17 March 1998 GST/HST Interpretation HQR0001004 - Landlease Retirement Community

Dear Mr. Villazor:

This letter is in response to XXXXX letter of December 19, 1997, with attachments, concerning the application of the Goods and Services Tax (GST) with respect to a retirement community. XXXXX is working out of the XXXXX Tax Services Office. Please provide her with an interpretation letter based on the following at the earliest convenience.

All legislative references are to the Excise Tax Act (the Act) and regulations thereunder, unless otherwise specified. This letter does not reflect any legislation regarding the provincial component of the Harmonized Sales Tax (HST).

Our understanding of the facts, based on the submitted documentation and conversations with XXXXX on XXXXX, 1997, and XXXXX on XXXXX, 1998, is as follows:

Statement of Facts

XXXXX purchased a block of land near XXXXX in XXXXX prior to 1991 and started construction of a retirement community on the land in 1992.

XXXXX is registered for GST purposes under XXXXX serviced all of its land in preparation for the retirement community and built a recreation centre on the property. Full input tax credits (ITCs) were claimed in respect of this work.

XXXXX sells modular homes to retirees and assembles the homes on sites located within the community.

XXXXX maintains ownership of the land and charges the occupants a monthly land lease fee along with monthly charges for maintenance fees, cable TV and municipal taxes.

The payment of the monthly fees entitles residents, among other things, to use the community recreational facilities, including a $ XXXXX recreation centre and tennis courts.

Paragraph XXXXX of Schedule XXXXX to the "Agreement to Purchase and Sale" states that the tenant in common shall be granted at the sole discretion of the landlord, the nontransferable right to use all common areas and facilities to the community.

Paragraph XXXXX of Schedule XXXXX to the "Agreement to Purchase and Sale" states that the landlord may make alterations, additions or enlargements to the community in which event all tenants shall pay their proportionate "House Site Tax" and shall contribute to "Maintenance and Operation Charges".

Section xx of Schedule XXXXX to the "Agreement to Purchase and Sale" describes the "House Site Tax" to consist of the tenant's proportionate share of the property taxes.

Section x of Schedule XXXXX to the "Agreement to Purchase and Sale" describes the "House Site Maintenance and Operation Charges" to include costs in respect of property damage insurance, cleaning, policing, salaries for maintenance employees, and repairs, maintenance, operation and improvement to the common areas and facilities, etc.

The XXXXX breaks down the monthly costs as follows:

maintenance fees which cover the recreational facility (indoor pool, whirlpool, sauna, library, exercise room, woodworking shop, tennis, horseshoes, shuffleboard), maintenance of all common facilities, water and sewer services, snow clearing, and grass cutting; land lease fees; cable TV fee; municipal taxes; and heating and air conditioning costs. However, residents of XXXXX may only choose not to use the cable TV option. XXXXX receives one payment for all costs on a monthly basis from the residents and does not issue invoices.

XXXXX does offer memberships for use of the recreation centre to individuals not residing within the retirement community. These memberships are minimal in that individuals involved consist of far less than XXXXX of total number of individuals (tenants of the retirement community) that use the recreation centre.

XXXXX does not qualify as a "trailer park" pursuant to the GST definition in subsection 123(1).

XXXXX selfassess the GST on what they believe to be the fair market value of each site at the time of each house sale.

Interpretation Requested

Is the practice of selfassessing on a sitebysite basis acceptable, provided that the fair market value used is appropriate?

Can XXXXX claim ITCs on the construction of the recreation centre, taking into consideration that the recreation centre is not used for commercial activity, but rather is "appurtenant to the exempt activity of renting residential land"?

Should XXXXX selfassess the GST on the fair market value of the land that the recreation centre and all other common facilities are located on?

Interpretation Given

Subparagraph 191(1)(b)(ii) applies the selfsupply rules to a builder who gives possession of a residential complex under an agreement whereby the residential unit (in this case the modular home) is sold, but the related land is leased or there is an assignment of the lease. Builders in such cases are required to selfassess the GST on the fair market value of the building and the land at the latter of the time of substantial completion and the time possession is given under the agreement.

Each modular home, together with the land to which the home is affixed, is considered a "single unit residential complex" as per the definition in subsection 123(1). According to subsection 123(1), XXXXX is the builder of the residential complexes, and as such, will be required to selfassess on each unit as per the qualifications above.

The Act does not contain any guidelines for the calculation of fair market value. However, as per Policy Statement P165 entitled "Fair Market Value (FMV) For Purposes of the Excise Tax Act", the Department's position is that FMV represents the highest price, expressed in terms of money or money's worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact.

The ITCs that XXXXX claimed on the construction of the recreation centre should be denied pursuant to subsection 169(1) as the centre is not being used in a commercial activity.

The meaning of the definition of "residential complex" as per subsection 123(1) does not extend to include the recreation centre. A "residential complex" refers to a building, appurtenances and the land immediately contiguous to the building that is reasonably necessary for its use and enjoyment as a place of residence for individuals. The recreation centre is not an appurtenance "to the exempt activity of renting residential land". An appurtenance is that which belongs to something else; an adjunct; an appendix. It is something annexed to another thing more worthy as principal 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".

The actual use of the recreation centre is not in the course of a commercial activity as defined in subsection 123(1). The right to use the recreation centre is part of the supply of the lease of real property. The supply of the lease of land is exempt from the GST pursuant to section 7 of Part I of Schedule V, provided the lease is for a period of at least one month. In accordance with Policy Statement P077 entitled "Single and Multiple Supplies", the additional fees (i.e. "maintenance fee", etc.) are considered to be part of the consideration for the supply of the real property and therefore, take on the same tax status, in this case that being GST exempt.

At this time XXXXX is not required to selfassess the GST on the fair market value of the land that the recreation centre and all other common facilities are located on. However, if the use of the recreation centre changes in the future from exempt use to commercial use, XXXXX will be required to selfassess under subsection 206(2). Where a registrant begins to use real property as capital property in a commercial activity that was previously acquired for use as capital property but not for use in a commercial activity, this subsection deems the registrant to have received a supply of the property by way of sale and to have paid tax in respect of the basic tax content of the property at that time. As a result, the registrant would be entitled to claim an ITC for the tax deemed to have been paid, to the extent that the property is for use in a commercial activity.

However, as per section 197, an insignificant changeinuse will not be treated as a changeinuse for GST purposes. An insignificant changeinuse occurs when the use of the property in the commercial activities of a registrant is less than XXXXX of the total use of the property.

Consequently, if the ratio in the membership to the recreation centre increased so that more than 10% of the members were individuals from outside of the retirement community who were not eligible for membership through a land lease agreement, the changeinuse rules may apply if the use of the recreational facility was in the course of a "commercial activity", as per subsection 123(1).

If you need additional information, please feel free to contact us again at the above address or myself at phone number (613) 952-9214.

Yours truly,

Doris Rist
A/Rulings Officer
Financial Institutions and Real Property
GST/HST Rulings and Interpretations

Legal References:                   ETA ss 123(1), 165(1), 169(1), 191(1)
sec.138, sched. VI5.1, VI7

Authority:                               ETA, ITA

Reference:                               subj. 11870 case 94094 and 960328, subj. 11950 case 94177 and 96023 and 910822, (HQ)1292, HQR0000621, HQR0000719 and HQR0000181, subj.11925 and 11935, QA0822, 2e.152, 4a.109, 2e.62, 2e.164, 2e.21, pp077, 158, 159.

b.c.c.:   NCS Subject Code(s) I 2, 3, 5

b.c.c.:   District Chief, Audit

b.c.c.:   hard copy RF GST
Francis Villazor