18 May 1999 GST/HST Interpretation HQR0001405 - Residential Complexes

We are writing at the request of XXXXX in response to a memorandum dated October 22, 1998 (with attachments) from Mr. XXXXX XXXXX concerning whether certain condominium units were, at the time of their supply, residential complexes as defined in the Excise Tax Act (ETA).

Statement of Facts

A review of the documentation provided reveals that key facts arising from the interpretation of certain documents, such as the XXXXX XXXXX remain in dispute amongst the affected parties. Since the documents referred to above were not provided to us it is not possible for us to independently determine facts where such contradictions exist. Therefore, we are only able to provide a general response to the issues raised.

•   The memorandum dated April 1, 1998 from XXXXX cites seven documentary sources submitted for the purpose of determining whether, and to what extent, the factors outlined in Policy Paper P-099, The Meaning of "Hotel", "Motel", "Inn", [etc.] ... have been met. Of the facts considered from these sources, the following are key upon which the XXXXX concluded that each of the XXXXX was, immediately prior to their sale, a "hotel or other similar premises" in accordance with Policy Paper P-099.

1. The presence of the "Section 215 Convenant" in the XXXXX note it is our understanding that section 215 is in reference to XXXXX

•   "provides that each unit in XXXXX must be placed in or listed with a rental pool through which the units will be available for rental to the public", and

•   "also allows the owner of a unit to use the unit on an unlimited personal basis provided the owner reserves the unit in accordance with the XXXXX[.]

2. The formation of the XXXXX and the requirement that each owner of a unit in XXXXX join this XXXXX immediately following their purchase of the unit and pay such fees and assessments as may be levied by the XXXXX[.]

3. Specific provisions of the XXXXX which:

•   place XXXXX Pool which are essentially for the purpose of facilitating the supply the member's units as short-term accommodation to a public through the operation of a "condominium hotel", and

•   permit owners who are members of the XXXXX to reserve days for their personal use provided they properly notify the XXXXX in advance of the beginning of each rental season.

4. The particular zoning (Tourist Accommodation One) of the land upon which the property is situated.

5. Statements in the developer's promotional material:

•   indicating that the units are fully ready for "occupancy or rental",

•   allowing for full unlimited use at the owner's discretion, and

•   featuring professional rental management when the owner is not using his property thereby "assuring a maximum return on investment".

6. The auditor's viewpoint that, although there appeared to be a few units rented on a long- term basis, more than 90% of the rentals were on a short-term basis.

•   In XXXXX letter dated June 3, 1998 to XXXXX states that the use or expected use of these units in the condominium complex acquired for investment purposes should not affect the characterization of the seven units acquired for residential purposes.

•   XXXXX states that it developed the XXXXX or mixed use, that being either residential use or for use as hotel-type accommodation and that such use was entirely at an owner's discretion.

XXXXX supports this statement with the following assertions:

1. that the Section 215 Convenant in title was established for the purpose of ensuring that a prospective buyer of a unit has the right to use the unit either as an investment property or alternatively as a residential property;

2. that during discussions with individual purchasers, each was advised on the contents of the Section 215 Covenant and of the fact that, as allowed by the Covenant, they must elect to either have their property available for rental or to occupy their property as a residence on either a full time or seasonal basis;

3. that each of the purchasers made the decision as to their intended use of the property for themselves and where they chose to occupy the property as their residence (as in the case of the seven units in question) each purchaser provided XXXXX with the appropriate elections for the appropriate rebates;

4. that the Covenant filed on the XXXXX property allows for full time occupancy as a residence whereas the convenants filed against other properties which are in fact hotel or like facilities do not allow for full time occupancy as a residence; and

5. the XXXXX property has been assessed by the XXXXX as a residential property for property tax purposes and has been approved by XXXXX as a residential complex for purposes of enabling individual mortgagors to obtain mortgage insurance.

Issues

At issue is whether certain condominium units for which XXXXX accepted signed GST/HST New Housing Rebate applications were, at the time of their sale, excluded from the definition of "residential complex" in subsection 123(1) of the ETA in accordance with the exclusionary provisions following paragraph (e) of that definition. In particular, whether seven condominium units would remain defined as "residential complexes" solely on the basis of the application of paragraph (c) of the definition of "residential complex" in subsection 123(1) of the ETA.

Comments

The opinion provided by the XXXXX April 1, 1998 that each of the strata units in XXXXX were not residential complexes at the time ownership of the units passed from XXXXX to the purchasers appears to have been based largely upon two considerations:

•   the Section 215 Convenant making the placing or listing of all units in XXXXX with a rental pool mandatory, and

•   despite provision in the Section 215 XXXXX allowing for unlimited personal use by the owner of a unit, their view that it is not reasonable that a person would purchase a unit with the intention of using it primarily for personal use given the substantial restrictions and additional fees placed upon personal use and given the substantial fixed costs of maintaining a unit in XXXXX[.] However, where the assertions made by XXXXX in its letter of June 3, 1998 are accepted as fact, it is both possible and reasonable that the purchasers of the seven units in question did in fact purchase their condominium units for use as places of residence, and not for the purpose of providing temporary lodging.

For purposes of the definition of "residential complex" and the application of the exclusionary provisions following paragraph (e) of that definition, the intentions of the purchaser are generally not taken into consideration in determining whether property held for the purpose of supply is a residential complex.

An exception to this would be in circumstances where the supplier has more than one intention with respect to the expected use of property held for supply and where the purchaser has taken actions which serve to clearly identify which of the supplier's intentions was realized immediately prior to making of the supply.

For example, a builder may receive instructions from a purchaser which are clearly intended for the purpose of enabling the purchaser to use the property in a certain manner or capacity. For instance, the purchaser may instruct the builder to make modifications or improvements to the building or to obtain a particular change in the zoning of the property. Where such instructions are acted upon by the builder prior to the sale of the property, such actions can be a relevant and significant factor in determining the expected or intended use of the property immediately prior to its sale.

In the case at hand, XXXXX appears to have given the prospective purchaser the option of either purchasing the unit for use as a hotel or similar premises or purchasing a residential condominium unit for use a place of residence. In addition, XXXXX as required the purchaser to in effect exercise this option, prior to the sale of the unit, by requiring the purchaser to elect to either occupy their unit as a residence on a full time basis or to consent to placing their unit in a rental pool.

In order for a particular unit to be a residential condominium unit (and hence a residential complex) immediately prior to its sale, the actions taken by the purchaser prior to the sale must clearly establish that the purchaser, as stated in XXXXX memorandum noted above, either exercised a right not to participate in the rental pool or was excused from that obligation.

Where such is the case the purchaser would be either not subject to, or otherwise relieved from, the substantial restrictions and additional fees place upon his or her personal use of the unit.

The actions taken by the purchaser prior to the sale considered necessary to establish that the unit was not a hotel or similar premises may vary from case to case. In this case, provided the five assertions made by XXXXX noted above are correct, then the signing of the form GST 190 - New Housing Application for Rebate of the Goods and Services Tax by both XXXXX the purchaser prior to the sales of those seven units would, in all likelihood, be considered sufficient to establish that, with respect to those sales, XXXXX made supplies of residential condominium units.

These seven units would be residential complexes on basis that they are not hotels or similar premises immediately prior to their sales and not on the basis that these units are described in paragraph (c) of the definition.

In our view, the exclusionary condition "... the building is not described in paragraph (c) ..." for supplies of accommodation which has not been previously occupied would ordinarily be met prior to the sale of these units.

While we concur with the interpretation that the "whole of the premises described in subparagraph (b)(i)" of the definition of residential complex would, in this case, be referring to a single condominium unit, it is our view that the next condition in paragraph (c) "that [the whole of the premises] is not used primarily as a place of residence of the individual ..." is met.

Based upon the word "used" (as opposed to "for use") in the phrase noted above, it is our view that in order for the building to be as described in paragraph (c) of the definition of residential complex and thereby excepted from being excluded from the definition of residential complex, the individual would have to have occupied and commenced use of the complex as a place of residence prior to the sale of the unit.

In this case it is unlikely that the unit was used by the individual purchaser as place of residence prior to its acquisition by the purchaser (i.e. prior to the earlier of the transfer of possession in the agreement or the transfer of ownership).

Rather it could be said that the seven units at issue were supplied "for use" primarily as a place of residence of the purchaser. For this reason reliance should not be placed upon the "paragraph (c) exclusionary factor" in concluding that these seven units were residential complexes immediately prior to their sale.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact Mr. John Bain at (613) 954-3772 or Mr. Daryl Hooley at (613) 954-8852.

J. Sitka
Director
Financial Institutions
and Real Property
GST/HST Rulings and Interpretations

XXXXX