CRA notes the requirement to allocate an up-front lease prepayment to subsequent exempt and taxable lease intervals, thereby triggering subsequent collection obligations

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.

At the time of the upfront payment made at the lease’s inception, how is the lessor to determine known whether the long-term lessee will commence to engage in short-term rentals at a future juncture and, thus, whether it should charge GST/HST on a portion of the up-front payment?

In answering, CRA implicitly assuming that there would be periodic charges in addition to the up-front charge, so that throughout the term of the lease of, say, 99 years, there would be recurring “lease intervals” for purposes of s. 136.1(1). It then indicated that where a home leased to the lessee was exempted under Sched. V, Pt. 1, s. 6 (i.e., generally, it was for occupancy as a place of residence of the lessee for over one month) or 6.1 (where there was an exempt sublease), the portions of the upfront payments that were “attributable” to such lease intervals would be exempted – whereas the portion of the upfront payment attributable to any subsequent lease intervals where the use became taxable would be subject to GST/HST.

CRA did not proffer any suggestions on the practical difficulties a landlord would face in monitoring whether such short-term taxable use (e.g., in an Airbnb operation) had commenced or in collecting GST/HST on a portion of the upfront payment which had long since been made.

CRA also noted that such a change in use could trigger the change-in-use provisions in s. 206.

Neal Armstrong. Summary of 7 April 2022 CBA Roundtable, Q.10 under ETA s. 136.1(1).