7 May 2002 GST/HST Interpretation 38538 - Input Tax Credit Entitlement - Construction of (the Centre)

Dear XXXXX

Thank you for your letter of September 20, 2001 (with attachments) which has been forwarded to us by XXXXX. This letter and the attachments thereto provide additional information in support of the XXXXX the XXXXX claim for full input tax credits (ITCs) related to the construction of the Centre.

Interpretation Requested

It is our understanding based upon your letter of September 20, 2001 and our discussions with XXXXX that you are requesting re-consideration of our position that the XXXXX is not entitled to claim ITCs related to the construction of the Centre (This position was communicated in a telephone conversation on XXXXX and in an interpretation letter dated XXXXX.).

Interpretation Given

Based on our review of the additional information provided on September 20, 2001 we confirm that the XXXXX is not entitled to claim ITCs related to the construction of the Centre for the reasons provided in our interpretation letter of XXXXX.

Explanation Provided

The XXXXX is precluded from claiming ITCs on construction services supplied to the XXXXX as improvements to lands leased from XXXXX by virtue of having elected to use the Special Quick Method (SQM) for Public Service Bodies (PSBs).

The essential facts pertaining to the XXXXX claim for the ITCs related to the construction of the Centre are as follows:

1. The XXXXX and a "registrant" for GST/HST purposes, as defined is subsection 123(1) of the ETA.

2. In early XXXXX, the XXXXX acquired largely unimproved lands from the XXXXX by way of lease for a term of 99 years with an option to renew the lease but without an option to purchase the lands (the Lease).

3. Should the XXXXX not exercise its option to renew the Lease, as required pursuant to the terms of the Lease, the lands revert back to the XXXXX as landowner.

4. At the end of the term if the XXXXX chooses not to renew the lease, the Centre will be demolished prior to the surrender of the lands to the XXXXX or ownership of the Centre will be transferred to the XXXXX, at the XXXXX option.

5. In XXXXX, the XXXXX entered into a contract with a general contractor to construct the Centre on the leased lands for a cost of approximately XXXXX million.

6. The Lease states that title to and ownership of the Centre, exclusive of the lands, vests with the XXXXX for the duration of the Lease notwithstanding any rule of law to the contrary.

7. Since January 1, 1991, the XXXXX has elected to use the SQM for PSBs pursuant to subsection 227(1) of the Excise Tax Act (ETA) and Part V of the Streamlined Accounting (GST/HST) Regulations to the ETA.

Analysis

Pursuant to subsection 227(1) of the ETA, the XXXXX has elected to determine its net tax in accordance with section 21 of Part V of the Streamlined Accounting (GST/HST) Regulations, referred to as the SQM for PSBs.

The SQM provision permitting ITCs on acquisition of real property and on the acquisition of improvements to real property is subparagraph (a)(i) of the description of "C" in the formula for net tax "A + B - C" in subsection 21(1) of the Regulations noted above.

This provision permits a PSB, for a particular reporting period in which the SQM election is in effect, to claim ITCs for improvements ("Improvement" for purposes of Part IX of the ETA and the Regulations thereto is defined in subsection 123(1) as: "... in respect of property of a person, means any property or service supplied to, or goods imported by, the person for the purpose of improving the property, to the extent that the consideration paid or payable by the person for the property or service or the value of the goods is, or would be if the person were a taxpayer under the Income Tax Act, included in determining the cost or, in the case of property that is capital property of the person, the adjusted cost base to the person of the property for the purposes of that) made to real property, provided such real property is acquired by way of purchase.

Therefore, based upon the facts stated above, the XXXXX is precluded from claiming ITCs on costs related to the construction of the Centre since the construction services were improvements to real property (i.e. land) which was acquired by way of lease, and not by way of purchase as required in the regulations noted above.

Review of Additional Information Submitted

For ease of reference we refer to the information that you have asked us to consider using the same numbers as in your letter of September 20, 2001.

1. Since you have not provided any details on the legal, audit or other advice provided to you from tax consultants with respect to the XXXXX entitlement to full ITCs, we are unable to comment on this information.

2. The CCRA has considered, both in its interpretation of XXXXX XXXXX and in this interpretation, that the term of the Lease is for 99 years and that the XXXXX has an option to renew the Lease after the initial term of 99 years. It is the CCRA's position that for purposes of the GST/HST, a lease of real property is not to be treated as a sale, notwithstanding the fact that the lease may have a long term.

3. The ETA provisions relied upon in this case apply specifically to PSBs. The XXXXX, by having elected to use the SQM for PSBs, has given up its entitlement to certain ITCs in exchange for its entitlement to remit GST at a SQM rate of XXXXX in accordance with subparagraph 19(3)(e)(iii), of Part V, of the Streamlined Accounting (GST/HST) Regulations.

4. The CCRA's mandate is to administer the ETA and its regulations as enacted by the Parliament of Canada. Amendments to the ETA and its regulations fall within the purview of the Department of Finance. Should you wish to seek such amends you may wish to contact the Department of Finance.

5. Even accepting as fact that the XXXXX owns the building portion of the Centre, this does not alter the XXXXX entitlement to ITCs related to the construction of the building.

The ITCs at issue are with respect to construction services acquired by the XXXXX for the purpose of constructing a building on lands (i.e. real property) acquired by way of lease. Costs of constructing the building are, by definition, improvements for GST/HST purposes. Therefore the applicable tax paid by the XXXXX is with respect to improvements made to real property acquired by way of lease.

For GST/HST purposes a distinction is made between the acquisition of building materials (as tangible personal property) and services for the purpose of constructing a building as an improvement to land and the acquisition of a building, as real property. In the XXXXX case, the facts are that it acquired construction services for the purpose of constructing the building.

The foregoing comments represent our general views with respect to the subject matter of your letters. 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 Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-8852.

Yours truly,

Daryl J.A. Hooley
Senior Rulings Officer
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate