Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A 10th Floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 192058
Dear [Client]:
Subject: GST/HST INTERPRETATION
Definition of “qualifying residential unit” in subsection 256.2(1) of the ETA
Thank you for your [correspondence] of [mm/dd/yyyy], wherein you requested an interpretation regarding the definition of “qualifying residential unit” in subsection 256.2(1) of the Excise Tax Act (ETA).
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the ETA unless otherwise specified.
Based on the information you provided in your letter, our understanding is as follows:
1. […] (hereafter referred to as “the Developer”) is a Canadian corporation.
2. The Developer’s activities consist of:
a. the acquisition of real property;
b. the development and construction of multiple unit residential complexes; and
c. the leasing of residential units, situated in multiple unit residential complexes, to individuals as a place of residence.
3. In [yyyy], the Developer acquired a parcel of land in […][a participating province] for the purpose of developing a [#]-unit residential rental apartment building (hereafter referred to as “the Building”).
4. Between [yyyy] and [yyyy], the Developer applied for re-zoning of the land and acquired the permits and financing necessary to construct the Building.
5. Construction of the Building began in [yyyy] and was substantially completed on [mm/dd/yyyy].
6. The Building is a multiple unit residential complex (MURC) as defined in subsection 123(1).
7. In [mm/yyyy], the Developer entered into an agreement (hereafter referred to as “the […] Sales Agreement”) with a Canadian corporation, […] (hereafter referred to as “the Investor”).
8. Pursuant to the […] Sales Agreement, the Developer agreed to the future sale of the Building to the Investor. The sale would close at the time […]% of the residential units situated in the Building had been leased to individuals (that is, tenants) as a place of residence.
9. You have stated that the Developer is the builder of the Building pursuant to paragraph (a) of the definition of “builder” in subsection 123(1).
10. On [mm/dd/yyyy], the first tenants took possession of residential units situated in the Building under one-year leases, thereby requiring the Developer to apply the self-supply rules in subsection 191(3).
11. Based on a professional valuation, the Developer determined that the fair market value (FMV) of the Building on [mm/dd/yyyy] was $[…]. On that basis, the Developer reported $[…] of HST collectible, pursuant to subsection 191(3), in its GST/HST return for the [mm/yyyy] reporting period.
12. All of the Developer’s leases to tenants in the Building were for a period of one year, and provided for the renewal of the lease for subsequent one-year periods.
13. By [mm/dd/yyyy], [#] of the [#] residential units situated in the Building (that is, […]% of the units) had been leased to tenants, triggering the sale of the Building to the Investor pursuant to the […] Sales Agreement. The sale of the Building from the Developer to the Investor closed on [mm/dd/yyyy].
14. The Developer apportioned the FMV of the Building to the [#] residential units in the Building based on the formula in subsection 256.2(3). The Developer filed Form GST524 and Form GST525 to claim […] the new residential rental property rebate (NRRPR) pursuant to section 256.2 […]
15. The Developer claimed the NRRPR for all [#] residential units in the Building and reported the total NRRPR amount on Line 111 of its GST/HST return for the [mm/yyyy] reporting period.
16. The Developer mailed Form GST524, Form GST525 […] to the relevant Tax Centre and on the same day the Developer electronically filed its GST/HST return for the [mm/yyyy] reporting period.
17. You have confirmed that this interpretation request is not made in respect of a client that is currently under audit, or that is the subject of a notice of objection or an appeal.
INTERPRETATION REQUESTED
You would like to know the following:
1. Whether the […] Sales Agreement entered into between the Developer and the Investor in [mm/yyyy] has any relevance for the Developer’s entitlement to the NRRPR for the [#] residential units as claimed.
2. Whether the fact that the Developer sold the Building to the Investor with only [#] of the [#] residential units leased, and [#] residential units vacant, has any relevance for the Developer’s entitlement to the NRRPR for the [#] residential units as claimed.
3. Whether the Canada Revenue Agency’s (CRA) position on the foregoing issues would be affected if there were no pre-existing […] Sales Agreement and instead the Developer’s business plan for the Building included, as an objective, the sale of the Building within a year following the Developer’s first lease of a residential unit to a tenant.
4. Whether the CRA’s position on the foregoing issues would be affected if there were no pre-existing […] Sales Agreement and the Developer had no plan to sell the Building, but after remitting the HST and claiming the NRRPR, the Developer received a favourable offer for the Building and sold the Building within six months of the first rental, and with only […]% of the units leased.
INTERPRETATION GIVEN
Based on the information you have provided:
1. The […] Sales Agreement entered into between the Developer and the Investor in [mm/yyyy] will not affect the Developer’s entitlement to the NRRPR for the [#] residential units as claimed.
2. The fact that the Developer sold the Building to the Investor with only [#] of the [#] residential units leased, and [#] residential units vacant, will not affect the Developer’s entitlement to the NRRPR for the [#] residential units as claimed.
3. The CRA’s position on the foregoing issues would not be affected if there were no pre-existing […] Sales Agreement and instead the Developer’s business plan for the Building included, as an objective, the sale of the Building within a year following the Developer’s first lease of a residential unit to a tenant.
4. The CRA’s position on the foregoing issues would not be affected if there were no pre-existing […] Sales Agreement and the Developer had no plan to sell the Building, but after remitting the HST and claiming the NRRPR, the Developer received a favourable offer for the Building and sold the Building within six months of the first rental, and with only […]% of the units leased.
EXPLANATION
A person is eligible for a NRRPR if all of the conditions in subsection 256.2(3) are satisfied. Subsection 256.2(3) states that if:
(a) a particular person, other than a cooperative housing corporation,
(i) is the recipient of a taxable supply by way of sale (in this subsection referred to as the “purchase from the supplier”) from another person of a residential complex or of an interest in a residential complex and is not a builder of the complex, or
(ii) is a builder of a residential complex, or of an addition to a multiple unit residential complex, that gives possession or use of a residential unit in the complex or addition to another person under a lease entered into for the purpose of its occupancy by an individual as a place of residence that results in the particular person being deemed under section 191 to have made and received a taxable supply by way of sale (in this subsection referred to as the “deemed purchase”) of the complex or addition,
(b) at a particular time, tax first becomes payable in respect of the purchase from the supplier or tax in respect of the deemed purchase is deemed to have been paid by the person,
(c) at the particular time, the complex or addition, as the case may be, is a qualifying residential unit of the person or includes one or more qualifying residential units of the person, and
(d) the person is not entitled to include the tax in respect of the purchase from the supplier, or the tax in respect of the deemed purchase, in determining an input tax credit of the person,
the Minister shall, subject to subsections (7) and (8), pay a rebate to the person equal to the total of all amounts each of which is an amount, in respect of a residential unit that forms part of the residential complex or addition, as the case may be, and is a qualifying residential unit of the person at the particular time, determined by the formula
A x ($450,000 – B)/$100,000
where
A is the lesser of $6,300 and the amount determined by the formula
A1 x A2
where
A1 is 36% of the total tax under subsection 165(1) that is payable in respect of the purchase from the supplier or is deemed to have been paid in respect of the deemed purchase, and
A2 is
(i) if the unit is a single unit residential complex or a residential condominium unit, 1, and
(ii) in any other case, the unit’s percentage of total floor space, and
B is the greater of $350,000 and
(i) if the unit is a single unit residential complex or a residential condominium unit, the fair market value of the unit at the particular time, and
(ii) in any other case, the amount determined by the formula
B1 x B2
where
B1 is the unit’s percentage of total floor space, and
B2 is the fair market value at the particular time of the residential complex or addition, as the case may be.
The condition in paragraph 256.2(3)(a) requires that the person must be either:
(i) the recipient of a taxable supply by way of sale of a residential complex, or
(ii) the builder of a residential complex that gives possession or use of a residential unit in the complex to another person under a lease entered into for the purpose of its occupancy by an individual as a place of residence that results in the application of the self-supply rules in section 191.
The Developer is a builder of the Building that gave possession or use of a residential unit situated in the Building under a lease agreement for the purpose of its occupancy by an individual as a place of residence and, as a result, the self-supply rule in subsection 191(3) applied. Therefore, the Developer meets the condition in subparagraph 256.2(3)(a)(ii).
Paragraph 256.2(3)(b) requires that either tax has first become payable in respect of the purchase from the supplier or tax in respect of the deemed purchase is deemed to have been paid by the person at a particular time. When the first tenant moved into the Building, the Developer was deemed to have paid tax pursuant to subsection 191(3) at that time, so the Developer meets the condition in paragraph 256.2(3)(b).
The condition in paragraph 256.2(3)(d) requires that the person is not entitled to include the tax in respect of the purchase from the supplier, or the tax in respect of the deemed purchase, in determining an input tax credit (ITC) of the person. Since the Developer is making exempt supplies of residential units, there is no ITC entitlement in respect of the deemed tax payable, so the condition in paragraph 256.2(3)(d) is met.
The condition in paragraph 256.2(3)(c) requires that the complex must be a “qualifying residential unit” of the person or include one or more “qualifying residential units” of the person.
Pursuant to subsection 256.2(1), a “qualifying residential unit” of a person, at a particular time, means
(a) a residential unit of which, at or immediately before the particular time, the person is the owner, a co-owner, a lessee or a sub-lessee or has possession as purchaser under an agreement of purchase and sale, or a residential unit that is situated in a residential complex of which the person is, at or immediately before the particular time, a lessee or a sub-lessee, where
(i) at the particular time, the unit is a self-contained residence,
(ii) the person holds the unit
(A) for the purpose of making exempt supplies of the unit that are included in section 5.1, 6.1, 6.11 or 7 of Part I of Schedule V,
(A.1) for the purpose of making exempt supplies of property or a service that includes giving possession or use of the unit to a person under a lease to be entered into for the purpose of its occupancy by an individual as a place of residence, or
(B) if the complex in which the unit is situated includes one or more other residential units that would be qualifying residential units of the person without regard to this clause, for use as the primary place of residence of the person,
(iii) it is the case, or can reasonably be expected by the person at the particular time to be the case, that the first use of the unit is or will be
(A) as the primary place of residence of the person or a relation of the person, or of a lessor of the complex or a relation of that lessor, for a period of at least one year or for a shorter period where the next use of the unit after that shorter period is as described in clause (B), or
(B) as a place of residence of individuals, each of whom is given continuous occupancy of the unit, under one or more leases, for a period, throughout which the unit is used as the primary place of residence of that individual, of at least one year or for a shorter period ending when
(I) the unit is sold to a recipient who acquires the unit for use as the primary place of residence of the recipient or of a relation of the recipient, or
(II) the unit is taken for use as the primary place of residence of the person or a relation of the person or of a lessor of the complex or a relation of that lessor, and
(iv) except where subclause (iii)(B)(II) applies, if, at the particular time, the person intends that, after the unit is used as described in subparagraph (iii), the person will occupy it for the person’s own use or the person will supply it by way of lease as a place of residence or lodging for an individual who is a relation, shareholder, member or partner of, or not dealing at arm’s length with, the person, the person can reasonably expect that the unit will be the primary place of residence of the person or of that individual; or
(b) a prescribed residential unit of the person.
Based on the information you have provided in your letter, the Developer meets the conditions in subparagraph (a)(i) and (a)(iii) of the definition of “qualifying residential unit.” That is, the Developer is the owner of the residential units, which are self-contained residences, and it is the case, or can reasonably be expected by the Developer at the particular time to be the case, that the first use of the units will be as a place of residence of individuals, each of whom is given continuous occupancy of the unit, under one or more leases, for a period, throughout which the unit is used as the primary place of residence of that individual, of at least one year. Subparagraph (a)(iv) of the definition of “qualifying residential unit” and paragraph (b) of the definition of “qualifying residential unit” do not apply to the case at hand so they will not be discussed further.
In order to meet the condition in subparagraph (a)(ii) of the definition of “qualifying residential unit,” the Developer must hold the residential units for one of the two purposes described in clause (a)(ii)(A) or clause (a)(ii)(A.1) or the use indicated in clause (a)(ii)(B) of this definition. Clause (a)(ii)(A) and clause (a)(ii)(B) do not apply to the case at hand so we will focus on clause (a)(ii)(A.1).
In order to satisfy the conditions set out in clause (a)(ii)(A.1) of the definition of “qualifying residential unit,” the person must satisfy the following two conditions:
1. the residential unit or units must be held by the person for the purpose of making an exempt supply of property or a service; and
2. the exempt supply must include giving possession or use of the residential unit or units to a person under a lease to be entered into for the purpose of its occupancy by an individual as a place of residence.
Based on the information you have provided in your letter, we are of the view that the Developer satisfies the conditions set out in clause (a)(ii)(A.1) of the definition of “qualifying residential unit.” That is, during the time that the Developer holds the Building, the Developer holds the residential units contained therein for the purpose of making exempt supplies of the units pursuant to section 6 of Part I of Schedule V to the ETA, which includes giving possession or use of the residential unit to a person under a lease to be entered into for the purpose of its occupancy by an individual as a place of residence. As such, the units in the Building are qualifying residential units of the Developer, so the Developer meets the condition in paragraph 256.2(3)(c).
The fact that the Developer has entered into the […] Sales Agreement with the Investor to sell the Building to the Investor does not preclude the Developer from meeting the conditions set out in clause (a)(ii)(A.1) of the definition of “qualifying residential unit.”
The terms “residential complex” and “residential unit” are defined in subsection 123(1) and are two distinct things for purposes of the GST/HST. Generally, a residential complex is a thing composed of two or more elements, such as the residential unit, common areas, appurtenances and land and is a thing in its own right. A residential unit may be a component of a residential complex in certain situations, but it is also a thing in its own right.
As such, the Developer can hold the Building (a multiple unit residential complex) for the purpose of making a supply by way of sale to the Investor (or to another party as contemplated in items #3 and #4 that you have proposed herein in your interpretation requested), and also hold the residential units contained therein for the purpose of making exempt supplies of the units by way of lease to individuals who will occupy the units as a place of residence.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretations given in this letter, including any additional information, is not a ruling and does not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretations or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-670-1358. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Melissa Mercer
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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