31 March 2000 GST/HST Interpretation 8179 - Application of the GST/HST to the Construction and Operation of a Community Centre on Land Owned by a Municipality

Dear XXXXX

Thank you for your letter of March 28, 1999 (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the construction and operation of a community centre on land owned by a municipality. The letter was sent to the XXXXX and has been forwarded to us for our response.

Please note that as of November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (CCRA).

All legislative references are to the Excise Tax Act (the Act) unless otherwise stated.

Our understanding of the situation is as follows:

1. The XXXXX was incorporated XXXXX[.] The main objectives of the XXXXX are to provide a centre and a suitable meeting place for various community activities and to provide a facility for the visual and performing arts.

2. The XXXXX was registered by the Charities Division of the CCRA and designated as a charitable organization effective May 1, 1997 (i.e. it is a registered charity within the meaning assigned to that expression by subsection 248(1) of the Income Tax Act).

3. The XXXXX[.]

4. XXXXX[.]

5. XXXXX not including the GST.

6. Clause 4 of the Agreement states that "The XXXXX shall own all improvements on and XXXXX until such time as a building is completed for occupancy and use. At that time, this Agreement will terminate and the building and all site improvements shall become the property of the Town. Such event and arrangement will be undertaken by way of a Management Agreement for the completed Centre between the Town and the XXXXX. It is stated in your letter that at the time the Centre is transferred from the XXXXX to the Town, the XXXXX and the Town intend to enter into a management agreement whereby the XXXXX will manage the Centre.

7. XXXXX [a]lso states that "The Town will assume responsibility for securing course of construction insurance on the building until its completion and the XXXXX will pay the premiums for that coverage. The XXXXX will secure its own liability insurance for its Directors and volunteers".

8. The Town agreed to provide XXXXX or the development of the Centre to be allocated XXXXX[.] The Town's contribution XXXXX is to be advanced on a monthly pro rata basis upon evidence of expenditures. Contributions to  XXXXX are to be advanced as required.

9. A contribution of XXXXX from the XXXXX XXXXX towards the XXXXX to be managed by the Town and it is anticipated that advances from these funds will be provided in the same manner as the Town's contribution towards the XXXXX[.]

10. XXXXX[.]

11. During our telephone conversations you provided the following information.

•   The XXXXX is the insured under the course of construction insurance policy.

•   The XXXXX entered into an agreement with the building contractor and pays the payments under that agreement.

•   While the XXXXX approached the Town about the possibility of construction of the Centre, the Town Council and the Mayor agreed that a Centre was needed but they said the Town was not in the position to come up with the money; however, the Town said it would support the XXXXX and to your knowledge, no other alternatives were considered.

•   It is the understanding of the XXXXX that it owns the improvements to the land until such time as the Centre is completed for occupancy and use.

12. During my telephone conversations with XXXXX XXXXX provided the following information.

•   No Management Agreement or lease agreement between the Town and the XXXXX is in existence and there is nothing before Council for consideration in respect of these matters.

•   The Management Agreement may (but not necessarily would) take the form of a lease agreement for a term that has not yet been agreed (but may initially be for three to five years) wherein the Town would lease the Centre to the XXXXX and the XXXXX would manage the Centre. At this point in time, the XXXXX has the right to possession of the Centre. However, that may change if the XXXXX is unable to complete the construction of the Centre. The issues of whether the XXXXX will have exclusive possession of the Centre and if the XXXXX will be required to pay rent for the use of the Centre have yet to be decided or negotiated with the Town Council. However, if the Centre is completed, XXXXX suspects that rent will be paid although he is not sure that the amount of the rent will be at market rates.

•   Based on a business plan for three years, the XXXXX expects to operate at a loss for the first two years and will raise the funds to cover the shortfall. The issue of the XXXXX receiving ongoing funding from the Town for the operation of the Centre has not yet been discussed.

•   The Centre will be represented to the public as a XXXXX based operation.

•   XXXXX listed cash and investments as assets in its financial statements. However, if interim statements were to be prepared at this time, the Centre would be included as an asset in the XXXXX financial statements.

•   It is the Town's understanding that the XXXXX is the owner of the improvements until the Centre is completed for occupancy and use. There is no separate legal title in respect of the construction and when the Centre is complete, there will be a transfer of legal title of the Centre from the XXXXX to the Town. (During a telephone conversation with Mr. Costa Dimitrakopoulos of this office, XXXXX clarified this statement by saying that where one owns real property in XXXXX one does not have the ability to separate the land (which is owned by the Town) from the building for legal title purposes. When the Agreement ends, the Town may enter into an agreement with the XXXXX to provide the XXXXX with a right of occupancy of the Centre for the XXXXX to operate the Centre. This agreement to provide the XXXXX with a right of occupancy could be registered on title as a caveat.

•   The Centre is constructed on municipal land and if the XXXXX is unable to operate the Centre, it is a community decision as to whether the Centre will continue to operate.

•   The XXXXX does not pay property taxes on the building.

•   If the XXXXX were not involved in the construction of the Centre, it was not something the Town was otherwise required to do even though it may be desirous.

13. In a letter dated XXXXX XXXXX to you, it is stated that, upon completion, the Centre will become the property of the Town for the nominal sum of XXXXX paid to the XXXXX. It also states the XXXXX shall own all improvements until that time.

Interpretation Requested

You are requesting a ruling on the effects of an election filed under section 211 of the Act by the XXXXX when the Centre is transferred from the XXXXX to the Town. Representatives of the Town have indicated to you that if the Town were to build the Centre, the net GST payable by them on the construction would be 3.1%. They are concerned that if the XXXXX erects the Centre at a net GST cost of 0% and then transfers it to the Town, there may be a contravention of the Act.

Interpretation Given

You have asked for a GST Ruling. However, in this case, there are insufficient facts to conclude that the XXXXX has an interest in the property that was improved by the construction of the Centre. For example, we have no evidence of a lease agreement being in effect between the Town and the XXXXX such that the XXXXX may be considered to have a leasehold interest in the property. We also have no evidence that there has been a severance of real property rights between those of the Town and those of the XXXXX to enable us to conclude that the XXXXX is the owner of the improvements to the land owned by the Town. The only written agreement entered into by the Town and the XXXXX is referred to in the agreement as a "license of occupancy". Where insufficient facts are provided to issue a definitive ruling, the Canada Customs and Revenue Agency (CCRA) may provide an interpretation of the relevant portions of the legislation in order to assist you in fulfilling your obligations under the law.

Section 209 contains certain rules for the acquisition of real property for use as capital property by a public service body (which includes a charity) and for improvements made to the real property. A charity is eligible to claim full input tax credits on the acquisition of real property or improvements thereto only where the property is for use primarily in commercial activities of the charity. Where the property is for use primarily in commercial activities, subsections 209(1) and 199(2) collectively provide that the property is deemed to be used exclusively in commercial activities. Subsection 123(1) defines "improvements" to capital property to be property or services acquired or imported for use in improving capital property to the extent that the consideration for the property or services is included in determining the adjusted cost base of the capital property for purposes of the Income Tax Act (or would be so included if the person were a taxpayer under the Income Tax Act).

If capital real property is not primarily for use in commercial activities, a charity cannot claim input tax credits. However, in these circumstances, the charity can apply for a rebate of 50% of the GST paid or payable on acquisitions of and improvements to real property of the charity. Under the primary use rules, a charity cannot claim both an input tax credit and a rebate for the GST paid on the same acquisition of or improvement to capital property. It has to claim one or the other, depending on the primary use of the property.

Charities (and other public service bodies) can opt out of the primary use rules by electing under section 211, on a property by property basis, to have sales, leases and other supplies of real property, which would normally be exempt, treated as taxable. Section 211 provides, in part, that while the election is in effect, subsection 193(1) and section 206 apply, and section 209 does not apply to the property. An election filed under section 211 would allow for apportioned input tax credits in respect of tax paid or payable on acquisition of the property to the extent to which the property is used 10% or more in commercial activities and even where such commercial activities do not constitute the primary use of the property.

The election under section 211 of the Act made by a public service body applies only to capital real property of the body, real property that is inventory held for resale, or real property that is acquired by the body by way of lease, licence or similar arrangement for the purposes of subleasing the property.

The definition of "real property" in subsection 123(1) of the Act includes an interest in real property. An interest in real property may arise, for example, by way of lease.

A licence is in the nature of a right or privilege to enter upon or to use real property in a certain manner or for a specified purpose (such as to construct the Centre). It is a personal right between the licensor and licensee and does not normally create any estate or interest in the property.

It is important to determine whether the Town or the XXXXX is the owner of the improvements to the land. At all times, the Town is the owner of the lands upon which the Centre is constructed. Under common law, there is a strong presumption that improvements to real property become the property of the owner of the land as soon as the improvements are made.

To overcome this presumption and to consider the improvements to be owned by the XXXXX, we would want to see clear evidence that ownership rests with the XXXXX. This evidence should demonstrate that there has been a severance of the building from the land underneath or that the building is intended to be a chattel.

The letter dated April 26, 1999 from XXXXX to you states the XXXXX owns the improvements until completion of the Centre and clause 4 of the Agreement states "The XXXXX shall own all improvements on and to the XXXXX until such time as a building is completed for occupancy and use". It is our opinion, however, that this evidence is not sufficient to clearly show there has been a severance of real property rights between those of the Town and those of the XXXXX. As a result, we do not consider the above mentioned common law presumption has been overcome and we are unable to conclude the XXXXX is making a supply of real property to the Town.

Consequently, the XXXXX would not be eligible to file an election under section 211 of the Act.

Pursuant to section 225.1 of the Act, charities are required to use the net tax calculation method for reporting periods beginning after 1996. Our records indicate that the XXXXX has not elected to opt out of this net tax method. Under the net tax method, charities can only claim input tax credits for purchases of real property, capital personal property and improvements to real or capital property of the charity if the property is for use primarily (more than 50%) in commercial activities.

The XXXXX has acquired construction services in connection with the construction project it undertook. In this case, it is our opinion that the XXXXX has not provided sufficient evidence that the XXXXX had an interest in the real property which was improved by the construction services acquired. Therefore no input tax credits would be allowed to the XXXXX in respect of the construction costs.

In conjunction with the restrictions on input tax credits under the net tax calculation for charities, generally charities will remit less tax. Under section 225.1, charities will only remit 60% of the GST/HST collectible or collected on their taxable supplies (other than sales of real and capital property). Charities must remit 100% of the GST/HST collectible by them on their sales of real and capital property.

As a charity, the XXXXX is generally entitled to a 50% rebate of the GST/HST paid or payable by it for which no input tax credit may be claimed, pursuant to section 259.

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 CCRA 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) 952-8816.

Yours truly,

Anne Kratz
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate