4 December 1998 GST/HST Interpretation HQR0001122 - Tax Status of a Staged Conversion of a Hotel into a Multiple Unit Residential Complex

Dear Mr. XXXXX

This is in response to your conversation of March 9, 1997 with Ms. Doris Rist wherein you requested a clarification of our interpretation letter issued March 5, 1998 in respect of HQR0000928, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations. All references in this letter are to the Excise Tax Act (ETA) unless otherwise stated.

In our interpretation letter we stated that where a lessee was initially using a building as a hotel, but then began to supply some of the units on a long-term basis, those units would form a residential complex and the lessee would have to self-supply on those units, pursuant to either of subsections 191(1) or 191(3) depending on the number of units initially converted. However, if additional units were converted to long-term use at a later date, no further self-supply would occur. Instead, the lessor would be required to self-assess GST on an amount equal to the basic tax content of the converted portion of the property, in accordance with the provisions of subsection 206(5).

In your conversation with Ms. Rist on March 9, 1997, you asked her whether the change-in-use provisions in subsection 206(5) applied on both the initial conversion as well as the subsequent conversions, given that on the initial conversion tax was already being remitted by the lessee pursuant to section 191.

We have conducted an in depth review of this matter and we concur that there is a strong chance that the initial conversion of units could trigger both an obligation on the part of the lessee to pay tax on the fair market value of the converted units pursuant section 191 and an obligation on the lessor to pay tax equal to the basic tax content of the same converted units pursuant to subsection 206(5).

Please note that we have advised the Department of Finance of this situation and we will keep you apprised of any future changes. Should you have any questions or require further clarification, please do not hesitate to contact me at (613) 954-4393.

Yours truly,

Michael Ezri
A/Rulings Officer
Real Property Unit
Financial Institutions and Real Property Division