23 February 1999 GST/HST Interpretation HQR0001572 - GST on Capital Building Construction

GST/HST Rulings and Interpretations Directorate Place Vanier, Tower C, 10th Floor 25 McArthur Avenue Vanier, ON K1A 0L5XXXXXAttention: XXXXX XXXXX

Case: HQR0001572XXXXXFile: 11950-1February 23, 1999

Subject:

GST/HST INTERPRETATION GST on Capital Building Construction

Dear Sir:

Thank you for your letter of November 15, 1998 (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your XXXXX construction, which was forwarded to us by the XXXXX for reply.

We understand the circumstances in question to be as follows:

1. In XXXXX the XXXXX had new construction done to your XXXXX. This entailed gutting and renovating the inside of your business office and your telephone system office and adding an addition.

2. The new construction was primarily for telephone system operations, which you advise is an activity in which the XXXXX collects GST.

3. The costs incurred in the new construction are itemized in your correspondence. The costs fall within the following categories:

•   Architect

•   Building Construction

•   Inside Workstations and Furniture

•   Outside Landscaping

•   Signs

•   Plumbing and Other Costs

4. The XXXXX has already claimed a 57.14% public service body rebate with respect to GST paid on the costs.

It is not clear which of the costs actually represent improvements to the real property and which represent purchases of capital personal property. It is also not clear whether GST would have actually been paid on all the items included within the categories of costs. We accordingly are not able to issue a ruling on this matter. We are able, however, to provide the following interpretation which we trust will be assistance.

Interpretation Requested

You wish to know whether the XXXXX is entitled

a) to file an election under section 211 of the Excise Tax Act ("the Act") effective January 1, 1998, and

b) to claim the part of the GST paid on the new construction costs that has not been claimed as a rebate as an input tax credit (ITC).

Interpretation Given

Based on the information provided it is our view that

a) pursuant to paragraph 211(5)(c) of the Act, the XXXXX is not currently entitled to file an election under section 211 effective January 1, 1998, but may file such an election at any time provided it is effective no earlier than the first day of the reporting period ending immediately prior to the month in which the filing takes place; and

b) the XXXXX may not claim an ITC as requested, but

i) if an election under section 211 of the Act is filed in the form and manner specified in subsection 211(5) the XXXXX may claim ITCs pursuant to subsections 193(2) and 169(1), and

ii) the XXXXX may be able to claim ITCs with respect to the acquisition of capital personal property pursuant to subsection 199(2) and 169(1).

Analysis

Introduction

Your letter was a result of a commodity tax review performed for the XXXXX XXXXX[.] In their report to you of October 23, 1998, XXXXX advised as follows:

"Capital is looked at as primarily taxable or not. If the renovation or capital work is to be used primarily in a taxable area then 100% ITC's are available, if not then just the rebate is available. In the case of the XXXXX the renovation was primarily for telephone operations and therefore a complete ITC is available."

The XXXXX report continues by recommending that you execute an election under section 211 effective January 1, 1998.

In the interests of clarity, this interpretation will use the expression "improvements" in discussing renovations or new construction to real property. To assist you in determining whether a particular cost item would be considered to be an "improvement", we should advise that subsection 123(1) of the Act defines improvements to capital property to be property or services acquired or imported for use in improving the capital property to the extent that the consideration for the property or services is included in determining the adjusted case base of the capital property for the purposes of the Income Tax Act (or would be so included if the person were a taxpayer under the Income Tax Act). An item that would ordinarily be considered to be personal property would generally be considered to be an improvement to capital real property only if it becomes a fixture to the real property.

In the absence of an effective election under section 211 of the Act, improvements to capital real property owned by a public service body that is a registrant are treated, by virtue of subsection 209(1), as if they were improvements to capital personal property. Accordingly, subsection 199(4) requires that tax payable with respect to those improvements not be included in determining ITCs of the public service body unless the capital real property is being used at the time the tax is paid or payable primarily in commercial activities of the body. The XXXXX report suggests that the area of the capital real property in question XXXXX that is used in "taxable" (i.e. commercial) activities is currently less than 50% of the total area. On that basis, it would appear that the capital real property would not have been used primarily in commercial activities at the time the tax was paid or payable on the improvements and the XXXXX would be prevented from claiming any ITCs for the improvements by subsection 199(4).

a) Excise Tax Act, section 211 election

Had a section 211 election been in effect at the time the improvements were made, section 209 (and consequently subsection 199(4)) would not have applied. Pursuant to paragraph 169(1)(b) the XXXXX would have been able to have claimed a proportional ITC based on the extent to which the XXXXX was being used in commercial activities immediately after its "last acquisition" (i.e. generally its construction).

An election effective January 1, 1998 would not be of assistance in this regard, even assuming it could be filed now, as it would not have been in effect at the time of the new construction.

In any event, paragraph 211(5)(c) requires that an election be filed within one month after the end of the reporting period in which it was to come into effect. As your reporting period that includes January 1, 1998 ended on March 31, 1998, in order for the election to be valid, it should have been filed no later than April 30, 1998.

If you were to file a valid section 211 election with respect to the XXXXX property (i.e. all the real property falling within the relevant legal description) the XXXXX would be deemed to have sold the property immediately before the effective date of the election and to have collected GST on the sale on the effective date equal to the "basic tax content" of the property (BTC; see below). The XXXXX would also be deemed to have purchased the property on the effective date of the election and to have paid GST on that date equal to the BTC.

b) ITC entitlements

i) improvements

Because of the deemed sale, the XXXXX would be entitled under subsection 193(2) of the Act to claim an ITC equal to the BTC. The BTC would be calculated as set out below. Because of the uncertainty as to which of the items in the cost information provided would be improvements and/or would have been subject to GST, in our calculations we are using sample figures for illustrative purposes only. In these calculations it is assumed that GST was payable on the original acquisition of the XXXXX (land and building). The amount shown for GST payable on improvements refers to any improvements that may have been made since the original construction, including but not limited to the improvements made in XXXXX.

Under paragraph (a) of the definition of "basic tax content" in subsection 123(1), the BTC of the XXXXX property would be:

(A - B) x C

A is the total of

(i) GST payable on acquisition	XXXXX
(ii) GST payable on improvements	XXXXX
	XXXXX

B is the total of *

(i) part of A the XXXXX is exempt from paying	XXXXX
(iii) part of A the XXXXX was entitled to as a rebate (XXXXX)	XXXXX
	XXXXX

C is the lesser of one and H/I where H is the current fair market value of the property and I is the total of the consideration paid on the acquisition of the property and improvements to the property. Assuming that the fair market value of the property has not declined, C would equal one.

Applying the above amounts to the variables in the formula, the BTC of the property would be calculated as:

XXXXX[.] This is the amount that the XXXXX in our example, would be deemed to have collected as GST under paragraph 211(2)(a) of the Act and be entitled to claim as an ITC under subsection 193(2). Because the XXXXX would be deemed under paragraph 211(2)(b) to have paid tax on the acquisition of the XXXXX property equal to the BTC amount, it would also be entitled to an ITC under paragraph 169(1)(c) for a portion of that amount based on the extent of use of the entire property in commercial activities.

Accordingly, the immediate net tax effect of the section 211 election would be as follows:

GST collectible on deemed sale (para. 211(2)(a))	$XXXXX
ITC available at time of deemed sale (s. 193(2))	(XXXXX[)]
ITC available on deemed acquisition (s. 169(1))	XXXXX (XXXXX)
Net tax (refund)	(XXXXX *[)]

Percentage use of the entire property in commercial activities (example).

It should be noted that the XXXXX would not be entitled to a public service body rebate on the deemed acquisition under subsection 211(2)(b). Tax deemed to have been paid under that paragraph is excluded from the definition of "non-creditable tax" in subsection 259(1), and therefore from the rebate calculations in subsection 259(4).

ii) Capital personal property

Capital personal property is not affected by section 211 of the Act. Generally, where a registrant acquires capital personal property for use primarily in commercial activities of the registrant, the property is deemed under paragraph 199(2)(b) to have been acquired exclusively for that purpose. As a result, the registrant is entitled to a full ITC under subsection 169(1). In your circumstances, this provision would apply to the acquisition of those cost items that are not improvements to the real property but are capital personal property, provided that those items were purchased for more than 50% use in commercial activities. The XXXXX would accordingly be entitled to full recovery of the GST paid on those costs.

The actual ITC available at this time would, of course, be reduced by the public service body rebate already claimed.

General

While the decision to elect under section 211 of the Act would result in an immediate recovery of GST by the XXXXX you should be reminded that the primary effect of the election is that the exemption provided by section 25 of Part VI of Schedule V to the Act will no longer apply to a supply of the XXXXX property. Accordingly, any future rentals of the property will be subject to GST, regardless of the previous use of the property or the terms of the rental.

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.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-3413.

Yours truly,

J. Michael C. Wolff
Real Property Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate

XXXXX
XXXXX

Encl.:	GST/HST Memoranda Series, Section 1.4
Legislative References:	Excise Tax Act, section 211 Excise Tax Act, subsection 193(2) Excise Tax Act, subsection 123(1) basic tax content Excise Tax Act, subsection 169(1) Excise Tax Act, section 199
NCS Subject Code(s):	11950-1