News of Note

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).

CRA has announced:

The application of penalties and interest under the UHTA for the 2022 calendar year will be waived for any late-filed underused housing tax (UHT) return and for any late-paid UHT payable, provided the return is filed or the UHT is paid by October 31, 2023.

This transitional relief means that although the deadline for filing the UHT return and paying the UHT payable is still April 30, 2023, no penalties or interest will be applied for UHT returns and payments that the CRA receives before November 1, 2023.

Although CRA has published quite a number of UHT Notices, they mostly deal with basic points. Preferably, CRA will address some of the more obvious issues before October (rather than lying in wait until taxpayers have filed), including the following:

• Must a registered owner of a 200-unit condo project file a separate return for each condo, or can it rely on the jurisprudence under s. 32 of the Interpretation Act and file one return for all the condos - keeping in mind that the stipulated penalty is $10,000 per late-filed return, absent relief?
• Must such a return (or returns) be filed even where the condo tower was only partially constructed on December 31 (there being no explicit requirement that a residential property be habitable)?
• Can a nominee corporation with $1 of share capital rely on the direct and indirect ownership and control of that one itty-bitty share to access the substantive exemption for specified Canadian corporations –even if, viewed as the trustee of a bare trust, such trust would not qualify as a specified Canadian trust?
• Does the reference to “indirect” ownership override the tax jurisprudence that a shareholder does not own the property of the corporation?
• Does “control” refer only to de jure control?
• Is a trust a person, so that, as a beneficiary, it could preclude a trust as qualifying as a specified Canadian trust? For example, if a mooted specified Canadian trust has an RRSP as a beneficiary, would the beneficiary be the annuitant, the trust company trustee - or the RRSP viewed as a person that was a trust (which would not qualify as an excluded owner, and would taint the trust)? Similarly, what if a beneficiary is an estate?
• Similarly, is a trust a person so as to taint a mooted specified Canadian partnership of which it is a partner?
• Are contingent beneficiaries treated as beneficiaries for purposes of the specified Canadian trust definition – for example, a trust specifies various Canadian citizens as beneficiaries, but the trustees are accorded the discretion to expand the beneficiaries to any other family members, some of whom are not citizens or permanent residents?
• Will CRA apply its position under the ITA that partnership property is not owned by the partners – and similarly where a non-citizen/non-permanent resident is the beneficiary of a trust whose corpus includes shares of a mooted specified Canadian corporation?

Neal Armstrong. Summary of 27 March 2023 CRA News Release, Underused Housing Tax penalties and interest waived, under UHTA, s. 48(1).

On January 1, 2019, NewCo acquired a building with 30 residential rental units and one commercial unit (rented to a convenience store) and then, a year later, terminated the commercial unit lease, and hired a construction company to convert the unit into four residential units, with first occupancy in December 2020.

If such conversion of the commercial unit constituted a conversion to residential use per ETA s. 190, this would have resulted in there being deemed to be a self-supply of the converted property under s. 191 for its FMV with a correlative GST/HST remittance obligation. On the other hand, if s. 190 did not apply, then the change-in-use rule in s. 206(4) would merely trigger GST/HST equal to the converted property’s “basic tax content” (simplistically, the GST/HST, if any, that had been payable on the acquisition of the commercial unit, assuming no decline in FMV since then).

In finding that s. 190(1) would not apply, CRA noted that the s. 190(1) preamble requires that a person begins to hold or use real property as a residential complex – whereas here, the person (NewCo) held a single residential complex both before and after the transaction (merely expanding the size of its residential complex). Similarly, the requirement in s. 190(1)(b) that the person (NewCo) begin to hold or use real property as a residential complex was not satisfied. Thus, the more favourable rule in s. 206(4) applied.

Neal Armstrong. Summary of 7 April 2022 CBA Roundtable, Q.9 under ETA s. 190(1).

Proposed s. 212(13.1)(a) - by deeming a partnership to be a person resident in Canada respecting the portion of a particular amount paid or credited by the partnership to a non-resident person where the amount is deductible in computing a partner’s share (to the extent taxable under Part I) of the partnership's income or loss - would create significant practical issues that would be extremely difficult to deal with. Such concerns would arise for instance regarding a foreign partnership whose only connection to Canada is the residence of some partners who might be passive and constitute a very small minority of the partners.

Indeed, compliance may not be possible at all, for example, where a foreign fund organized as a partnership has a tiered partnership as an investor, and there is a transfer of a partnership interest to a Canadian resident 2 or more levels above (giving rise to a withholding tax obligation thereafter to the fund even though such transfer occurs without its knowledge).

Neal Armstrong. Summary of Joint Committee, “August 9, 2022 Technical Amendments - Application of Part XIII tax where payer or payee is a partnership,” 22 March 2023 Joint Committee Submission under s. 212(13.1)(a).