17 April 2000 GST/HST Interpretation 13434 - Self-supply by

This memorandum is further to Lynn Birnie's memorandum to you of November 19, 1999, file reference XXXXX[.] In that memorandum, XXXXX advised that we would be providing a response to certain issues raised in your letter of July 5, 1999, XXXXX[.] We are pleased to provide the following response.

Our understanding of the situation is as follows.

1. XXXXX[.]

2. XXXXX, which is XXXXX[.]

3. In July of 1995, the XXXXX obtained a building permit for a single family dwelling on the Land, and completed construction of a residential unit XXXXX[.]

4. Your office has determined that during construction of Unit #1, the intention of the XXXXX was to construct only one house on the Land and that the property would be sold upon completion.

5. In XXXXX XXXXX occupied Unit #1 as their primary place of residence. The XXXXX pay the XXXXX per month in rent.

6. On XXXXX issued an invoice to the XXXXX for architectural design services. This invoice represents the first documentary evidence you have obtained as to the XXXXX intent to build a second, larger residence (Unit #2) on the Land.

7. The XXXXX has no record prior to XXXXX that the XXXXX intended to build a second residence on the Land. Nor does the XXXXX have any evidence of activity on the part of the XXXXX to have the zoning for the Land changed from "single family residential" to accommodate a second home. To the contrary, once the XXXXX became aware of the XXXXX intention to build a second residence, it obtained a letter, dated XXXXX confirming that there would be a single residence on the Land. Furthermore, in order to receive a building permit for Unit #2, a restrictive covenant had to be registered against the title to the Land stating that, for all time, there will only be one residence on the Land.

8. In XXXXX the XXXXX obtained a permit to construct Unit #2. This permit was granted on the condition that Unit #1 be converted to an "accessory building" within 30 days of the occupancy of Unit #2 in accordance with the aforementioned restrictive covenant. An "accessory building" for these purposes is a non-residential detached building that is an accessory to the principal building (e.g. a detached garage, shed, barn or greenhouse). As such, Unit #1 would require substantial modifications to meet this requirement.

9. On XXXXX a building inspection of Unit #2 was carried out. The report listed minor deficiencies with the exception of one: that the original building (i.e. Unit #1) be converted to an accessory building within 30 days of occupancy of Unit #2. An occupancy permit for Unit #2 was granted at that time. The XXXXX has received no application to subdivide or strata title the Land and in any event, further subdivision is not permitted.

10. You indicated that the XXXXX had intended to sell the real property upon completion of Unit #2. At some point that intention changed and on XXXXX XXXXX occupied Unit #2 as their primary place of residence. They will pay monthly rent to the XXXXX for this unit.

11. The XXXXX responded to you in its memorandum of November 19, 1999, file XXXXX outlining the responsibilities of the XXXXX with respect to the assessment of Unit #1 pursuant to section 191 of the Act.

Issue

You are enquiring as to the ITC eligibility on the construction of Unit #2 and any requirements the XXXXX has to account for tax on a deemed supply of the residential complex that contains Unit #2 (Unit #2 RC).

Response

When the XXXXX forms the intention to construct Unit #2 with the intention of allowing the shareholders to occupy the complex as a place of residence, the XXXXX is considered to be engaged in a commercial activity. Commercial activity, as defined in subsection 123(1), includes in paragraph (c) of the definition, the making of a supply (other than an exempt supply) by a person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply, is a commercial activity. The deemed supply of the residential complex under section 191 that will occur when the XXXXX gives possession of the complex to the XXXXX is not an exempt supply. Therefore, the XXXXX is considered to be engaged in a commercial activity with respect to the construction of Unit #2.

At the time the XXXXX formed the intention to construct Unit #2, the Land undergoes a change-in-use as described in subsection 206(2). Pursuant to the definition of residential complex, it becomes necessary to determine that portion of the Land which is no longer considered to be necessary for the use and enjoyment of Unit #1 as a place of residence for individuals. At the particular time of the change-in-use, that portion will not form part of any residential complex. Such land will be excluded from the residential complex that contains Unit #1 (Unit #1 RC) as it is not reasonably necessary for the use and enjoyment of Unit #1 as a place of residence for individuals. Similarly, that land will not yet form part of Unit #2 RC as construction of Unit #2 has not yet commenced.

Subsection 206(2) will deem the XXXXX to have acquired a supply of the Land and Unit #1 at the particular time. However, subsection 206(2) will not deem the XXXXX to have paid tax where the deemed acquisition of the property is an exempt supply. Subsection 136(2) will apply to deem the XXXXX to have acquired two separate properties, i.e. a residential complex and other real property (i.e. the land portion which will form part of Unit #2 RC). Subsection 206(2) will not deem the XXXXX to have paid tax on that part of the property which is Unit #1 RC, but only to have paid tax, equal to the basic tax content, of the remaining part of the Land. This deemed tax paid will qualify for an ITC under the provisions of subsection 169(1).

When the XXXXX gives possession of Unit #2 XXXXX there is a deemed supply of Unit #2 RC pursuant to subsection 191(1). The tax owing on the deemed supply is equal to the GST on the fair market value of the complex at the later of the time the construction of the complex is substantially complete and the time possession of the complex is given to the XXXXX. The amount of land included in Unit #2 RC will be the same as that amount that was subject to the change in use provisions of subsection 206(2).

Should you require further information, or have any questions on this matter, please do not hesitate to contact me at (613) 954-4393.

Hugh Dorward
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate