20 February 2003 GST/HST Interpretation 42636 - Eligibility for the New Residential Rental Property Rebate

We refer to your communications with XXXXX of the XXXXX GST/HST Rulings Centre, concerning a certain claimant's eligibility to the New Residential Rental Property Rebate (NRR). They have forwarded your request to us for our direct reply to you.

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

Our understanding of the situation is as follows.

1. XXXXX (the Company) entered into a construction agreement dated XXXXX, with XXXXX (the Corporation). The agreement called for the Company to construct for the Corporation a new residential complex (the Complex) situated on land owned by the Company and legally described as XXXXX. The Company agreed to transfer title to the Complex at the time of its completion of construction or upon its possession being given to the Corporation. The construction agreement contemplated construction of the Complex being complete on or about XXXXX. The consideration for this sale of the Complex was XXXXX.

2. The Complex contains four residential units and each unit is a "self-contained residence" as that term is defined in subsection 256.2(1).

3. The Company is registered for Goods and Services Tax (GST)/Harmonized Sales Tax (HST) purposes while the Corporation has never registered for the GST/HST. The Company and the Corporation have the same shareholder structure in that XXXXX owns XXXXX % of the outstanding shares of the Company and the Corporation and XXXXX owns the other XXXXX % of the outstanding shares of the Company and the Corporation.

4. The Corporation entered into an agreement of purchase and sale, dated XXXXX, with XXXXX to sell the Complex for consideration of XXXXX. The closing date of this sale was XXXXX. The GST was not charged on the consideration for this sale of the Complex. XXXXX is not registered for GST/HST purposes. There is no indication how XXXXX intended to use the units, i.e. whether she would lease them to others, occupy one or more units as a place of residence or lodging, or some combination of such uses.

5. Until XXXXX took possession, an individual never occupied any unit in the Complex as a place of residence or lodging after it was substantially completed. The Corporation indicated that after the Complex was acquired from the Company and prior to its sale to XXXXX, approximately XXXXX of landscaping was done on the Complex.

6. The Corporation has indicated that, upon acquisition, it was their intention to rent the units in the Complex on a monthly basis to individuals as their primary place of residence. However, the Corporation stated that they were looking to acquire additional rental properties in another area of XXXXX near the campus of the XXXXX. The Complex, situated XXXXX and further from the campus, would have been located away from these other properties and as such, the Corporation decided to sell the Complex before any of the units were actually rented out.

7. The Corporation has filed a form GST524, GST/HST New Residential Rental Property Rebate Application, for XXXXX equal to 36% of the GST paid on the purchase of the residential complex from the Company.

Issue

You are enquiring as to whether the Corporation is eligible for the NRR.

Response

In order to determine if the Corporation is eligible for the NRR, we need to determine whether the Corporation is a builder of the Complex. In order to make that determination, we need to determine whether the Corporation had the primary intention of selling the Complex or leasing it to persons (other than to individuals acquiring it for use otherwise than in the course of a business or an adventure or concern in the nature of trade).

the Corporation's intention with respect to the Complex is a question of fact, which can either be corroborated or refuted based on the available evidence. We have not been presented with evidence to establish that intention, however we have included in the explanation below some factors you may consider in making such a determination.

If you determine that the Corporation's primary intention with respect to the Complex was to sell it or to lease it to persons (other than to individuals who are acquiring it otherwise than in a business or adventure or concern in the nature of trade), the Corporation would be a builder of the Complex and the sale to XXXXX would be subject to the GST. The Corporation would not be entitled to the NRR in such a case, however XXXXX may then be eligible for the NRR. Further, the Corporation, as a non-registrant making a taxable supply of real property, may be eligible for a rebate under section 257 of the Act.

If you determine that the Corporation's intention was to lease the Complex to individuals for use otherwise than in a business or an adventure or concern in the nature of trade (e.g. as a place of residence), then the Corporation will be eligible for the NRR provided the conditions for claiming the rebate are met. These conditions are considered in greater detail in the explanation below.

Explanation

In order to qualify for the NRR, a person must meet several criteria, one of which, relevant to this case, is set out in paragraph 256.2(3)(a). That paragraph requires that, where the person is not a co-operative housing corporation, the person must be:

(a) the recipient of a taxable supply by way of sale from another person of a residential complex (or an interest therein) and cannot be a builder of the complex, or

([b]) a builder of a residential complex who makes an exempt supply of the complex, or a residential unit in the complex, by way of lease included in section 6 or 6.1 of Part I of Schedule V to the Act that results in the person being deemed to have made a self-supply of the complex under section 191.

[T]he Corporation did not make an exempt supply of the Complex under section 6 or 6.1 of Part I and also was not required to make a self-supply of the Complex under section 191. Accordingly, paragraph (b) does not apply and the only way the Corporation will qualify for the NRR is if they fall within paragraph (a).

[T]he Corporation was the recipient of a taxable supply by way of sale of a residential complex when it acquired the Complex from the Company. (The Company made a taxable supply by way of sale of the Complex to the Corporation, who was the person liable to pay consideration to the Company under the construction agreement, thus making the Corporation the recipient of that supply. Further, although the Complex had not yet been occupied by an individual as a place of residence at the time of that sale, it had never been used or occupied for any purpose and was intended to be used as a place of residence for individuals. As such, each unit in the Complex would be a residential unit and the Complex itself would be a multiple unit residential complex.) We must examine, however, whether the Corporation is a builder of the Complex. If the Corporation is a builder, paragraph (a) above is not met and the Corporation has no eligibility to the NRR; (There will be tax consequences to this outcome, which will be discussed later in this letter.) if the Corporation is not a builder, they will have to meet the remaining eligibility criteria set out below in order to be eligible for the NRR.

Whether the Corporation is a builder of the Complex

The definition of "builder" is found in subsection 123(1) and is reproduced in the Appendix to this letter. It appears that paragraph (d) may apply to this situation. That paragraph provides that a person will be a builder if they acquire an interest in a residential complex, before it has been occupied by an individual as a place of residence or lodging, for the primary purpose of:

(i) selling the complex, or an interest in the complex, or

(i[i]) making one or more supplies of the complex or parts thereof by way of lease, licence or similar arrangement to persons (other than individuals who are acquiring the complex or part otherwise than in the course of a business or an adventure or concern in the nature of trade). (Paragraphs (f) to (h) of the definition exclude certain persons from the definition of builder. Paragraphs (f) and (g) apply only to individuals and it is unnecessary to examine either paragraph further. Paragraph (h) excludes from the definition of builder a person described in any of paragraphs (a) to (c) of the definition if that person's only interest in the complex is a right to purchase the complex from a builder of the complex. As paragraph (d) is not excepted in paragraph (h), the Corporation is not excluded from the definition of builder by virtue of paragraph (h).)

In order to fall within the paragraph (d) definition of builder, therefore, the Corporation would have to have one of these courses of action as the primary purpose for acquiring the Complex. If either of these courses of action was a secondary intention or was never an intention, the Corporation would not fall within the definition of builder. The questions therefore become when the Corporation acquired an interest in the Complex and whether the Corporation had the primary intention to carry out either of these undertakings.

We do not have knowledge as to the exact date on which the Corporation acquired an interest in the Complex. (As set out in our understanding, the construction agreement called for title to transfer on or about XXXXX. However, we do not know when title was actually transferred or when the Corporation acquired some other interest in the Complex.) However, we do know that the interest was acquired before any unit in the Complex was occupied by an individual as a place of residence or lodging. Therefore the first part of the paragraph (d) definition of builder is met.

the Corporation has stated that its intention was to rent all four units in the complex to individuals as a place of residence. If in fact this were their primary intention, the Corporation would not be a builder of the complex. However, intentions can only be judged by outward indicators, i.e. the presence or absence of physical actions and/or evidence. We have not been presented any evidence to establish whether the Corporation's stated intention in fact existed. Evidence of such an intention might include: (We would add that, given construction of the Complex began in XXXXX, if the intent to rent the Complex indeed existed, one could expect to see evidence of an intention to rent from at least that time forward.)

1. Marketing the property for rent as a place of residence for individuals in newspapers, magazines, rental property guides, etc., or marketing it through firms specializing in renting residential property.

2. A list of prospective tenants for the units.

3. A sample lease agreement that was to be used in renting the units.

4. If required under municipal or provincial law, occupancy permits and/or business licences identifying the Corporation as a supplier of residential units.

5. If financing was used in the purchase of the Complex, a long-term and/or closed mortgage as opposed to an open mortgage, which can generally be paid off without penalty.

A lack of such evidence, while not necessarily conclusive, may suggest that the Corporation did not form the intention to rent the units in the Complex and it is possible that some other intention existed.

Other factors that could be considered in determining whether there was an intention to rent, or alternatively to sell, the Complex include:

1. The Corporation's treatment of the sale for income tax purposes (i.e. whether it was income from a business or income from property/capital gain).

2. Incorporation documents or corporate minutes indicating the purpose for which the Corporation was established and is operated.

3. Corporate financial statements.

4. Business correspondence that demonstrates one intention or another.

5. The history of the Corporation's operations (i.e. whether the Corporation has operated as a landlord or property management company in the past or whether they have been involved in buying and selling properties).

Where a person does not carry through on what they state is an intended course of action, absent an intervening frustrating event, one must question whether the stated intention ever actually existed. In this case, the Corporation suggests that the intervening event was that the Complex was situated some distance from other rental properties which they were looking to acquire and supposedly it was no longer feasible for the Corporation to be supervising the rental of the Complex, which they now viewed as being isolated. If that were the case, it would be beneficial to know why the Corporation acquired the Complex to begin with if they were contemplating acquiring rental units in other parts of the city and apparently do not want properties in more than one area of XXXXX. If the Corporation intended to acquire other rental properties in the neighbourhood in which the Complex is situated, you may want to ascertain the reasons as to why those other properties became unavailable.

In the absence of such evidence or other verifiable indications that demonstrate an intention to rent units in the Complex, it is possible to conclude that the Corporation did not form the intention to rent the premises to individuals as a place of residence. If that is the case, we must consider whether instead there was an intention to sell the Complex or to lease the Complex (or units therein) to another person (other than individuals who are acquiring the complex or part thereof for non-business use). As stated above, if either of these scenarios were their intent, then the Corporation would be a builder of the Complex and would not be eligible for the NRR.

If the Corporation had the primary purpose of selling the Complex, that purpose or intention may be established by some of the details surrounding the listing agreement it entered into with XXXXX. For example, if the listing agreement with XXXXX was entered into when the Complex was under construction or a short time after its completion, it suggests that the Corporation was not intending to rent units in the Complex (unless the listing agreement was for rental purposes rather than for sale). The listing broker or the Corporation should have documents or information as to when the Corporation and XXXXX entered into the listing agreement, when the Complex was first listed, and the number of days the Complex was listed for sale. If the Complex was listed for sale during the time of construction or shortly thereafter, it strongly suggests the Corporation had the intention to sell the Complex rather than leasing units therein.

If XXXXX made other offers on the Complex, or if offers besides any made by XXXXX were made, it suggests the Complex was listed for sale for a longer time. The longer the time the Complex was listed for sale prior to XXXXX, the more likely the Corporation's intent was to sell it rather than lease it out.

If the Corporation is a builder of the Complex, the supply of the Complex by the Corporation to XXXXX was a taxable supply and, pursuant to subsection 221(1), the Corporation was required to collect the GST on that sale. As the Corporation would not fall within paragraph (a) above, they would not be eligible for the NRR. In such a case, XXXXX may be eligible for the NRR, provided she meets the eligibility criteria. Further, as stated above, the Corporation may be eligible for a rebate under section 257 in respect of the Complex. GST/HST Memoranda Series Chapter 19.3.6, Rebate on Non-Registrant's Sale of Real Property, contains further information on the rebate under section 257.

If the Corporation is not a builder

If, after reviewing additional evidence, it is determined that the Corporation is not a builder, it is because you will have concluded that the Corporation did not have the primary intent of selling the complex or renting it to persons (other than individuals who are acquiring the complex or part thereof for non-business use). Hence, the Corporation will have met the condition set out in paragraph (a), above. However, the Corporation must still meet the remaining criteria for the NRR.

Included among the criteria is that, at the time tax became payable on the purchase of the Complex from the Company, the Complex had to contain one or more qualifying residential units. As it applies to this case, a qualifying residential unit is a residential unit that the Corporation held for the purpose of making an exempt supply under section 6 or 6.1 of Part I of Schedule V to the Act. (The type of evidence listed above may serve to support or oppose the Corporation's position that it has met this condition.) Further, at the time tax became payable on the purchase from the Company, the Corporation must have reasonably expected that the first use of the unit would be as a place of residence of individuals, generally for a period of at least one year. (If within that year, the unit is sold to a recipient who will use the unit as their primary place of residence, or as a primary place of residence of a relative of the recipient, the unit will still be a qualifying residential unit. Further, if the Corporation intended that once the unit had been occupied as a primary place of residence of an individual for at least a year, the unit would be supplied to a shareholder of the Corporation, or supplied by the Corporation to any other individual in a non-arm's length supply, the unit would have to be the primary place of residence of that individual if the unit is to be a qualifying residential unit.) This goes beyond the "intention" test used to determine whether the Corporation was a builder in that there must be an intent to rent the unit to the same individual for at least one year. This one-year test does not mean that the first lease of the unit must be a one-year lease; it could, for example, be twelve consecutive monthly leases. However, unless one of the exceptions referred to above apply, the one-year test must be applied with respect to the first tenant of each unit.

The fact that the Complex was sold by the Corporation before any of the units therein were leased does not mean that any unit cannot be a qualifying residential unit of the Corporation. Note that the intention to lease must be present at the time tax became payable on the purchase of the Complex. This is not to suggest that the intention to lease must exist only at that moment in time when tax became payable. Indeed, one would ordinarily expect that if the Corporation intended to lease the Complex, the intention to do so would exist throughout the time of construction of the Complex up to the time the intention to sell the Complex was formed, which may well be after the time tax became payable on the purchase of the Complex from the Company. Nonetheless, if subsequent to the time tax became payable on that purchase, the Corporation abandoned the intent to lease the Complex and decided to sell it instead, it is possible that each unit in the Complex could still be a qualifying residential unit.

The other eligibility criteria relative to this case are as follows:

1. The Corporation cannot be entitled to an input tax credit in respect of the tax payable on the purchase of the complex from the Company. (If the Corporation was not a builder of the Complex, the sale of the Complex to XXXXX would be exempt and the Corporation would not be eligible for an input tax credit in respect of the tax payable).

2. The Corporation must have paid the tax payable on the purchase of the complex from the Company, i.e. in this case, the Corporation would have been required to remit the tax to the Receiver General for Canada, pursuant to subsection 221(2).

If the foregoing criteria are met, the Corporation will be eligible for the NRR in respect of those units in the Complex that are qualifying residential units.

We would like to add that you may wish to consider whether the supply of the Complex by the Company to the Corporation was made for consideration less than the fair market value of the Complex. The construction agreement entered into between the two parties provides that the consideration for the supply is $XXXXX. A few months after this supply was made, the Corporation sold the Complex to XXXXX for consideration of $XXXXX. As indicated above, approximately $XXXXX of landscaping was performed by the Corporation after it acquired the Complex from the Company and before it was sold to XXXXX.

Subsection 155(1) provides, in part, that where a supply is made between persons not dealing at arm's length for consideration less than the fair market value at the time the supply is made, and the recipient is not a registrant acquiring the property or service for use exclusively in commercial activities of the recipient, the value of consideration is deemed to be the fair market value of the property or service at the time the supply is made. As the Corporation was not registered at the time of the supply made by the Company (and presumably not required to be registered), if the consideration of $XXXXX is less than the fair market value of the Complex at the time, subsection 155(1) would apply.

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

APPENDIX

"builder" of a residential complex or of an addition to a multiple unit residential complex means a person who

(a) 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

(i) in the case of an addition to a multiple unit residential complex, the construction of the addition to the multiple unit residential complex,

(ii) in the case of a residential condominium unit, the construction of the condominium complex in which the unit is situated, and

(iii) in any other case, the construction or substantial renovation of the complex,

(b) acquires an interest in the complex at a time when

(i) in the case of an addition to a multiple unit residential complex, the addition is under construction, and

(ii) in any other case, the complex is under construction or substantial renovation,

(c) in the case of a mobile home or floating home, makes a supply of the home before the home has been used or occupied by any individual as a place of residence,

(d) acquires an interest in the complex

(i) in the case of a condominium complex or residential condominium unit, at a time when the complex is not registered as a condominium, or

(ii) in any case, before it has been occupied by an individual as a place of residence or lodging, for the primary purpose of

(iii) making one or more supplies of the complex or parts thereof or interests therein by way of sale, or

(iv) making one or more supplies of the complex or parts thereof by way of lease, licence or similar arrangement to persons other than to individuals who are acquiring the complex or parts otherwise than in the course of a business or an adventure or concern in the nature of trade, or

(e) in any case, is deemed under subsection 190(1) to be a builder of the complex, but does not include

(f) an individual described in paragraph (a), (b) or (d) who

(i) carries on the construction or substantial renovation,

(ii) engages another person to carry on the construction or substantial renovation for the individual, or

(iii) acquires the complex or interest in it, otherwise than in the course of a business or an adventure or concern in the nature of trade,

(g) an individual described in paragraph (c) who makes a supply of the mobile home or floating home otherwise than in the course of a business or an adventure or concern in the nature of trade, or

(h) a person described in any of paragraphs (a) to (c) whose only interest in the complex is a right to purchase the complex or an interest in it from a builder of the complex;

XXXXX XXXXX XXXXX XXXXX