29 December 2003 GST/HST Interpretation 47913 - Interpretation Section 191.1

Please note that the following documents, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ces documents, bien qu'exacts au moment émis, peuvent ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your facsimile letter XXXXX concerning the application of section 191.1 to the various scenarios described therein. All references are to the Excise Tax Act (the Act) unless otherwise noted.

Statement of Facts

You have made the following assumptions applicable to the questions posed:

•   All other conditions in 191.1(2)(b) have been met; (The assumption is stated as it appears in the submission. For purposes of this interpretation request, it is assumed that the requirement under paragraph 191.1(2)(b) is met.)

•   The builder is not a government or municipality;

•   The builder is a private non-profit or charitable organization.

Interpretation Requested

Specifically, you request an interpretation of the following phrases:

•   "except where the builder is a government or municipality, the builder, at or before that time, has received or can reasonably expect to receive government funding in respect of the complex," in paragraph 191.1(2)(d) (The applicable reference is paragraph 191.1(2)(c) and not (d) as submitted in the interpretation request.); and

•   "for the purpose of making residential units in the complex available to individuals referred to in paragraph 2(b)." in the definition of "government funding" in subsection 191.1(1).

Your specific questions are reproduced below:

1. Is an upfront grant paid by a government (i.e. federal, provincial or municipal) to a builder to help defray the cost of construction considered to be: "government funding for the purpose of making residential units in the complex available to individuals referred to in (2)(b)"?

2. Is a post construction subsidy payment by a government (i.e. federal, provincial or municipal) to a builder to support rent geared to income housing charges (i.e. residents pay a reduced rate of housing charge based upon a means income test) considered to be: "government funding for the purpose of making residential units in the complex available to individuals referred to in (2)(b)"?

3. Is the answer in question (2) different if the rent geared to income payment is made directly to the resident and not the builder? That is, does it make a difference if the rent geared to income payment is based upon an agreement between the resident and the government funder or between the owner of the residential complex (i.e. builder) and the government agency providing the funding?

4. Is there a de minimis rule or administrative position as it relates to the level of government funding and the application of section 191.1? For example, assuming all other section 191.1 conditions are met, if a builder constructs a residential complex for a cost of $10,000,000 and receives a one time grant of $10,000 or $1,000 from a government body to assist in paying initial feasibility studies or planning costs would section 191.1 apply?

5. The definition of government funding refers to an amount of money including a forgivable loan. Based on our reading of this definition and exclusions listed, is it correct to say that gifts in kind (for example, land) made by a government body do not qualify as government funding for purposes of section 191.1?

6. Where a builder constructs a residential complex and receives no capital government funding whatsoever (i.e. the building and land have been acquired and developed with 100% private resources) but receives a per diem rate from a municipality to service a hard to house clientele (for example, mentally or physically disabled persons) is the per diem rate considered to be "for the purpose of making residential units in the complex available to individuals referred to in (2)(b)"?

Interpretation Given

Based on the information provided, we are pleased to provide the following interpretation. The questions are dealt with in the order presented.

Generally, section 191.1 provides for special deeming rules for builders who receive government funding in respect of a residential complex or of an addition thereto for the purpose of making residential units in the complex available to individuals referred to in paragraph 191.1(2)(b). Section 191.1 deems the amount of tax resulting from the self-supply to be the greater of 7% GST or 15% HST on the fair market value of the residential complex and the tax paid on the acquisition of the land, on the construction of the building, and on any improvements to the property, where:

•   government funding in respect of a complex is paid or payable to a builder of the complex or of an addition thereto;

•   the builder is deemed under any of subsections 191(1) to (4) to have, at any time, made and received a supply of the complex or addition thereto;

•   at least 10% of the residential units in the complex are intended to be supplied to individuals referred to in paragraph 191.1(2)(b); and

•   the builder, at or before that time, has received or can reasonably expect to receive government funding in respect of the complex.

1. It will be a question of fact whether an upfront grant paid by a government (i.e. federal, provincial or municipal) to a builder to help defray the cost of construction is considered to be "government funding for the purpose of making residential units in the complex available to individuals referred to in (2)(b)". Generally, where the grantor agrees to defray construction related expenses incurred by a builder in respect of a subsidized residential complex, the amount received by the builder will be considered to be government funding under subsection 191.1(1).

The deeming rules under section 191.1 apply to a builder who, at or before the time of having made and received a supply of the complex or addition under section 191, has received or can reasonably expect to receive government funding in respect of the residential complex and paragraphs 191.1(2)(a) and (b) apply. The definition of "government funding" in respect of a residential complex under subsection 191.1(1) states in part that, it is an amount of money paid or payable to a builder by a grantor or by an organization that received the amount from a grantor for a specified purpose.

The purpose for which "government funding" in respect of a residential complex is paid or payable may be determined by examining any contractual agreement between the grantor and the builder and the grantor's funding program, where applicable. It is CCRA's view that funds received by a builder in respect of a residential complex will be considered to be government funding as defined in subsection 191.1(1) where a builder incurs construction expenses to make residential units in a complex available to those individuals referred to in paragraph 191.1(2)(b).

2. Where a post construction subsidy payment is to be applied by a builder to reduce the rate of housing charges based on a means income test to be paid by individuals referred to in paragraph 191.1(2)(b), that subsidy payment made by a government to a builder will be considered to be "government funding for the purpose of making residential units in the complex available to individuals referred to in (2)(b)".

"Government funding" in subsection 191.1(1) is defined to mean an amount of money paid 'in respect of' a residential complex to a builder, who must clearly demonstrate that the government funding received is 'for the purpose' of making residential units in the complex available to certain individuals. The legislation does not specify the particular manner of use of the funds by the builder in making subsidized residential units available. This may only be determined upon examination of the relevant documents.

Note that in order for the deeming rules to apply, the condition under paragraph 191.1(2)(c) must also be met. That is, (i) the builder has received the post construction subsidy payment in respect of the complex at or before the time the builder is deemed under any of subsections 191(1) to (4) to have made and received a supply of the residential complex or addition thereto or (ii) the builder, at or before the time of deemed self supply, reasonably expects to receive government funding, notwithstanding that actual payment may occur at some later time.

3. Yes, the answer will be different if the rent geared to income payment is made directly to the resident and not the builder.

As stated above, all of the criteria under section 191.1 must be met in order for the deeming rules to apply. Specifically, "government funding" in subsection 191.1(1) means an amount of money (e.g. rent geared to income payment) paid or payable to a builder of the complex or of an addition thereto who makes residential units in the complex available to certain individuals referred to in paragraph 191.1(2)(b). Thus, the builder will be required to self assess tax in accordance with section 191.1 only where government funding in respect of a complex is paid or payable to the builder.

Section 191.1 ensures that a government-funded builder of subsidized residential housing self-assesses an amount of tax that is at minimum equal to tax that was payable by the builder in respect of real property that forms part of the complex or addition or in respect of improvements thereto. Where the conditions of section 191.1 are not met the builder is required to self-assess tax calculated only on the fair market value of the complex.

4. The CRA does not have an administrative position or a de minimis test as it relates to the level of government funding in s. 191.1.

Section 191.1 provides for self-supply rules for government-funded builders of subsidized residential housing to be occupied by individuals referred to in paragraph 191.1(2)(b). Generally, the amount of government funding received by a builder of a subsidized residential complex is not a determining factor in applying section 191.1.

With regard to the example in your submission, assuming that all other conditions of section 191.1 are met, if a builder constructs a subsidized residential complex for a cost of $10,000,000, section 191.1 would apply to the builder who receives a one-time grant of $10,000 or $1,000 from a government body to assist in paying initial feasibility studies or planning costs. The specific amount of the grant will not in and of itself disqualify the grant from the application of section 191.1.

However, please note that it will be a question of fact whether the initial feasibility studies or planning costs are incurred for the purpose of making residential units in the complex available to individuals referred to in paragraph 191.1(2)(b).

5. You are correct to say that gifts in kind (for example, land) made by a government body do not qualify as government funding for purposes of section 191.1.

Generally, "government funding" refers to financial payments (i.e., an amount of money) paid by a grantor (including federal, provincial and municipal governments). The meaning given to "government funding" in subsection 191.1(1), is an amount of money ("Money" is defined under subsection 123(1).), including a forgivable loan.

Subsection 191.1 further provides that government funding must not flow-through more than two intermediaries. That is, government funding is the amount of money that a builder receives either (1) directly from a grantor or from an organization that received the amount from a grantor, or (2) an organization that received the amount from another organization that received the amount from the grantor.

6. For purposes of this question, it is assumed that "hard to house clientele" includes individuals as described in subparagraphs 191.1(2)(b)(i) to (viii). It will be a question of fact whether a particular per diem funding amount will meet the definition of "government funding" under subsection 191.1(1). As noted in our reply to Question 2 above, the legislation does not specify the particular manner of use of the funds by the builder in making subsidized residential units available. (Paragraph 191.2(c) requires that the builder has received or can reasonably expect to receive government funding at or before the time the builder is deemed under any of subsection 191(1) to (4) to have made or received a supply of the complex or addition. The liability for tax, at the time of the deemed sale, is then determined under paragraphs 191.1(d) and (e).)

Therefore, provided that the requirement under paragraph 191.1(2)(c) is met, where a builder constructs a residential complex and receives no capital government funding (i.e. the building and land have been acquired and developed with 100% private resources) and the builder receives a per diem rate paid by a municipality to service hard to house clientele, the per diem rate may be considered to be government funding in respect of a complex "for the purpose of making residential units in the complex available to individuals referred to in (2)(b)".

The foregoing comments represent our general views with respect to the subject matter of your letter. 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.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8226.

Yours truly,

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