Homes in a new residential subdivision may be supplied under long-term leases, especially on First Nations lands. The “buyer” might acquire a home under a 99-year lease or sublease for a single lump sum (which might not be related to any lease intervals during the term) or for an upfront payment coupled with periodic charges. Under s. 168, the GST collectible under a lease depends on the time at which the consideration under the lease is paid or becomes payable. However, where an upfront payment is made at the lease’s inception, it may not be known whether the long-term lessee will commence to engage in short-term rentals at a future juncture.
Part #1
How does a landlord under the 99 year lease determine its obligations for collecting GST with respect to upfront and ongoing payments?
Part #2
a) If it is reasonably expected that the property will be used for residential purposes of the long-term lessee, is no GST collectible on the up front rent payment?
b) What happens if in the future the home becomes devoted exclusively to short-term rentals after being occupied for some period by the long-term lessee as a place of residence?
c) What happens if the landlord, a registrant, has filed its GST/HST returns on a timely basis, but the change to short-term rental usage has occurred beyond the limitation period applicable to the receipt of the initial upfront rent payment?
Part #1
After noting that the “determination as to whether the balance of the lease term following the upfront payment consists of only one lease interval or multiple lease intervals will depend on whether a ‘periodic charge’ made subsequent to the upfront payment is recognized as consideration for the lease of the home for GST/HST purposes,” CRA stated:
[I]f during a particular lease interval, the intent of the Long-Term Lessee is to use the home for the purpose of its continuous occupancy as a place of residence for a month or longer, that supply would be an exempt supply and the landlord would not have to collect tax on that supply. But, if during the next lease interval, the Long-Term Lessee intends to use the home to make short-term rentals, the lease of the home by the landlord to the Long-Term Lessee for the particular lease interval would be a taxable supply and, if a registrant, the landlord would have to collect tax on that supply calculated on the consideration for that supply (that is, on the particular periodic charge).
Part #2
(a) CRA indicated:
If the Long-Term Lessee will be leasing the home (that is, a residential complex) initially for the purpose of their occupancy as a place of residence and the period throughout which continuous occupancy of the home is given to the same individual under the arrangement is at least one month, the lease of the home by the landlord to the Long-Term Lessee will be an exempt supply. As such, tax is not collectible on the upfront payment.
Accordingly if the landlord was a builder of the residential complex, “this purpose should be reflected in a self-supply of the residential complex by the landlord, assuming all of the conditions in subsection 191(1) apply.”
(b )CRA indicated that, in this regard, “[i]f, at the particular time that the supply of the home is deemed to be made by the landlord under paragraph 136.1(1)(b), the intention of the Long-Term Lessee is to use the home to make short-term rentals, the lease of the home by the landlord to the Long-Term Lessee for the particular lease interval is a taxable supply and, if a registrant, the landlord would have to collect tax on that supply”.
It went on to note that there could be a resulting deemed supply by the landlord, e.g., under the s. 206 change-in-use provisions.
(c) CRA indicated that “there would be no requirement to change the tax status of the supply for which the upfront payment is attributable to, if the tax status of that supply was correctly determined at the time that the supply was deemed to be made under paragraph 136.1(1)(b).”
