14 August 2003 GST/HST Ruling 43149 - GST/HST New Residential Rental Property Rebate

Dear XXXXX:

Thank you for your letter XXXXX, wherein you have asked us to reconsider our ruling issued XXXXX based upon the additional information you have provided.

Statement of Facts

Based on the original submission XXXXX, the subsequent submission of XXXXX and the information provided by telephone XXXXX XXXXX, our understanding of the facts and transactions is as follows:

•   XXXXX adjoining townhouses located at XXXXX, (the subject properties) were purchased by XXXXX (the Company) from the XXXXX Municipality XXXXX XXXXX. The purpose for purchasing the subject properties was to restore them as heritage buildings and to substantially renovate them into a single apartment building containing XXXXX residential rental units.

•   Prior to their purchase by the Company, the subject properties had been unoccupied for about XXXXX years, except for trespassers. Although the subject properties were vacant at the time of their acquisition, their last use was as a "rooming house" rented out on a monthly basis to individuals for use as their place of residence.

•   The Company carried on or engaged other persons to carry on the restoration and substantial renovation of the subject properties.

•   Title to the subject properties was consolidated into a single legal description, hereafter referred to as the subject property.

•   After the substantial renovation was substantially complete, the subject property consisted of a single apartment building containing XXXXX residential units. For Harmonized Sales Tax (HST) purposes, the subject property had become a substantially renovated multiple unit residential complex, as defined in subsection 123(1) of the Excise Tax Act.

•   After the substantial renovation of the subject property was substantially complete, the Company gave possession of one or more of the residential units in the apartment building under a lease, licence or similar arrangement to person(s) for the purpose of occupancy as place(s) of residence of one or more individuals.

•   Thus for HST purposes, you considered the Company to be a "builder" of the complex, as defined in subsection 123(1), and the Company self-assessed the HST as required under subsection 191(3) of the Excise Tax Act.

•   The subject property (formerly properties) is a municipal heritage building, and changes to the exterior (excluding preservation) required approval of the Heritage Advisory Committee.

•   The XXXXX Municipality granted approval to construct a truncated pitched roof to replace the flat roofs on the subject properties by issuing a permit XXXXX. The issuance of this permit was unrelated to the request for approval of the conversion of the subject properties into an 8-unit apartment building.

•   The building permit for the conversion of the subject properties into one apartment building was granted XXXXX.

•   Work done prior to February 28, 2000 XXXXX was limited largely to work of a preservation nature. Some of the first brickwork done was part of the demolition process as the bricklayers had to disassemble two high chimneys and set about salvaging the brick. Very little re-pointing was actually done prior to the spring of XXXXX. None of the masonry work necessary to support a new roof was conducted until well after February 2000. No building permit was required to conduct the masonry demolition and initial re-pointing work.

•   Demolition of the interior of the subject property was conducted in XXXXX. The contract price of the demolition work was $XXXXX out of a total project cost of $XXXXX. A temporary electrical mast was erected around XXXXX to assist in the demolition process. Posts and framing were inserted to prevent the building from collapsing. The demolition work consisted of removing materials from the interior of the building such as the plaster (including walls and ceilings) however some of the elaborate plaster mouldings were preserved.

•   The configuration of the interior was left largely intact however some of the interior (non-supporting) walls were relocated. The basement floor was removed and replaced.

•   The reframing did not start until after February 2000. The framers were not hired until XXXXX. Until that time only casual labourers were used.

•   The Company purchased the last piece of land pursuant to an agreement which was negotiated in XXXXX but which was not on paper until XXXXX and which agreement was completed in XXXXX. This piece of land was consolidated with the rest of the subject property and formed part of the multiple unit residential complex.

•   You regard this project as your civic contribution. You were "in it" firstly to redirect yourself personally, and secondly, as a heritage buff.

•   You maintain that the possibility of abandoning the project was very much on your mind until the work moved ahead, which really only happened in XXXXX. In XXXXX the project turned around and you were able to direct events, instead of being carried away by them.

•   You also maintain that your intention to construct the apartment building was not fully formulated until long after construction started, though construction ebbed after the XXXXX gust of activity. Until XXXXX you found it was more palatable to swallow the losses than to continue with this project.

•   It is your position that if the builder's commercial intent to construct the multiple unit residential complex could be implied in the circumstances (as described above), you submit that "intention" cannot amount to "construction" within the ordinary definition of the word.

•   Finally you submit that the construction work done on the subject property up until XXXXX, was of a sustaining or stabilizing nature. Thus it is your submission that XXXXX was the date of commencement of construction.

TRANSACTION

Upon rental of the first residential unit in the newly reconstructed or substantially renovated multiple unit residential complex, the Company was deemed to have paid the HST under subsection 191(3) of the Excise Tax Act.

Ruling Requested

Is the Company, as builder of the multiple unit residential complex, entitled to claim a GST/HST New Residential Rental Rebate in respect of the federal portion of the HST that is it deemed to have paid under subsection 191(3) of the Excise Tax Act?

Ruling Given

Based on the facts set out above, we confirm the previous ruling issued XXXXX XXXXX, and we rule that the builder is not entitled to claim a GST/HST New Residential Rental Rebate in respect of the federal portion of the HST.

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 our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

After reconsidering all of the facts stated above and in particular the representations you made in your letter XXXXX and by telephone on XXXXX, it is our position that substantial renovation of the subject property, as defined for HST purposes, began prior to February 28, 2000.

Given the condition of the subject properties at the time of their acquisition, it is our position that the demolition of the interior of the building was a necessary and integral part of the substantial renovation of the complex. The demolition work conducted in XXXXX involved, to some extent, the removal of portions of the interior of the building (or buildings), such as the plaster on the interior walls and ceilings. The starting point for a substantial renovation, as set out in the terms of the definition in subsection 123(1) of the Excise Tax Act, is the building as it existed immediately prior to the removal or replacement work having begun. Thus, once the removal or replacement work commences with respect to parts of the pre-existing building, other than certain excluded parts of the building (i.e. the foundation, external walls, interior supporting walls, floors, roof and staircases), it cannot be said that substantial renovation has not begun.

In accordance with the coming-into-force rule set out in clause 15 of subsection 16(1) of Bill C-13 enacted on June 14, 2001, the GST/HST New Residential Rental Property Rebate is not available to builders who began a substantial renovation of a residential complex prior to February 28, 2000.

In addition we wish to clarify that even if the substantial renovation of the subject property had begun after February 27, 2000, the GST/HST New Residential Rental Property Rebate is not available with respect to construction costs. Rather it is available with respect to the federal portion of the HST paid to purchase the residential complex or on the federal portion of the HST paid under self-supply.

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