2 February 2001 GST/HST Interpretation 32529 - Eligibility For New Housing Rebate or Input Tax Credit For a Bed and Breakfast/Residence

This concerns your e-mails of June 28, July 27, August 21, and November 9, 2000, regarding the eligibility of two individuals to claim a new housing rebate or an input tax credit (ITC) with respect to a building that is used both as a place of residence and as a location for a bed and breakfast (B&B) business that is operated by a partnership.

Facts

The facts of the case, as we understand them from the information you have provided, are as follows.

1) XXXXX registered as a partnership XXXXX[.] The account's major activity was listed as "Bed and Breakfast", XXXXX[.]

2) The partnership acquired XXXXX. When the property was acquired, the XXXXX site was vacant, without improvements.

3) As the partnership was registered, the vendor did not charge or collect GST with respect to the transaction. However, the partnership remitted XXXXX GST with respect to its acquisition of the land.

4) The partnership had a building constructed on the vacant land. Construction XXXXX was substantially completed XXXXX when XXXXX moved in. The building contains a master bedroom XXXXX, XXXXX for use in a B&B business, and common areas that include a living room, a kitchen, a dining room and hallways.

5) According to the diagram provided, XXXXX the portion of the building that is used exclusively in the B&B business appears to cover approximately 1600 square feet. In addition, there is a balcony or patio for each unit. The master bedroom unit is approximately 800 square feet, and has a large deck attached. There is approximately 800 square feet of space in the building occupied by the common areas, which are used by XXXXX, and the B&B guests.

6) XXXXX indicated that all of the acreage, other than the portion that is part of their place of residence, is used in the B&B business. They indicated that nature trails and a swimming pool were constructed on the property for use in the B&B business.

7) XXXXX indicated that the minimum allowable lot size is XXXXX.

8) The property is registered in the names of XXXXX. The insurance policy for the property is in the name of the two individuals.

9) The partnership claimed ITCs XXXXX on its return of XXXXX. This represents 50% of the total GST XXXXX that the partnership paid on the land and on the construction of the building and its appurtenances.

10) XXXXX filed for a new housing rebate XXXXX, calculated as 36% of XXXXX the remaining 50% of the total GST that the partnership paid on the land and construction costs.

Issues and Decisions

We understand that you wish us to address the question of whether XXXXX are eligible to claim a new housing rebate under section 256 of the Excise Tax Act (ETA) with respect to all or part of the tax paid on the property.

We understand that you also wish us to address the question of whether the partnership was eligible to claim an ITC under section 169 of the ETA with respect to all or part of the tax paid on the property.

Our view is that XXXXX are not eligible to claim a new housing rebate under section 256 of the ETA with respect to the tax paid on any of the property.

Our view is that the partnership was eligible to claim an ITC under section 169 of the ETA with respect to all the tax that it paid on the acquisition of the land and the construction of the building and its appurtenances, provided all the other requirements of section 169 were met. When the residential complex portion of the property was substantially completed and XXXXX began to reside in it, the partnership was required to self-assess on the fair market value of that part of the property that is a residential complex, under subsection 191(1) of the ETA.

Rationale

(a) Availability of a New Housing Rebate Under Section 256 of the ETA

XXXXX are not eligible to claim a new housing rebate under section 256 with respect to any part of the property because, in order to be eligible to claim a new housing rebate, an individual must construct a residential complex or engage another person to construct it. The information that has been provided indicates that it was the partnership that acquired the land and had the building constructed.

This conclusion is based on the information that you provided to us. You indicated that the partnership purchased the property and remitted GST in respect of the transaction, rather than the vendor collecting and remitting the tax. This would suggest that the supply of the land was made to the registrant partnership and not to the non-registrant individuals, and the transaction fell under paragraph 221(2)(b) of the ETA. Also, the partnership paid the consideration and tax on the improvements to the land. The partnership claimed an ITC with respect to a portion of the tax paid on the land and improvements. It is the partnership that is registered for the B&B business, and there is no evidence to suggest that the individuals are supplying the property to the B&B business for this purpose. These facts suggest that the partnership was and is the beneficial owner of the property. As subsection 123(1) of the ETA defines the term "person" to include a partnership, the partnership is a separate person from the individuals for purposes of the GST/HST.

Since only individuals can claim a new housing rebate, the partnership is ineligible to claim a new housing rebate with respect to the property at issue.

Of course, our view that the partnership is the beneficial owner of the property is based on the information we received, and could be affected by any further information that comes to light on the issue.

(b) Eligibility of the Partnership to Claim ITCs Under Section 169 of the ETA

As the beneficial owner of the property, the partnership was eligible to claim an ITC under section 169 of the ETA with respect to all of the tax that it paid on the acquisition of the land and the construction of the building and its appurtenances, provided all the other requirements of section 169 were met.

The partnership intended the B&B portion of the property to be used in, and is using it in, the course of the partnership's commercial activities. Accordingly, the partnership was eligible to claim an ITC with respect to the tax paid on the inputs related to that part of the property under section 169 of the ETA, provided all the other requirements of section 169 are met.

As a registrant that is the builder of the residential complex portion of the property, the partnership is also eligible to claim an ITC with respect to tax paid on inputs relating to the portion of the property that forms a residential complex, to the point that the residential complex was substantially completed and XXXXX first began to reside in the house. At that point, subsection 191(1) would require the partnership to self-assess on the residential complex, based on its fair market value. This is because the partnership, as a separate person from the individuals for purposes of the GST/HST, appears to have made a supply of the residential complex to the individuals by way of lease, licence or similar arrangement. This supply was apparently made for no consideration, but the partnership must nevertheless self-assess on the fair market value of the residential complex portion of the property at that point.

The residential complex only includes that part of the property that is used as a place of residence, because of the definition of "residential complex" in subsection 123(1) of the ETA. The definition provides that, where a house is used partly as a place of residence and partly as a place of lodging, the part that is used as a place of lodging, and its related common areas, appurtenances and land, are excluded from the definition by the wording that follows paragraph (e) of the definition.

The exclusion applies to that part of a building that is a hotel, a motel, an inn, a boarding house, a lodging house or other similar premises, and the land and appurtenances that are attributable to that part of the building, where the building is not described in paragraph (c) of the definition, and where all or substantially all of the leases, licences or similar arrangements under which the residential units are supplied are provided, or are expected to be provided, for periods of continuous possession or use of less than sixty days.

Paragraph (c) of the definition does not appear to apply to the case at issue, as the property seems to be owned by the partnership, and paragraph (c) refers specifically to a building that is owned by or has been provided by way of sale to an individual. Therefore the exclusion following paragraph (e) of the definition applies.

Consequently, the part of the property that is used to provide places of temporary lodging (i.e. that part of the property that is used in the B&B business), does not form part of the residential complex, as all or substantially all of the leases, licences or similar arrangements under which rooms in a B&B business are supplied are normally provided, or would be expected to be provided, for periods of continuous possession or use of less than sixty days. The partnership therefore was only required to self-assess on that portion of the property that the individuals use as a place of residence.

(c) Other

Based on the information provided, it appears that the property is primarily used in the B&B business, and only secondarily as a residential complex. However, the extent that the property is actually used as a residential complex is a question of fact XXXXX.

If a portion of the property is not part of the residential complex but was supplied to the individuals by the partnership for their personal use, the supply would be a taxable supply for no consideration, made by a registrant not dealing at arm's length with the recipients of the supply (the individuals). Consequently, the partnership should remit tax on the fair market value of any such supply.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9211.

Yours truly,

Don Dawson
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate