25 McArthur Road
Place Vanier, 10th Floor, Tower C
Ottawa, ON
XXXXX K1A 0L5
XXXXX
XXXXX
Dear XXXXX
This letter is in response to correspondence of October 7, 1996 from XXXXX concerning the application of the Goods and Services Tax (GST) to the transactions described below.
Our understanding of the facts is as follows:
Statement of Facts
• The XXXXX is a charitable organization registered under the Income Tax Act (ITA) and registered for GST purposes XXXXX that owns and operates a long term care facility XXXXX , and leases property to the XXXXX
• The XXXXX is a non-profit organization that recently requested, but has not received, confirmation as a registered charity under the ITA that builds residential units and then subleases these to individuals.
• The XXXXX is not registered for GST purposes.
• The XXXXX has requested, and been denied, designation as a municipality under the Excise Tax Act (the Act).
• The purpose of the XXXXX pursuant to its constitution, is to provide low rental housing.
• The XXXXX owns XXXXX detached buildings that include about XXXXX units that are leased or are expected to be leased on a life-time basis at fair market value. These two buildings are divided from one another by a common area and are divided from the long term care facility XXXXX by a walkway (as shown in the diagram enclosed in the incoming letter and as discussed with XXXXX Only XXXXX units out of all the current residential units owned by the XXXXX are leased on a monthly basis, and only XXXXX of those units are currently occupied by individuals subsidized under a provincial safer grant. All units are residential condominium units as defined for GST/HST purposes. The safer grants are provided to the individuals themselves as opposed to the landlord of the building.
• The prices for life-time leases vary depending on the floor of the building and on the extras requested in the unit (e.g. carpet, cabinets, upgrades, etc.). Prices range from XXXXX to XXXXX for the detached buildings and start at XXXXX for the units on the XXXXX floor of the long term care facility.
• The two organizations are not related.
• Neither organization has received nor expects to receive any government assistance relating to the construction or maintenance of these premises (other than the long-term care facility not included in the lease).
Interpretation Requested
Pursuant to my conversation with XXXXX she confirmed that only some of her questions in her original letter are relevant at this time. She would like confirmation regarding the application of section 191.1 of the Act and would like me to address question (4) as though section 191.1 does apply to the situation. She does not require me to go over the basic self-supply rules but she would like me to summarize the application of the GST to life lease arrangements.
The response to her letter will help XXXXX determine the application of the self supply rules to the XXXXX and possibly the XXXXX. Further she will be able to determine the eligibility to claim the public service body rebate under section 259 of the Act at the rate of 57.14% in regards to tax paid resultant from the self-supply and whether this eligibility can be backdated to the date of XXXXX municipal designation (if they were successful in obtaining this).
1. Does section 191.1 of the Act apply to XXXXX , or to XXXXX qualify to be designated as a municipality based on its stated purpose of providing low rental housing, even though only a very small proportion of the units it manages are occupied by low income subsidized tenants? (i.e. does it matter what proportion are low rental units?)
3. If yes to (1) above, does the XXXXX automatically qualify under section 191.1 of the Act as subsidized non-profit housing? Would all the phases qualify, or just the buildings with low rental tenants?
4. How does one determine whether the XXXXX qualifies under section 191.1 of the Act?
a) Is the 10% low income rental test required?
b) Does the 10% low income rental test apply to each building separately, or should all units be considered jointly?
c) Should the self-supply be based on fair market value or cost?
Interpretation Given
1. Section 191.1 of the Act does not apply to the XXXXX , or to the XXXXX as paragraph 191.1(2)(c) does not apply. Neither organization is a government nor a municipality and neither organization has received nor reasonably expects to receive government funding.
2. The XXXXX does not qualify to be designated as a municipality as per the enclosed letter.
3. As per question 1, the XXXXX does not qualify under section 191.1 of the Act.
4. Pursuant to paragraph 191.1(2)(b) of the Act:
"at least 10% of the residential units in the complex are intended to be supplied to
i) seniors,
ii) youths,
iii) students,
iv) individuals with a disability,
v) individuals in distress or individuals in need of assistance,
ix) individuals whose eligibility for occupancy of the units or for reduced lease payments is dependent on a means or income test,
x) individuals for whose benefit no other persons (other than public sector bodies) pay consideration for the supply of the units and who either pay no consideration for the supplies or pay consideration that is significantly less than the consideration that could reasonably be expected to be paid for comparable supplies made by a person in the business of making such supplies for the purpose of earning a profit, or
xi) any combination of individuals described in any of the subparagraphs (i) to (vii)".
Section 191.1 of the Act does not apply to the XXXXX , or to the XXXXX as neither organization meets the criteria in paragraph 191.1(2)(c).
a) If section 191.1 of the Act did apply to the XXXXX 10% or more of the residential units in each complex would have to be occupied by individuals listed in the criteria outlined above in paragraph 191.1(2)(b) of the Act.
b) Pursuant to paragraph 191.1(2)(b) of the Act, at least 10% of the residential units in the complex must be supplied to one of the individuals described above. Although the XXXXX leases XXXXX units on a monthly basis and leases or expects to lease on a life-time basis about XXXXX units in two detached buildings, 10% of the residential units in each complex must be supplied to the applicable individuals. The legislation refers to the "residential complex". As per subsection 123(1) of the Act, the term "residential complex" refers to the building, appurtenances and the land immediately contiguous to the building. An appurtenance is that which belongs to something else; an adjunct; an appendix. It is something annexed to another thing more worthy as principle and which passes as incidental to it, as a right of way or other easement of land. The appurtenance must be reasonably necessary for the use and enjoyment of the building as a place of residence to come within the definition of "residential complex". An appurtenance to a building would be something that is adapted to or belongs to the building and is intended to be a permanent accession or a fixture to the land upon which it is located.
In respect of this case and these particular circumstances, the fact that these structures are attached by a common area and a walkway does not preclude them from being viewed on an individual basis in reference to the 10% criteria discussed in paragraph 191.1(2)(b) of the Act. Each structure would in itself be a building, and in turn, a residential complex where the definition applies. The common area and walkway would qualify as appurtenances to the buildings, therefore, the 10% guideline refers to the units within each building individually as opposed to 10% of the units within the entirety of the real property and residential complexes owned by a particular organization or individual. Where the ownership of the appurtenances is not clearly established, the appurtenance should be reasonably apportioned according to use to the appropriate building.
Please note that similar circumstances will be viewed on a case by case basis and the GST application may vary due to a difference in facts.
c) Section 191.1 of the Act ensures that he builder must account for an amount of tax that is at least equal to the total of all tax that was payable by the builder in respect of real property forming part of the complex or addition or in respect of improvements thereto. Where the builder is registered for GST purposes, the builder will have been entitled to claim input tax credits for these amounts so the net effect will be to recapture the amounts of those credits.
Subsection 191.1(2) of the Act states that the amount of tax in respect of the supply calculated on the fair market value of the complex or additions is deemed to be equal to the greater of the amount that would be the tax calculated on the fair market value and the total of all tax that was payable by the builder in respect of the real property that forms part of the complex or addition, or any improvements to that real property.
Please note that section 191.1 of the Act generally applies after April 23, 1996, however, it does not apply where the builder received government funding on or before that day, or had a reasonable expectation of receiving the government funding, and the construction or substantial renovation of the complex or addition, began on or before that day and is substantially completed within two years after that day.
5. The GST application of a life lease agreement depends on the facts and circumstances of each particular case. The agreement itself may show the arrangement to be in fact and law a sale or a supply by way of lease, licence or similar arrangement. However, generally for GST purposes, life leases are viewed as a supply of a residential complex or residential unit by way of lease, licence or similar arrangement for occupancy as a place of residence by an individual, and as such, are exempt from the GST pursuant to paragraph 6(a) of Part I of Schedule V to the Act when continuous occupancy is given to the same individual for at least one month.
Subsection 123(1) of the Act defines a "sale", in respect of property, to include "any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer ownership of the property". Generally, within life lease agreements a sale of real property does not take place. Where there is not a transfer of ownership or legal title of the residential complexes or units, or the agreements do not create any ownership interest in respect of legal title to the real estate and property for the occupants, the agreements may be in regards to a supply of real property made by way of lease, licence or similar arrangement.
As per XXXXX message of September 10, 1997, neither the sample license agreement or the sub-lease agreement issued by the XXXXX , enclosed with her incoming letter, are intended to be life lease agreements, however, they do constitute a supply of real property by way of lease, licence or similar arrangement.
Leases of real property for one month or more made by a non- profit organization are exempt from the GST pursuant to subparagraph 25(f)(i) of Part VI of Schedule V to the Act, however, a licence for real property is excluded from the exemption under subparagraph 25(f)(ii) of Part VI of Schedule V to the Act. A licence for a residential complex or residential unit is exempted pursuant to paragraph 6(a) of Part I of Schedule V to the Act when continuous occupancy is given to an individual for at least one month. If the XXXXX does acquire charitable status for Income Tax purposes, the supply of real property would be exempt of the GST as it is not included in the exclusions listed in section 1 of Part V.1 of Schedule V to the Act.
Further to this, as the XXXXX does not meet the criteria as a qualified non-profit organization and has not received designation as a municipality, the organization is not eligible to claim a rebate pursuant to section 259 of the Act. However, if the organization does receive charitable status for income tax purposes, the XXXXX will be eligible for a 50% rebate of the GST paid or payable on most goods and services acquired for non-creditable tax charged (that tax for which no input tax credits are available), pursuant to subsection 259(3) of the Act.
If you require any further information concerning this matter, please contact me at (613) 952-9214.
Yours truly,
Doris Rist
A/Rulings Officer
Financial Institutions and Real Property
GST/HST Rulings and Interpretations
XXXXX
Legal References: ETA
Reference: ETA ss. 123(1), sec. 191.1, sched/6, V/VI/25, P-085, memo re: file 11240-1 from legal services, XXXXX XXXXX , tax court 327119 B.C. Ltd. vs. the Queen, subject file 11905-1 XXXXX
| b.c.c.: |
Originator's Desk Copy
NCS Subject Code(s) - R 11950-2, 11950-5
XXXXX
District Chief, Audit
H.Q. Quality Assurance
hard copy - R/F GST - XXXXX |
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