24 October 2003 GST/HST Interpretation 48006 - Application of the GST/HST with Respect to Certain Real Property Transactions

We are writing concerning XXXXX (hereafter "S Ltd."), XXXXX and XXXXX (hereafter "OPCO") XXXXX. The Municipalities and Health Care Services Unit of this Directorate sent an application ruling XXXXX to XXXXX, counsel for the above registrants, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transactions described below. You received a copy of XXXXX and as you are aware, three of the ruling requests in XXXXX original correspondence XXXXX were forwarded to our unit for our response. As advised in our telephone call XXXXX XXXXX no longer require a ruling with respect to certain questions raised in their original ruling request. Nonetheless, we feel that the following information may be beneficial to you XXXXX.

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

Our understanding of the facts is as follows:

1. S Ltd. built a XXXXX square foot facility containing XXXXX residential units on XXXXX floors in XXXXX[.]

2. S Ltd. leases the facility to OPCO under a XXXXX year lease.

3. Both S Ltd. and OPCO are private, for-profit companies.

4. OPCO uses the facility to provide an assisted living environment for seniors. It operates the Centre under the name XXXXX to provide accommodation, meals, and limited support services, but not skilled nursing care, to seniors. OPCO has been operating XXXXX since XXXXX.

5. XXXXX XXXXX the CentreXXXXX offers individualized care that integrates independence with a personalized program of assistance in daily living activities. Individual support programs range from light support to daily comprehensive care assisting residents with bathing and medications. (This assistance includes up to XXXXX per day of "hands-on" assistance with these activities of daily living, XXXXX.) The principles behind the Centre's operations include XXXXX[.]

6. The residential units at the Centre are private apartments consisting of XXXXX bedroom and XXXXX bedroom apartments that range in size from about XXXXX to XXXXX square feet. Each unit includes a four-piece bathroom, kitchenette containing a counter, sink, refrigerator and cabinets, and individually controlled heating and cooling systems.

7. OPCO supplies basic accommodation, meals and services to the residents under an agreement entitled "XXXXX (the "Agreement"). Under this Agreement, there are XXXXX residency programs that may be selected: what was referred to by XXXXX as the XXXXX (hereinafter referred to as "Program A") and the XXXXX (hereinafter referred to as "Program B"). The residents in Program B are located in a separate area of the Centre. The provisions of the Agreement as they relate to these programs are as follows:

(a) The initial term of the Agreement is based on a one-year tenancy. With the exception of the one-time XXXXX, the consideration for this supply is payable monthly and the fees are based on a daily amount. Utilities are included in the daily amount; however the resident is responsible for telephone and cable television hookup and fees. After the first year, the Agreement continues on a month-to-month basis. A resident may terminate the Agreement for any reason on one month's written notice to OPCO. The Agreement may also be terminated where a resident has health care needs that cannot be addressed at the Centre or for other reasons set out in the Agreement.

(b) The accommodation provides a resident with the use of an apartment and the property of OPCO located in the apartment, such as wall-to-wall carpeting, window coverings, a closet or wardrobe space, a small refrigerator and cabinet space.

(c) A resident may furnish the apartment with his or her own furniture and use his or her own minor electrical appliances and special equipment, such as televisions and radios.

(d) A resident is responsible for the cost of repairing, cleaning, or replacing the carpet in the resident's suite should it be damaged.

(e) Upon the consent of OPCO, a resident may be allowed to keep a pet in his or her suite.

(f) There is a limit to the care and services that OPCO can provide. If a resident requires certain care or services that OPCO is not able to provide pursuant to applicable local or provincial regulations, the resident may terminate the agreement with OPCO.

(g) Common areas available for use by residents of the Centre include a main dining room, a private dining room for guests, bistro lounge, television lounge, entertainment and activity room, living room, parlour, sunroom, library, sun porches, verandas, outdoor gardens and pathways, on-site hair salon and barber shop, laundry rooms and public restrooms. The Centre also includes areas for use by OPCO's staff in the administration of the facility.

(h) The accommodations and the care and services package are each separately identified and separately described. Exhibit XXXXX to the Agreement, XXXXX, separately lists the price associated with each of the foregoing supplies. The XXXXX also indicates that the XXXXX is $XXXXX per day and lists the total daily fee (i.e., the care and services package plus the accommodations), ranging from $XXXXX to $XXXXX per person per day.

All residents receive the following basic amenities:

i. The use of common areas of the Centre, which are available for the use and enjoyment of all residents. The common areas are hallways, walkways, meeting rooms, activity rooms, dining rooms, open common spaces located within the Centre, and other areas noted in Fact 7(g) above;

ii. The provision of restaurant-style dining services for three meals daily that are served in the dining room and availability of snacks 24-hours per day;

iii. Daily housekeeping services, such as making the bed, tidying up the room and removing the trash;

iv. Weekly housekeeping services, such as vacuuming and dusting, cleaning the bathroom and kitchenette, and changing the bed and bath linens;

v. Weekly personal laundry, including pick-up and delivery, but not including dry-cleaning services;

vi. Transportation in the Centre's bus or other vehicle as scheduled by OPCO for shopping and other community services and activities;

vii. A monthly wellness assessment by a licensed nurse, which includes complete vital signs analysis, assessment of weight, mental and emotional status, XXXXX eating and sleeping patterns, personal hygiene, nutritional status, fluid balance, and bladder and bowel functions. The wellness assessment is not a substitute for a health care provider's report or the requirement that the resident have a personal physician;

viii. Regularly scheduled social, educational, religious, recreational and wellness programs;

ix. An emergency signalling device that may be activated from the bathroom and sleeping areas of each apartment. This device sends a message to a staff member who can request emergency services, such as 911 services, available in the area. The emergency medical services are not supplied by OPCO and any costs related to these services are borne by the resident, and

x. At least two staff members are on duty 24-hours per day.

8. In addition to these XXXXX residency programs, there are various optional programs that provide other goods and services supplied by OPCO, or arranged by OPCO, which are available to the residents for a separate consideration. Briefly, these programs are:

(a) The XXXXX, an optional program which provides additional support services and is available to residents in Program A;

(b) The XXXXX, an optional program which provides for the management of the resident's medications and is available to residents in Program A; and

(c) Additional Goods and Services, which involve a variety of optional goods and services that residents may purchase.

9. Potential residents of the Centre are not required to demonstrate their needs in advance of moving to the Centre. An individual's decision to move to the Centre is made at his or her discretion.

10. Before moving into the Centre, the individual must pay the one-time XXXXX for the initial set-up and maintenance of the care and services package that applies to the residency program that was selected. This fee is non-refundable. However, if the Agreement is terminated prior to the individual moving into the Centre or receiving any assisted living services, OPCO will refund the fee paid.

11. The set-up of the care and services package involves a physical and mental assessment of the individual by a licensed registered nurse, who is an employee of OPCO. The purpose of the assessment is to ensure that the Centre can appropriately meet the individual's needs and personal interests. This information is used to determine the level of supervision and assistance that the individual requires to ensure that the individual's needs are not outside the scope of what the Centre can provide. The assessment also assists OPCO in tailoring meals and social programs to meet the individual's needs.

12. Following the initial assessment, the registered nurse develops a personalized care and services plan for the resident, which is provided to OPCO and the resident's family members and physician. The registered nurse reviews and updates the services care plan on a monthly basis.

13. The duties of the registered nurse are limited to the periodic review of the care and services plan and supervision of the distribution and administration of medications. Residents who require regular nursing care have to obtain the services of a private nurse from other sources.

14. You advised that the Centre is not a nursing home and it is not subject to provincial regulation governing long-term care facilities. You further advised that OPCO complies with the provisions of the XXXXX because it operates a residential facility (i.e., the Centre) that is intended to be occupied by persons for the purpose of receiving care services, including assistance with the activities of daily living, as described in the statutory definition of XXXXX in that Act.

Issue

Ruling Requests XXXXX set out in XXXXX letter XXXXX were addressed XXXXX. We will therefore be addressing the remaining questions, referred to in XXXXX ruling request as XXXXX. The questions are as follows:

1. Whether OPCO, under the Agreement with the residents, is making a separate supply of a residential complex or a residential unit that is exempt under section 6 or 7 of Part I of Schedule V to the Act.

2. If OPCO is making an exempt supply under section 2 of Part II or section 2 of Part IV, both of Schedule V to the Act, and not making a separate supply described in Ruling Request #1 (above), whether the lease of the premises from S Ltd. to OPCO is a taxable supply.

3. If the lease of the premises from S Ltd. to OPCO is a taxable supply, whether S Ltd. may claim input tax credits to recover the tax that is required to be accounted for under the self-supply provisions of section 191 of the Act on the first use of the premises.

Response

Based on the facts set out above, it is our position that:

1. The supply of accommodations by OPCO to a resident of the Centre is a separate supply from the other services provided by OPCO under the Agreement. The supply of the accommodations is exempt under section 6 of Part I of Schedule V to the Act.

2. The lease of the Centre from S Ltd. to OPCO is the lease of real property that is a residential complex and other real property that is not a residential complex. The lease of that part of the Centre that is a residential complex is exempt under section 6.1 of Part I of Schedule V to the Act. The lease of that part of the Centre that is not a residential complex is subject to tax.

3. As the supply by S Ltd. to OPCO of that part of the Centre that is a residential complex is exempt, no input tax credits are available with respect to the tax owing on the self-supply of the residential complex. With respect to that part of the Centre that is not a residential complex, there is no self-supply under section 191.

These rulings are 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 these rulings provided that none of the above issues is currently under 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 transactions for which you requested a ruling.

Explanation

XXXXX we concluded that the supply of Program A (XXXXX which was referred to in that ruling as the XXXXX ), the XXXXX, the XXXXX and the additional goods and services are each separate supplies from Program B XXXXX and from each other. Each of these supplies (except Program B) was found not to be exempt under Part II or Part IV of Schedule V and each is a taxable supply unless another exemption in Schedule V applies. This current ruling addresses the tax status of Program A and the related GST/HST consequences.

Response 1

In determining whether OPCO is making a supply under section 6 of Part I of Schedule V, it is necessary to consider whether OPCO is making a single supply or multiple/separate supplies. In that regard, policy paper P-077R, "Single and Multiple Supplies", provides assistance.

In respect of the Agreement, we note the following:

(a) The various elements supplied (i.e. accommodation and the various services) are not inputs consumed in making the supply; the elements are themselves supplied by OPCO to residents of the Centre.

(b) The form of the Agreement is structured such that the accommodations and the care and services package are each separately identified and separately described. Exhibit XXXXX to the Agreement, XXXXX, separately lists the price associated with each of the foregoing supplies. The XXXXX also indicates that the XXXXX is $XXXXX per day and lists the total daily fee (i.e., the care and services package plus the accommodations), ranging from $XXXXX to $XXXXX per person per day.

(c) Part XXXXX of the Agreement, separate from Part XXXXX, contains some provisions of a typical rental agreement such as that a unit may only be used as a residential dwelling, that S Ltd. be allowed to show the suite to prospective tenants during the last sixty days of the term of the Agreement, a resident's responsibility to maintain renter's insurance, as well as other provisions.

(d) While the care and services package is an important factor in a resident's decision to live at the Centre, we note that the "hands on" care offered under the standard service package is limited to XXXXX per day. This suggests that the accommodation is, in its own right, of use to a resident.

(e) There is no indication that OPCO does not accept persons who require only minimal assistance with the activities of daily living and indeed, the Centre is promoted on the basis that it encourages self-reliance of a resident in whatever manner possible.

(f) Residents are made aware of all the elements of the supply. The Agreement provides a detailed list of everything offered at the Centre. Further, consideration for each supply is separately identified such that a resident knows the amount paid for accommodations and for the care and services package.

Based on the foregoing, it is our view that OPCO is making separate supplies in respect of the accommodations and the care and service package, and indeed the various other packages. As such, one must determine the status of the supply of accommodations and the status of the supply of the remaining elements of the care and service package.

Section 6 of Part I of Schedule V to the Act exempts the supply by way of lease, licence or similar arrangement of a residential unit in a residential complex if the unit is to be used by an individual as a place of residence or lodging and if the rental period is a period of continuous occupancy or right of occupancy of one month or more to the same individual. The phrase "residential unit" is defined in subsection 123(1) to include:

"(b) a suite or room in a hotel, a motel, an inn, a boarding house or a lodging house or in a residence for students, seniors, individuals with a disability or other individuals ...

(c) ...

or that part thereof that

(d) is occupied by an individual as a place of residence,

A "residential complex" is also defined in subsection 123(1) to include

"(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 ...".

Accordingly, the supply of accommodations in Program A is exempt pursuant to section 6 of Part I of Schedule V to the Act.

There are no provisions to exempt the supply of the care and service package and as such, this is a taxable supply.

Response 2

XXXXX provided that the supply of Program B (referred to therein as the XXXXX) is exempt under section 2 of Part II of Schedule V to the Act. Further, that part of the Centre operated by OPCO and used to supply Program B is a health care facility and that "a health care facility for purposes of the [Act] is not a residential complex but rather a facility operated for the purpose of providing care services".

Accordingly, as the Centre is composed of a residential complex and other real property that is not a residential complex, the rules of subsection 136(2) apply. That subsection provides that where a supply of real property includes a residential complex and other real property that is not part of the residential complex, the supply of the residential complex and the non-residential complex are separate supplies and neither supply is incidental to the other. As such, the supply by way of lease of the Centre from S Ltd. to OPCO is the supply of a residential complex and other real property that is not a residential complex.

With respect to the supply of the residential complex, section 6.1 of Part I of Schedule V, in part, exempts the lease of that part of a building that forms part of a residential complex for a lease interval throughout which the lessee makes supplies of the property that are exempt under section 6 of Part I. As OPCO was found to be making exempt supplies under section 6 in respect of the accommodations in Program A, section 6.1 exempts the lease from S Ltd. to OPCO of that portion of the Centre that is a residential complex. However, this section does not exempt the supply of that part of the Centre that is not a residential complex (i.e. that part that is used in making supplies under Program B) and that supply is subject to tax.

It must also be noted that the consideration charged by S Ltd. to OPCO for the two deemed supplies must be fairly and reasonably attributed to each supply in accordance with the provisions of subsection 153(2).

Response 3

S Ltd. is entitled to input tax credits on the acquisition of land and construction of the Centre.

With respect to that part of the Centre that is not a residential complex, S Ltd. is entitled to input tax credits on the construction of that part of the Centre and will be eligible for input tax credits with respect to the ongoing expenses of the lease of that part of the Centre, subject to the general provisions of the Act. The self-supply rules in section 191 will not apply to that part of the Centre that is not a residential complex, as the rules in section 191 pertain only to real property that is a residential complex.

With respect to that part of the Centre that is a residential complex, under the provisions of subsections 191(10) and (3), when S Ltd. gives possession of the Centre to OPCO and the remaining conditions in subsection 191(3) are met, S Ltd. is deemed to have made and received a taxable supply by way of sale of a residential complex. S Ltd. is also deemed to have paid as recipient and collected as supplier, tax in respect of this deemed supply. However, this deemed acquisition is for use in making exempt supplies, i.e., the lease of the Centre to OPCO, which, as stated above, is exempt under section 6.1 of Part I of Schedule V to the Act. As such, S Ltd. is not eligible to any input tax credits in respect of the tax payable on the deemed supply under subsection 191(3). In summary, S Ltd. can claim input tax credits on the construction of the residential complex part of the Centre, will then owe tax on the deemed self-supply, and will not be eligible for input tax credits for the tax owing on that deemed self-supply, nor on ongoing expenses related to the lease of the residential complex to OPCO.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-4393.

XXXXX