2 June 1998 GST/HST Interpretation HQR0001027 - Lease of

                                                                        GST/HST Rulings and Interpretations
Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
 XXXXX                                                                                K1A 0L5              

                                                                        June 2, 1998

Dear XXXXX

We are writing in response to your facsimile submitted to the XXXXX Tax Services Office on December 21, 1997 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the above-noted real property transaction

Interpretation Requested

You have inquired as to the application of the GST to rent payable by your tenant under a lease of the above noted premises. We understand that the building consists of commercial space on the first floor and an apartment on the second floor which is accessed by way of a stairway from the first floor.

Our understanding of the facts based on your submission and subsequent telephone conversations is as follows.

You acquired the XXXXX property in 1997.

In July 1997 you entered into an agreement to lease the premises to a tenant. The lease, which was submitted to us, provides for rent on the entire building, that is, there is no allocation of rent between the commercial space and the apartment. The lease also provides that the only permitted uses of the premises are as a retail store, barber shop or repair shop. The lease was a commercial lease and you treated the entire rent as being subject to GST.

Shortly after taking possession of the premises under the lease, the tenant began living in the second floor apartment.

You made efforts during the ensuing months to have the tenant cease using the premises as a place of residence.

The tenant advised you that since he was using part of the premises as his residence, he would not pay GST on the portion of the rent attributable to the apartment.

On the advice of your lawyer, you prepared a document amending the lease. This amendment allocates the rent payable under the lease between the commercial and residential units. The amendment was made retroactive to the signing of the lease, and was signed by you and the tenant.

You have inquired as to whether the portion of the rent allocated to the residential unit is exempt from GST and, if so, from what time would the GST no longer apply?

Interpretation Given

Paragraph 6(a) of Part I of Schedule V to the Excise Tax Act ("the Act") exempts from the GST a supply by way of lease of a residential complex or a unit in a residential complex for the purpose of its occupancy as a place of residence or lodging by an individual where it is occupied by the same individual for a period of at least one month.

In the situation which you have described, the lease, which excluded use of the premises as a place of residence, would be subject to GST, notwithstanding the fact that the premises contain an apartment which might be suitable for use as a place of residence. This is because the premises were not leased for the purpose of occupancy as a place of residence or lodging by an individual.

Subsection 136.1(1) of the Act provides that where property is supplied by way of lease, and the lease includes payments that are attributable to a lease interval, such as a calendar month, the lessor is deemed to have made a separate supply of the property for each lease interval.

In determining whether the paragraph 6(a) exemption referred to above applies to a particular rent payment, the purpose for which the property was leased during the lease interval to which the rent payment relates must be considered. This purpose would be determined based on the agreement in place at that time, that is during the particular lease interval.

For GST purposes, the exemption in paragraph 6(a) of Part I of Schedule V to the Act could only apply to exempt from GST rents attributable to the apartment unit for lease intervals during which you and your tenant have agreed to the use of the premises as a place of residence. This rent would therefore be exempt beginning on the date the amendment to the lease was signed.

Additional Information

The GST legislation contains provisions which may apply in situations where a person begins to hold or use commercial real property as residential property or reduces the extent to which real property is used in commercial activities. The application of either of these provisions could require the owner of the real property to self-assess an amount of GST in respect of the property. This determination is a question of fact and you may wish to contact your local Tax Services Office concerning your obligations in this regard. The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9212.

Yours truly,

Michael Warren
Real Property Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate

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