29 November 2002 GST/HST Interpretation 35390 - GST/HST Treatment of a Mixed-use Dwelling

Dear XXXXX:

This is in reply to your letter XXXXX, concerning the Goods and Services Tax/Harmonized Sales Tax ("GST/HST") treatment of a dwelling used for both commercial and residential purposes. We apologize for the delay in responding.

All references are to the Excise Tax Act ("ETA") unless otherwise indicated.

The following scenario is based on the information given in your letter and during our conversations on XXXXX.

1. The dwelling, a single unit residential complex (the "Complex"), was constructed on land owned by your clients, a husband and wife. The Complex is located in a new subdivision that is not yet fully developed.

2. XXXXX is a realtor and is the listing agent for the lots within the subdivision. As such, XXXXX is registered for GST/HST purposes. XXXXX is an employee and is not a registrant.

3. Your clients engaged another person to carry on the construction of the Complex and did so otherwise than in the course of a business or an adventure or concern in the nature of trade.

4. No input tax credits ("ITCs") have been claimed by your clients in respect of the acquisition/construction of the Complex.

5. Your clients have been using the Complex as their primary place of residence since construction was completed and will continue to do so for a total of at least XXXXX months. Your clients plan to sell the Complex at the end of the XXXXX-month period or when the last residential complex in the subdivision is sold, whichever is later.

6. XXXXX percent of the Complex has been dedicated for use as an office (hereafter the "work space") of the realtor. It is being used exclusively as a base from which to conduct XXXXX business.

7. The Complex is also being used as a "model home" and is thus shown to potential purchasers of other lots in the subdivision from time to time.

8. Although the Complex is available to the public for viewing during the day and evening, you indicated in our conversation that the use of the Complex for this purpose is insignificant (i.e., less than 10% of the time) and that it will be used primarily as a place of residence of your clients.

Ruling Requested

You wish to ascertain the GST/HST consequences of the above arrangement. Specifically, you wish to know whether ITCs are available to the realtor in respect of the above-described uses of the Complex. Further, you wish to know what impact these uses will have on the eventual sale of the Complex.

GST/HST Memoranda Series Chapter 1.4, Goods and Services Tax Rulings, describes circumstances under which GST/HST rulings may be issued. In paragraph 6 of that document, it is indicated that an application ruling provides the CCRA's position on specific provisions of the ETA as they relate to a clearly defined fact situation of a particular person. As you do not wish to disclose the identity the particular persons, we regret that we are unable at this time to issue a GST/HST ruling. However, we are pleased to provide the following interpretation.

Interpretation

Availablitlty of ITCs for the acquisition/construction of the Complex

Pursuant to subsection 169(1), a registrant is generally entitled to an ITC in respect of GST/HST paid on property and services to the extent (expressed as a percentage) that the property or service is acquired or imported for consumption, use or supply in the course of the registrant's commercial activities.

However, pursuant to subsection 208(1), where an individual who is a registrant acquires real property, such as a residential complex, primarily for the personal use and enjoyment of the individual or a related individual, the tax payable by the individual in respect of the acquisition of the property shall not be included in determining an ITC of the individual. This is the case even where the remainder of the property is used for making taxable supplies. Therefore, in the present case, subsection 208(1) would effectively prevent the realtor from claiming any ITCs on the acquisition/construction of the Complex or any improvements thereto.

Availability of ITCs for ongoing expenses related to the work space

Under the circumstances, the realtor would be able to claim ITCs for GST/HST paid on property or services related to XXXXX ongoing activities, subject to subsection 169(1) above. However, with regard to GST/HST paid on expenses relating to the work space, the ITC entitlement under subsection 169(1) is further subject to the provisions of paragraph 170(1)(a.1).

Specifically, paragraph 170(1)(a.1) denies an ITC for GST/HST paid on a supply if it is related to any part (i.e., a "work space") of a self-contained domestic establishment in which the registrant or individual resides. (For purposes of this provision, a "self-contained domestic establishment" carries the same meaning as in the Income Tax Act, namely a dwelling house, apartment or other similar place of residence in which place a person as a general rule sleeps and eats.) However, the above restriction will not apply if the work space is: (i) the principal place of business of the registrant; or (ii) used exclusively for the purpose of earning income from a business and is used on a regular and continuous basis for meeting the registrant's clients, customers or patients in respect of the business.

Interpretation Bulletin IT-514, Work Space in Home Expenses (enclosed), explains the administrative meaning of the terms "principal place of business" and "regular and continuous basis" for purposes of subsection 18(12) of the Income Tax Act and, consequently, for purposes of subsection 170(1)(a.1) above. If the work space can be described as a "principal place of business" of the realtor in accordance with IT-514, the restrictions of subsection 170(1)(a.1) would not apply and XXXXX would be entitled to an ITC for GST/HST paid on expenses relating to the work space to the extent of use in XXXXX commercial activities, subject to subsection 169(1). Alternatively, if, in accordance with IT-514, the work space is used on a "regular and continuous basis" for meeting the realtor's clients and is used exclusively for the purpose of earning income from XXXXX business, ITCs would similarly be available subject to subsection 169(1).

You may wish to note the provisions of subsection 141.01(5), which indicates that the methods used by a person in determining the extent to which properties or services acquired by the person are for use in making taxable supplies for consideration, or for other purposes, must be fair and reasonable and used consistently throughout the year. That is, the determination of an ITC entitlement must reflect the intended use of the property that is reasonable under the circumstances, having regard to the nature of the activities of the registrant.

Future sale of the complex

Sales of real property (including a residential complex) made in Canada are considered to be taxable supplies for purposes of the ETA unless a specific provision applies to exempt them. Whether the sale of the Complex would be a taxable or exempt supply would depend on whether the whole of the Complex can be described as a "residential complex" for GST purposes at the time of sale. A "residential complex" is defined in subsection 123(1) of the ETA, in part, as:

(a) that part of a building in which one or more residential units are located, together with

(i) that part of any common areas and other appurtenances to the building and the land immediately contiguous to the building that is reasonably necessary for the use and enjoyment of the building as a place of residence for individuals, and

(ii) that proportion of the land subjacent to the building that that part of the building is of the whole building ...

(c) the whole of a building described in paragraph (a)... that is owned by or has been supplied by way of sale to an individual and that is used primarily as a place of residence of the individual, an individual related to the individual or a former spouse or common-law partner of the individual, together with

(i) in the case of a building described in paragraph (a), any appurtenances to the building, the land subjacent to the building and that part of the land immediately contiguous to the building, that are reasonably necessary for the use and enjoyment of the building...

For purposes of paragraph (a) above, the term "residential unit" is defined in the ETA to include a detached house, semi-detached house, rowhouse unit, condominium unit or that part thereof that is occupied by an individual as a place of residence or lodging. Under the circumstances, the Complex would qualify as a residential unit.

Pursuant to paragraph (c) of the definition of "residential complex", where a premises described in paragraph (a) is owned by or has been supplied by way of sale to an individual and is used primarily (i.e., more than 50%) as a place of residence of the individual, the whole of the premises is considered to be a "residential complex". Under the circumstances, the whole of the Complex would qualify as a "residential complex" since it would fall within the definition found in paragraph (c).

As mentioned previously, supplies of real property are taxable unless specifically exempt. Section 2 of Part I of Schedule V generally applies to exempt a supply by way of sale of a residential complex when made by a person who is not a builder of the complex. For this purpose, a "builder" of a residential complex is defined in the ETA to include a person who, at a time when the person has an interest in the real property on which the complex is situated, carries on or engages another person to carry on for the person the construction of the complex otherwise than in the course of a business or an adventure or concern in the nature of trade. As long as the case scenario remains unchanged, we would not consider either of your clients to be a "builder" of the Complex; its eventual sale would therefore be an exempt supply pursuant to section 2 above.

Finally, we note that a GST new housing rebate may be available to your clients pursuant to subsubsection 256(2) if all the conditions of that section are satisfied. If the Complex is located in Nova Scotia, an additional rebate may be available by virtue of paragraph 256(2.1). Full details on the eligibility criteria for these rebates are described in enclosed GST/HST Memoranda Series section 19.3.4, Rebate for Owner-Built Homes and, in the case of the Nova Scotia rebate, section 19.3.8, New Housing Rebates and the HST.

Should you have any further questions or require clarification on the above or any other GST or Harmonized Sales Tax matter, please do not hesitate to contact me at (613) 952-8816.

Yours Truly

Paul Hawtin
Rulings Officer
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate