2 February 2000 GST/HST Ruling 7689/HQR0001295 - Eligibility to Claim Input Tax Credits

Dear Mr. Davey:

Thank you for your letter of October 18, 1997¸ with attachments, concerning whether or not the XXXXX [i]s eligible to claim input tax credits in connection with the XXXXX[.] Your letter was addressed to the XXXXX XXXXX XXXXX. The Technical Interpretations Services unit forwarded your letter to our unit for reply.

Please accept our apology for the delay in responding to your query.

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

Statement of Facts

Our understanding of the facts is as follows:

1. Your client is the "XXXXX[".]

2. The XXXXX is a registered charity under the XXXXX XXXXX[.]

3. The XXXXX operates an athletic centre out of premises that are owned by the XXXXX[.] The building is known as the XXXXX[.]

4. The XXXXX unsigned agreement that you have provided is between the XXXXX (which is the same person as XXXXX identified above). The agreement includes the following provisions:

•   title to the centre is and remains with XXXXX;

•   equipment purchased by the XXXXX with its own funds remains the property of the XXXXX;

•   the facilities constitute a "community recreation centre" within the meaning of the XXXXX will continue to exercise such power and authority as is required to maintain this designation;

•   XXXXX is to provide all annual operating grants, though the XXXXX is ultimately responsible for all operation costs; and

•   XXXXX is responsible for all capital maintenance costs.

This XXXXX agreement is the most recent between the XXXXX[.] In your facsimile cover sheet, you referred to the above agreement as a "lease agreement". The word "lease" does not appear anywhere in either the agreement submitted or the accompanying Schedule "A", Memorandum of Understanding.

We understand that the XXXXX are currently negotiating a new operating agreement.

5. XXXXX the XXXXX revenues were derived approximately XXXXX from GST/HST-exempt activities and XXXXX from GST/HST-taxable activities. The XXXXX exempt activities include day care services and athletic or recreational programs for children 14 years of age or under. Its taxable supplies include membership fees, recreational or athletic program fees, locker rental fees and rental fees. The XXXXX makes all of the foregoing supplies from the premises that it obtains from XXXXX.

6. In XXXXX the XXXXX approved a project to expand the current facilities. The expansion was financed from reserve funds and from a fund-raising campaign conducted by the XXXXX. The cost of the expansion project was several hundred thousand dollars.

7. In July XXXXX the XXXXX passed a resolution approving the expansion of the XXXXX XXXXX, subject to conformity with the relevant regulations. The resolution also approved a request for XXXXX to act as guarantor for bridge financing.

XXXXX did not participate in the actual design of the expansion of the facilities, rather this was handled by the XXXXX board of directors. XXXXX was not involved regarding the specifications of the project.

8. The expansion project has been completed and included the following:

•   adding a total of XXXXX square feet of new space to the existing building;

•   adding a personal conditioning area with weights, rowers, climbers and other equipment;

•   adding meeting rooms for seminars on health and fitness;

•   expansion of locker room facilities;

•   upgrades to the heating and cooling system;

•   improving accessibility to and throughout the building by installing elevators and lifts; and

•   expansion of public lobby and viewing areas.

9. XXXXX sets aside XXXXX annually in a reserve account as part of its budget for any major repairs or renovations that may be required for the XXXXX. In XXXXX, XXXXX provided a capital grant of XXXXX from this fund towards the XXXXX expansion project.

10. The only costs incurred by the XXXXX prior to the beginning of construction were the architect's fees.

11. At the time of your letter in 1997, the XXXXX was reporting and remitting GST using the Special Quick Method of Accounting system. The requirement to use the net tax calculation for charities took effect for reporting periods beginning after 1996 and is pursuant to section 225.1 of the ETA. The XXXXX has not filed an election to opt out of the net tax calculation for charities.

12. The XXXXX has claimed full input tax credits for their inputs into the subject construction.

13. If the XXXXX defaulted on any of the payments due to contractors/suppliers in relation to the expansion project, as owner of the property XXXXX would be liable to pay any liens placed on the property by the contractors/suppliers.

[14]. The XXXXX arranged a line of credit with the XXXXX[.] Since the XXXXX had no assets to support this loan, XXXXX signed a guarantee. The XXXXX borrowed XXXXX on this line of credit for a short period of time. This amount has been paid down by the XXXXX to a current debt of XXXXX[.]

15. The XXXXX has exclusive use of the recreational centre. As operator and manager, the XXXXX arranges dates and times of use of the centre.

16. The XXXXX has not filed an election under section 211 of the Excise Tax Act in connection with the centre.

17. To the best of your knowledge, you have provided all relevant documentation.

Rulings Requested

1. Is the XXXXX entitled to claim full input tax credits with respect to the GST paid or payable in connection with the subject expansion project?

2. If the answer to the question 1 is yes, can full input tax credits also be claimed for GST incurred for architectural drawings associated with the expansion project?

Rulings Given

Based on the facts set out above, we rule that

1. The XXXXX is not eligible for input tax credits in respect of the construction costs.

2. The XXXXX is not eligible for input tax credits respect of architectural drawings costs associated with the expansion project.

On April 1, 1997, the harmonized sales tax (HST) replaced the goods and services tax (GST) and the provincial sales tax (PST) in the three participating provinces of Nova Scotia, New Brunswick and Newfoundland with a harmonized tax rate of 15%. Example: Goods that are delivered or made available in a participating province are subject to the HST[.]

As the transactions described above occur in a non-participating province, the HST has not been addressed.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to departmental interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

The XXXXX has acquired construction services in connection with the expansion project that it undertook. Under the net tax calculation for charities, 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 (pursuant to section 225.1). In this case, there is not 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 subject construction costs. Preliminary costs such as architectural fees form part of the cost of the construction services and accordingly are denied input tax credits.

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% XXXXX 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 rebate of 50% of the GST/HST paid or payable by it for which no input tax credits may be claimed, pursuant to section 259. However, effective for reporting periods beginning after 1996, charities that are subject to the net tax calculation are not eligible for a GST/HST rebate on deemed tax payable for the use of seized or repossessed personal property pursuant to subsections 183(5) and 183(6).

For more detailed information on the net tax calculation for charities, including rebate calculation, please refer to the information sent to you on this topic in January 1998 by the Technical Interpretation Services unit XXXXX[.] You have indicated that the XXXXX has claimed full input tax credits for its costs regarding the subject expansion project. We recommend that you contact your local Canada Customs and Revenue Agency Tax Services Office for information on amending the XXXXX GST/HST returns for reporting periods in which the XXXXX claimed input tax credits for which it was not eligible. The Tax Services Office will be able to advise you on the application of possible interest and penalty and requests for waiver of such.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9212.

Yours truly,

(Mrs.) S.C. Cahill
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate