wings was incorrect.) The complex contained a total of XXXXX units. XXXXX began an addition to the building in 1990, in the form of a third floor to each of the three wings, resulting in the addition of XXXXX units to the original XXXXX units. The construction continued into 1991. The first unit of the new construction was rented June 1, 1991. The date of substantial completion of the addition has not been ascertained, but construction was completed on September 10, 1991, and 90% of the units were occupied by September or October of 1991.
XXXXX accountants, XXXXX, corresponded with the Department of Finance concerning the matter in 1992. On April 22, 1994, XXXXX submitted a rebate claim (form GST 212E) to the Department for federal sales tax on behalf of XXXXX in the amount of XXXXX in respect of costs pertaining to the addition and incurred prior to January 1, 1991. This was based on their estimate of the habitable space as XXXXX square metres and on their estimate that the addition was more than fifty percent complete as of January 1, 1991.
The Remission Order would permit a calculation of XXXXX indicated that XXXXX as liable for a self-assessment of XXXXX on a fair market value of XXXXX on the addition, less applicable input tax credits in the amount of XXXXX. The input tax credit figure was based on a general ledger recording of XXXXX GST paid on costs in 1991, allocated on the basis of total costs of XXXXX, of which they calculated XXXXX pertained to the addition. The net result was calculated by XXXXX as an amount of XXXXX owed by the Department to XXXXX[.]
In a Consultation Report addressed to you and dated January 23, 1995, XXXXX indicated that he believed that the fair market value of the addition was XXXXX[.] He stated that the total area of new construction, including stairs, links and the new addition, is XXXXX square metres, of which XXXXX square metres is uninhabitable floor space. In a memorandum dated May 18, 1995, XXXXX indicated that his first estimate was incorrect and the non-habitable floor space is XXXXX square metres. He also indicated that the estimated percentage of completion as of January 1, 1991 was 52.2%.
XXXXX does not mention in either memo the total metric measurements of the addition, which is essential in order to calculate the amount of the federal sales tax to be remitted. You indicated this information is currently unavailable, and it will take some time to obtain it.
Question #1
Should the value for self-assessment on the addition have been established at the time that the addition is 90% complete rather than when it is 100% complete? If so, would cut-off for ITCs then also be at 90% completion?
Response
Firstly, it is necessary to distinguish clearly between federal sales tax rebate claims and the claiming of input tax credits, since the two are subject to different rules.
Subsection 121(3) of the ETA permits the builder of a multiple unit residential complex to claim a rebate of 50% of the federal sales tax paid on supplies used in the construction of the complex, where the construction was more than 25% completed and not more than 75% completed on January 1, 1991. Subsection 121(3) permits a rebate of 75% of the federal sales tax where the construction was more than 50% completed on January 1, 1991.
Although section 121 did not originally refer to additions, the Goods and Services Tax Builders Remission Order provides for a remission of federal sales tax for an addition to a multiple unit residential complex, provided an application is made prior to January 1, 1996, no rebate was paid under section 121 and no remission was granted to any other person. The remission order, a copy of which is attached, outlines how to calculate the remission, based on either the square metres of the interior floor space of the addition or the fair market value of the addition. The calculation for XXXXX if based on square metres, should be based on the square metres of the addition only, less non-habitable space. The builder cannot claim rebates of federal sales tax in respect of non-substantial renovations to the existing building that are performed at the same time as the addition.
Claims for input tax credits would only apply to that portion of construction that occurred on and after January 1, 1991. Pursuant to section 191 of the ETA, a builder of an addition to a multiple unit residential complex is required to self-assess on the addition at the time of first occupancy or at the time of substantial completion (i.e. ninety percent complete).
The value of the addition is based on the fair market value of the addition at the time of substantial completion (i.e. ninety percent complete), less input tax credits pertaining to that portion of the construction of the addition that occurred on or after January 1, 1991, up to the time that the addition was 90% complete.
No ITCs can be claimed in respect of any portion of the addition that was completed prior to 1991, or in respect of the last 10% of the construction of the addition. Nor can input tax credits be claimed if the required documentation is unavailable. Details as to the documentation that is required for claiming input tax credits can be found in the Input Tax Credit Information Regulations, a copy of which is attached. Input tax credits on non-substantial renovations cannot be claimed pursuant to section 191 of the ETA, but can be claimed pursuant to section 192. Section 192 states that a person who makes supplies of real property and who performs non-substantial renovations after 1990 must self-assess on the renovations and can claim the related input tax credits.
If some construction costs relate to both the addition and the non-substantial renovations, it may be necessary to pro-rate the costs on a reasonable basis in order to correctly calculate the amount of federal sales tax that can be remitted, and the input tax credits that can be claimed pursuant to sections 191 and 192 of the ETA.
Question #2
If the rebate application was received in 1994 and the remission order is granted in 1995, which date should be used as the date of application for purposes of calculating interest on the rebate claim?
Response
The Financial Administration Act does not provide for a government department to pay interest on moneys that are remitted to a taxpayer pursuant to a remission order made pursuant to that Act. Therefore, no interest should be paid to XXXXX on the federal sales tax paid to it as a result of the Goods and Services Tax Builders Remission Order.
Question #3
How do we value substantial completion? Should it be calculated as 90% of physical completion, 90% of total valuation or 90% of cost?
Response
As stated in section 191 of the ETA, substantial completion in respect of substantial renovation is considered to occur when the construction is 90% completed in a physical sense, but the valuation to be used is 90% of the fair market value of the addition.
Question #4
The Real Property Manual states that the calculation of fair market value at substantial completion may be based on the value of the completed construction. Is it still a suitable practice to utilize completed basis valuation and to allow input tax credits to that date?
Response
It was never acceptable to allow full input tax credits with regard to the requirement to self-assess on the fair market value of the building at the time of substantial completion. The Real Property Manual was merely indicating that, if the builder did not obtain a valuation of the addition at the time it was ninety percent complete but did obtain a valuation at the time of completion, the value of the addition at the time of substantial completion could be calculated as 90% of the fair market value of the completed addition. The builder can claim input tax credits only on inputs pertaining to the ninety percent stage of completion.
Question #5
The registrant should have self-assessed for the quarter ended September 30, 1991. XXXXX claimed input tax credits in a letter dated April 22, 1994, which was received on May 11, 1994. Should we allow input tax credits only at the date of the letter of April 22, 1994, or should we assess on net tax owing (GST less input tax credits) as of September 30, 1991.
Response
It is possible that the liability for self-assessment would commence on June 30, 1991, since the first unit was rented on June 1, 1991, and substantial completion (i. e. 90% completion may have also occurred by that date. This information should be available from progress reports prepared by architects in order for XXXXX to know how much to pay the contractors or the general contractor, if there was one. The GST should be calculated as the net of the amount owing on the fair market value of the property at the time of substantial completion, less applicable input tax credits at the time of substantial completion.
Question #6
The registrant has not located many of the original suppliers' invoices and some of the contracts but has been able to obtain some duplicates. Some of the invoices and contracts specify old versus new sections but some are very general and the quotes that might be able to identify work on each section is not available. The accountants calculated eligible input tax credits as a percentage of total GST costs that were recorded in their general ledger. Please advise what input tax credits should be included or excluded.
Response
Input tax credits cannot be claimed solely on the basis of figures that the registrant recorded in their general ledger.
The registrant must provide appropriate invoices containing the required amount of information, which varies depending on the amount of the invoice. The Input Tax Credit Information Regulations, a copy of which is attached, indicate what documentation is required before input tax credits can be claimed. If some of the invoices and contracts are missing, the registrant will not be able to claim input tax credits for some of its GST costs. However, it is possible that some of XXXXX 1991 costs were not subject to GST.
If there was no general contractor, as is suggested by the reference to invoices and multiple contracts, a portion of XXXXX costs may have involved labour by their own employees, which is not subject to GST. Therefore, although it has been calculated that 47.8% of the cost of the addition was incurred after the implementation of GST, it is possible that not all of that cost was taxable.
If you require any further information concerning this matter, please contact Don Dawson at 952-9211.
J.A. Venne
Director
Special Sectors
GST Rulings and Interpretations
Email this Content