25 McArthur Road,
Place Vanier, 10th Floor, Tower C
Vanier, ON
XXXXX K1A 0L5
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Attention: XXXXX
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February 23, 1998
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Subject:
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GST/HST INTERPRETATION - Life Leases
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Dear XXXXX
Thank you for your letter of January 6, 1997 and your information package received August 5, 1997 concerning the application of the Goods and Services Tax (GST) to your operations. This letter is in response to your original query to Mr. Brian Dath at Revenue Canada Taxation regarding housing supplied under a life lease arrangement. Please note that although we are not addressing the application of the Harmonized Sales Tax (HST) within this interpretation, the HST will apply to any supplies made within one of the participating provinces (i.e. New Brunswick, Newfoundland or Nova Scotia).
BACKGROUND INFORMATION
Canada Mortgage and Housing Corporation (CMHC) has sponsored research into the field of life lease housing as an alternative form of financing to create seniors housing. CMHC did develop a general definition for life lease housing but never produced standardized documents because each province had different applicable legislation.
The CMHC definition of life lease housing was:
"A life lease is a general agreement that permits its purchaser to occupy a dwelling unit for life in exchange for a lump sum prepayment and monthly fees. The lump sum may equal or be less than the market value of the unit. The monthly fees are paid to cover maintenance and other ongoing costs."
In Ontario, generally the sponsor of the building and holder of the undivided title is a nonprofit, nonshare corporation. The sponsor is not a coop issuing shares and is not a condominium. In some cases, the sponsor may be registered as a charity. The units being created will be the primary place of residence of the occupants. Without the capital investment by individual occupants, the buildings would not have sufficient financing to proceed.
There are a variety of legal arrangements to create the contractual relationships. The following is a summary of each scenario for which you have provided documentation and directed your questions to:
• Sample 1 (Life Lease Purchase Plan) This is an occupancy agreement for the privilege of occupying an apartment for life or 21 years, whichever is shorter and does not create an interest in the real estate.
• Sample 2 This is also an occupancy for life until death or transfer to the nursing home. It does not create an interest in the real estate.
• Sample 3 This is a lease agreement under The Short Forms Leases Act of Ontario. It allows for occupancy for the greater of perpetuity or 21 years less a day. This agreement does allow the lease to be registered without the Consent of the Owner.
• Sample 4 This agreement grants the right to occupy a unit and the resident agrees to pay a monthly licence fee with a term that ends on the earlier of the death of the resident or transfer of the agreement. The issue of registering the agreement is not addressed.
Further notes regarding the samples provided may be found in Appendix 1 to this letter.
Interpretation Requested
At issue is the application of the GST to life lease housing developments which are sponsored by nonprofit organizations (NPOs). In this regard, you would like our comments with respect to five specific questions including our understanding that the NPO would be required to register for GST purposes, be required to selfassess the GST on the fair market value of the residential complex under the selfsupply rules and be in a position to recover the GST paid on construction costs.
Interpretation Given
Before responding to your specific questions, we would like to provide the following comments. Generally, life lease arrangements, including those examples provided in your sample documentation, are viewed as a supply by way of lease, licence or similar arrangement of a residential complex or a unit in a residential complex. Where continuous occupancy is given to an individual for use as a place of residence for at least one month under a lease, licence or similar arrangement, the supply will be exempt pursuant to paragraph 6(a) of Part I of Schedule V to the Excise Tax Act (the Act). Generally, it is our view that a "sale", as defined for GST purposes in subsection 123(1) of the Act, does not occur as there is not a transfer of ownership or a transfer of possession under an agreement to transfer ownership of the residential complex or units in the residential complex.
Each question will be dealt with in the order presented in your letter.
1) Question:
How is the GST to be treated during construction? Would the nonprofit group be deemed to be the developer and therefore report for purposes of receiving input tax credits? Then at the time of occupancy, would the selfsupply rule be applied on the fair market value as supported by an appraisal?
Answer:
During the course of construction of a residential complex, the NPO would be considered the "builder" of the residential complex as defined for GST purposes in subsection 123(1) of the Act. Since you have not specified the type of units involved with these life leases, we will address the situation in regard to a single unit residential complex and a multiple unit residential complex. For your information, please find enclosed the appropriate definitions pursuant to subsection 123(1) of the Act in Appendix 2.
The selfsupply rules generally apply where a builder constructs or substantially renovates (as per the definition in subsection 123(1) of the Act) a residential complex, and subsequently rents it, or a part thereof, out to others or occupies it, or a part thereof, as a place of residence. In such circumstances, the builder is treated as having sold and repurchased the residential complex at its fair market value.
With respect to a single unit residential complex, the NPO, as the builder, will be deemed to have made a taxable supply of the complex at the later of the time construction is substantially completed (generally meaning 90% or more) and the time the possession of the complex is given to the tenant under a lease, licence or similar arrangement. The NPO will be required to remit the GST on the fair market value of the complex at the later of that time pursuant to subsection 191(1) of the Act.
Subsection 191(3) of the Act provides the rules that apply to the selfsupply of a multiple unit residential complex. The NPO, as the builder, will be deemed to have made a taxable supply of the entire complex at the time possession of any residential unit in the complex is given under a lease, licence or similar arrangement for the purposes of its occupancy by an individual as a place of residence. As a result, the builder is required to remit the GST based on the fair market value of the entire complex.
In the case of substantially completed multiple unit residential complex, the builder is treated as having made a taxable supply of the entire complex at the time the first unit is rented out. The builder is in this case also required to remit the GST on the fair market value of the complex at that time. If a multiple unit residential complex is not substantially completed for the purposes of the selfsupply rules in subsection 191(3) of the Act, then subsection 191(9) of the Act treats the construction as having been substantially completed when 90% or more of the residential units therein are occupied after construction is begun.
A builder who undertakes the construction or substantial renovation of a residential complex will be deemed to have made a taxable supply by way of sale, and, therefore, be engaged in a "commercial activity", as defined in subsection 123(1) of the Act, up to the time of the selfsupply of the residential complex. As a result, a builder registered for GST purposes will generally be entitled to claim full ITCs in respect of the GST paid on costs incurred during the construction of the complex, including the acquisition of the land, pursuant to section 169 of the Act. Alternatively, section 257 of the Act allows a person who is not a GST registrant but makes a taxable supply of real property by way of sale, to claim a rebate equal to the lesser of the basic tax content of the property, or the tax that is, or would be, payable in respect of the particular supply.
Please note that at the time selfsupply occurs, the property begins to be used in a GST exempt activity (the supply of longterm residential rents) and the builder is not entitled to claim ITCs with respect to this activity. In cases where, after the selfsupply, the builder is only providing exempt supplies, the builder will normally be required to cancel their GST registration.
2) Question:
For the initial purchase of:
i) a tenancy lease less than 21 years ii)an occupancy for life iii)a lease for 21 years less a day or perpetuity iv)a right to occupy and a monthly licence would the GST be paid since they are buying their principal residence? If the GST is paid is the
purchaser eligible for a rebate?
Answer:
A supply of a residential complex or a unit in a residential complex by way of lease, licence or similar arrangement for the purpose of its occupancy as a place of residence or lodging by an individual, where the period of continuous occupancy is one month or longer, is exempt from the GST pursuant to paragraph 6(a) of Part I of Schedule V to the Act.
This exemption would apply to the tenancy lease less than 21 years, the occupancy for life, the lease for 21 years less a day or perpetuity and the right to occupy and a monthly licence.
As the supply being provided to the occupant is considered to be a supply of a residential complex, or a unit in a residential complex, by way of lease, licence or similar arrangement, where the conditions under section 6 of Part I of Schedule V to the Act are satisfied, the GST is not applicable to the supply to the occupant. As a result, the occupant would not be eligible to claim a new housing rebate as the conditions for the rebate are not satisfied (e.g. no GST would have been paid in regards to the purchase of the residence).
3) Question:
Are there any differences in the handling of the GST to purchasers in subsequent years? For example, when the group reimburses the estate of the resident for the value, must the GST be paid?
Answer:
The GST application may differ under various agreements. This interpretation only addresses, in general terms, those examples of agreements provided by your office. The agreements provided do not represent a sale with respect to real property but do show examples of a supply of real property by way of lease, licence or similar arrangement.
Whether the GST is applicable on the reimbursement by the NPO to the estate of the resident upon death or vacancy is also a question of fact where the GST application may differ according to the applicable agreement. It must be determined whether this reimbursement is the return of a deposit or if it is consideration for a supply or if perhaps an even different GST application exists pursuant to the agreement.
For your information, pursuant to subsection 168(9) of the Act, a deposit is not "...considered consideration paid for the supply unless and until the supplier applies the deposit as consideration for the supply". A "supply", according to subsection 123(1) of the Act, means "the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition". If it is determined that this reimbursement by the NPO is a supply, it must then be determined whether the supply is taxable or exempt for GST purposes.
• Sample 1
This agreement states that in the event the occupant dies before execution of the agreement, the association will pay the estate $1 000, a refund of part of the occupant's deposit of $2 000. The remainder of the deposit is retained to compensate for costs incurred as a result of the capital invested and operating costs.
Section 182 of the Act refers to situations where, as a consequence of the breach, modification or cancellation of an agreement for the making of a taxable supply, amounts are paid or forfeited by a person to a registrant otherwise than as consideration for the supply. In these cases, the registrant is treated having made a taxable supply to the other person and as having collected tax equal to 7107ths of the amount paid, or forfeited, reduced or extinguished. The GST would not be payable on the deposit until the time the supplier applies the deposit against any consideration for a supply.
In this case, as part of the deposit forfeited is in respect of an exempt supply (i.e. a long term residential lease), no GST would be deemed applicable in respect of the $1 000 forfeited.
• Sample 2
This agreement refers to a refund of the life lease which is to be made if the occupant dies after taking occupancy, as well as a refund of 90% of the releasing price after the closing of a releasing agreement if the occupation is terminated voluntarily or by death.
There are no GST implications in regards to a refund where the initial supply was tax exempt.
The GST would also not be applicable on the forfeited deposit as it is in respect of an exempt supply.
• Sample 3
This agreement states that in the event the resident wishes to vacate the unit or in the event of death, the resident or hisher legal representative shall first offer to sell the resident's interest in the agreement to the NPO. "Upon establishing such a price, the owner shall then have the option of purchasing the resident's interest at the said price less 5 per cent of the said price, which shall be retained by the owner in payment of expenses to be incurred in releasing the unit." In the event that the NPO chooses not to exercise its right to purchase, the resident or hisher legal representative shall have the right to assign its interest in this lease agreement.
Although the life lease is a supply of real property by way of lease, licence or similar arrangement rather than a supply of real property by way of sale, the lessee still has an interest in real property as defined for GST purposes. Pursuant to subsection 123(1) of the Act, the definition of "real property" includes "...messuages, land and tenements of every nature and description and every estate or interest in real property whether legal or equitable". In addition, pursuant to subsection 136(1) of the Act, a supply by way of lease of the right to use real property is a supply of real property for GST purposes. It is this right to use real property that is being sold or assigned by the resident back to the owner, or possibly a third party.
Accordingly, the assignment of the lease, licence or similar arrangement to use the residential complex as a place of residence is a "sale" of real property within the meaning of the definitions of "sale" (as described previously) and "real property" pursuant to subsection 123(1) of the Act. However, a supply of real property is a taxable supply unless it is specifically exempted within the applicable legislation. Section 2 of Part I of Schedule V to the Act exempts the sale of a residential complex or an interest therein by a person who is not the builder of the complex, unless the person has claimed an ITC in respect of the last acquisition of or an improvement to the complex. Therefore, the sale of the resident's interest in the agreement to the owner, is exempt from the GST under this section.
• Sample 4
This agreement states that the resident's estate has the right to transfer the "Right to Occupy Agreement" in the event of death. If the agreement is not transferred to the resident's spouse, the NPO shall have the first option of purchasing the resident's interest in this agreement. The price shall be determined by an appraisal, less 5 per cent which shall be retained by the corporation as compensation for the expenses of the transferring and otherwise dealing with the transfer of the right to occupy the unit.
These circumstances are similar to those in Sample 3, where the supply of the resident's interest in the real property is exempted pursuant to section 2 of Part I of Schedule V to the Act.
4) Question:
Are there any other obligations in regards to the GST which you would like to highlight for the groups?
Answer:
At this time we have no further comments in regard to this subject matter. We will be pleased to answer any further queries you may have at this time or in the future on this subject or any other GST matter relating to real property.
5) Question:
If a group used other alternate forms of putting forward equity to create the financing for a construction, how would that impact on the applicability of the GST? For example:
i) purchase of a debenture (i.e. an unsecured interest),
ii) purchase of coop share, or
iii )prepayment of rent for a 21 year period less a day (i.e. $700 per month X 12 X 21 years = $176 000).
Answer:
We are unable to provide definitive responses in regards to various equity agreements regarding the financing for the construction of housing without further specific information regarding the agreements themselves. Enclosed is a copy of Policy Paper P111 entitled The Meaning of Sale with Respect to Real Property which may be of some assistance to you in determining when a "sale" of real property is considered to have taken place.
i) We are unable to determine the nature of what this supply might be without further information, however, generally the supply of a financial service is exempt from the GST pursuant to Part VII of Schedule V to the Act, or is zerorated (taxable at a rate of 0%) for GST purposes pursuant to Part IX of Schedule VI to the Act.
ii) Additional information about the nature of the shares is required in order to provide you with a response to this question. However, generally where an individual purchases a share in a residential complex (i.e. cooperative housing), the purchase is exempted pursuant to Schedule V to the Act.
iii) The prepayment of rent for a 21 year period less a day (e.g. $700 per month x 12 x 21 years = $176 000) would be exempt from the GST pursuant to paragraph 6(a) of Part I of Schedule V to the Act if the residential complex was to be used as a place of residence for continuous occupancy by an individual for one month or longer and supplied under a lease, licence or similar arrangement.
The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed or future amendments to the legislation may result in changes to our interpretation. These comments are not rulings and, in accordance with the guidelines set out in GST Memoranda Series (1.4), do not bind the Department with respect to a particular situation.
For your convenience, find enclosed, copy of GST/HST Memoranda Series (1.4). If you need additional information, please feel free to contact us again.
Yours truly,
Doris Rist
A/Rulings Officer
Financial Institutions and Real Property
GST/HST Rulings and Interpretations
Encl.
Legal References: Excise Tax Act
Authority:
Reference: ETA: ss.123(1),136(1),169(1),191(1),191(3),191(9); sec.140,257; sched6(a),V12,V13,VVII,VIIX;
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QA: 2e.129,5a.91,2e.195,4b.12; |
cases:memo for XXXXX L0205A,F0905A,R25412A,IA1116A;
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citation: Green Timbers Retirement Housing Society v The Queen; Carswell 9529455; GST PP111; IT233R, IT403R; legal services: 1973(001), "Taxation of Real Estate in Canada", "The Modern Law of Real Property (Cheshire & Burns), "Carswell Tax Partner", case 960131, case 940380, case hqr0000100, case c0114a b.c.c.: Originator's Desk Copy |
b.c.c.: NCS Subject Code(s) I 1,2,5
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Registration Number: na |
b.c.c.: District Chief, Audit
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H.Q.Quality Assurance |
b.c.c.: hard copy RF GST XXXXX
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