GST/HST Rulings and Interpretations
Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
XXXXX Vanier, Ontario
XXXXX K1A 0L5
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XXXXX
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Case: HQR0001103
11950-15; 11870-14-2
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September 28, 1998
Dear XXXXX
We are writing in response to a memorandum (with attachments) from XXXXX[.] Verification and Enforcement Division, XXXXX TSO XXXXX dated March 16, 1998 concerning the application of the GST to a recreation centre that has been constructed as part of a retirement community and that is used exclusively by residents of that community.
Facts
The facts set out in XXXXX letter and attachments are as follows:
1. A developer has leased land from XXXXX for the purpose of establishing a retirement community in XXXXX phases, XXXXX phases of which are complete.
2. Residents of the community buy a house and enter into a XXXXX year lease for the land upon which the house sits. The land is described in the lease as a part on a reference plan.
3. The lease includes the following separate amounts that are to be paid by the tenant:
(a) a contribution of between XXXXX as "the tenant's contribution towards the cost of construction of the Recreation Centre", to be placed in a special reserve fund account; newer forms of the lease state that the payment will be considered as a fee for membership in the recreation centre;
(b) a basic rent that is to be net of any costs incurred in respect of the property;
(c) a monthly contribution to a capital reserve fund;
(d) a proportionate share of operating costs including the recreation centre, though newer leases separate out the recreation centre costs as a separate payment;
(f) GST, if applicable, to the rent and every other amount payable under the lease.
5. A recent invoice containing estimates of the operating costs lists a separate amount for the cost of the recreation centre and charged GST on the recreation centre amount, XXXXX.
6. The documents provided to us include a blank recreation centre agreement under which the developer grants the tenant a membership in the centre in return for a covenant to pay operating costs. The agreement stipulates that the developer will invoice the tenant on a monthly basis. XXXXX.
7. The original estimated cost of the centre was approximately XXXXX[.] As of March 1998, approximately XXXXX in contributions to the construction of the recreation complex had been made by purchasers pursuant to their lease agreements and construction costs to that point were approximately XXXXX. The developer had received XXXXX draws amounting to some XXXXX from the special reserve fund and had remitted XXXXX in GST on these amounts. The developer had also claimed ITC's in the amount of XXXXX on the construction costs. Construction on the centre has recently been complete and the facility is now in operation.
8. Currently, there are no plans to provide access to the facility to persons who are not residents of the retirement community.
Interpretation Requested
Based on our review of the file we have determined that the following questions are integral to resolving your concerns:
1. Does the recreation centre form part of any of the residential complexes supplied by the developer?
2. Is the developer entitled to claim ITC's on the construction costs of the recreation centre?
3. Is the developer required to self assess on the recreation centre?
4. Is GST applicable to the cash payments that are held as contributions towards the cost of constructing the recreation centre?
5. If GST is applicable to these payments, does the GST become payable at the time that the sale of the residential complex closes, or only when the developer draws the funds? In other words is the deposit part of the consideration for the residential complex?
6. Is the developer required to charge GST on the monthly payments made by residents towards the cost of the recreation centre, and is the developer entitled to claim GST on those costs?
7. Is the cash contribution towards the construction costs, eligible for inclusion in the GST rebate calculation?
Interpretation Given
Based on our understanding of the information provided to us the application of GST to the recreation centre is as follows:
Inclusion of the Recreation Centre in the Residential Complex
The developer is supplying a package deal consisting of several different elements including the building, land and recreation centre. None of these elements are available on their own and the residents are not permitted to opt out of any of the elements. In consequence, it appears that the each element is reasonably necessary for the use and enjoyment of the dwellings and therefore constitutes part of each residential complex that is supplied by the developer.
Further evidence of the integrated nature of the supplies is found in the lease. XXXXX, stipulates that all the rents payable are consideration for the supply of the land and common areas. Thus each type of rent established by the lease constitutes part of the consideration for that supply regardless of the specific expense to which the rent is attributable.
According to paragraph 18.1 of the lease, a default occurs whenever the tenant fails to pay, "any rent when due". Upon default, the landlord is entitled to terminate the entire agreement, repossess the demised land and distrain upon chattels. These provisions apply regardless of which type of rent is in arrears and affirm the integrated character of the developer's supplies.
ITC's
Pursuant to subsection 169(1), the developer is entitled to ITC's on all of its construction costs related to the recreation centre until it has self supplied on all of the residential complexes that include the facility as an element.
Self Assessment
The developer must include that portion of the recreation centre that is attributable to each residential complex when calculating the fair market value of that residential complex under paragraph 191(1)(d). The portion of the recreation centre that is attributable to a given recreational complex will be represented by the cash payment that purchaser is required to contribute towards the cost of the recreation centre.
Tax Treatment of Cash Payments
Once self supply occurs, the supply of the residential complex to the tenant is exempt from GST pursuant to section 4(b) of Part I of Schedule V to the ETA. In consequence the developer is not required to collect or remit tax on any consideration paid by the purchaser for any element of the residential complex including the cash payment for the recreation centre.
Operating Expenses
Since both the land and recreation centre form part of a residential complex, they are both supplied to the tenant on a tax exempt basis as they are considered to be rent. In consequence no ITC's are available on the expenses that are incurred in making the supply.
GST New Housing Rebate
The purchasers of the residential complex may be entitled to a GST/HST New Housing Rebate provided that they meet the requirements set out in section 254.1 of the ETA. Paragraph 254.1(2)(d) stipulates that eligibility is contingent upon the value of the residential complex not exceeding $481 500.00. However, once eligibility is established pursuant to this provision, paragraph 254.1(2)(h) provides that the amount of the rebate is calculated at 2.34% of the consideration paid for the building only. The amount of the rebate is not be increased by the inclusion of any amounts attributable to any other components of the residential complex such as the land or the recreation centre.
Should you have any further questions or require clarification on the above matter, 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
GST/HST Rulings and Interpretations Directorate
| NCS Subject Code(s): |
I-98 |
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