Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
XXXXX
XXXXX
XXXXX
Case Number: 103912
Attention: XXXXX
Subject:
GST/HST RULING
Lease of Long-term Care Facilities
Dear XXXXX:
Thank you for your letter of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain lease payments made by XXXXX (OPCO) and the application of the legislative changes made further to Budget 2008 which was announced on February 26, 2008.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Statement of Facts
We understand as follows:
1. OPCO is registered for GST/HST purposes.
2. Prior to XXXXX, OPCO purchased, or entered into agreements to purchase, XXXXX parcels of real property in XXXXX and began construction of a long-term care facility on XXXXX of the parcels. The facilities are located in XXXXX and XXXXX, and are referred to in this letter, in the singular, as "a Facility", and in the plural as "the Facilities". Where reference is made to a particular facility, the facility is referred to by its location.
3. OPCO paid GST on various construction inputs and claimed input tax credits (ITCs) with respect to the tax payable on these inputs.
4. On XXXXX, OPCO sold all of its interests in the parcels of real property to XXXXX (LESSOR).
5. OPCO did not collect GST in respect of the sale of the land that formed part of each long-term care facility on the understanding that LESSOR was responsible for paying the tax directly to the Canada Revenue Agency (CRA) iFootnote 1. However, OPCO collected GST from LESSOR in respect of the partially constructed buildings on the parcels at the time of the sale.
6. LESSOR completed, or engaged others (including OPCO) to complete, the construction of each Facility.
7. LESSOR then leased each Facility to OPCO, beginning on a specified date, which was based on the completion date of each Facility. Each lease agreement called for monthly lease payments to be made in arrears on the last day of each month for the term of the respective lease.
8. XXXXX of the Facilities (XXXXX) are nursing homes licenced under the XXXXX (XXXXX). All supplies made by OPCO at these Facilities that include the provision of a room in the Facility were made under a Resident Admission Agreement.
9. The other XXXXX Facilities (XXXXX) provide nursing home beds in one part of the building which is licenced as a nursing home under the XXXXX and also supplied by OPCO under a Resident Admission Agreement. The other separate part of the building is used by OPCO to provide assisted living units. This part of the building is not licenced as a nursing home and is instead governed by the XXXXX. Supplies of the assisted living units by OPCO are made under a Tenancy Residency Agreement.
10. Under the Tenancy Residency Agreement, a tenant is entitled to receive the elements listed under "Residential Facilities" in XXXXX to the agreement. Section XXXXX of the agreement provides that an amount (Accommodation Fee) is payable by the tenant for those elements. The tenant also has the option to receive the "Care Services" set out in XXXXX to the agreement. If the tenant chooses to receive the Care Services, an additional amount, over and above the Accommodation Fee is payable. This additional amount is set out in section XXXXX of the agreement as the XXXXX Fee.
11. LESSOR charged and collected the GST on the lease payments made by OPCO for all of the Facilities for all lease intervals ending prior to February 29, 2008. OPCO did not claim ITCs in respect of the tax paid to LESSOR in respect of the lease payments.
12. OPCO is not a "public service body" as that phrase is defined in subsection 123(1).
13. LESSOR has not made an election under section 236.4 in respect of any of the Facilities.
14. LESSOR is registered for GST/HST purposes.
15. LESSOR and OPCO did not make any improvements to the Facilities or additions to the Facilities after the construction of each Facility was complete.
16. OPCO did not apply for any rebates under the ETA for all, or any part, of the GST paid in respect of the lease payments.
Ruling Requested
You would like to know whether OPCO can adjust its previously filed GST/HST returns to receive credit for the amount of GST it paid to LESSOR in respect of the lease payments that were made prior to February 29, 2008, for all of the Facilities.
Ruling Given
Based on the information provided, we rule that the supplies made by LESSOR of the following Facilities: XXXXX, by way of lease, are taxable supplies where the lease payment for the supply became due on or before February 26, 2008, or was paid on or before that date without having become due. OPCO is not permitted to adjust its previously filed GST/HST returns to receive credit for the tax paid to LESSOR in respect of these lease payments.
We also rule that the supplies made by LESSOR, by way of lease, of the parts, if any, of following Facilities: XXXXX, that do not form part of a residential complex as defined in subsection 123(1) are taxable supplies. OPCO is not permitted to adjust its previously filed GST/HST returns to receive credit for the tax paid to LESSOR in respect of the lease payments that relate to these parts of the XXXXX Facilities.
We also rule that the supplies made by LESSOR, by way of lease, of the parts of following Facilities: XXXXX, that are residential complexes, iiFootnote 2 are exempt supplies regardless of when the lease payments become due or are made. iiiFootnote 3 OPCO was not required to pay GST in respect of these lease payments.
We also rule that, subject to the time limitations and conditions of section 232, OPCO may seek a refund or credit of the amount paid by OPCO as or on account of tax with respect to LESSOR's exempt supplies to OPCO of the residential complex parts of the XXXXX Facilities. Alternatively, OPCO is entitled to claim a refund under section 261, subject to the time limitation for claiming this rebate, for the amounts paid as or on account of tax with respect to LESSOR's exempt supplies to OPCO of the residential complex parts of the XXXXX Facilities.
We also rule that the supplies made by LESSOR, by way of lease, of the parts of the Facilities that are residential complexes are exempt supplies where the lease payment for the supply becomes due after February 26, 2008, and was not paid on or before that date, or was paid after that date without having become due.
We also rule that the supplies made by LESSOR, by way of lease, of the parts, if any, of the Facilities that do not form part of a residential complex as defined in subsection 123(1) are taxable supplies where the lease payment for the particular supply becomes due after February 26, 2008, and was not paid on or before that date, or was paid after that date without having become due ivFootnote 4.
These rulings are subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by these rulings provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
Explanation
Combined supply of a residential complex and other real property
Subsection 136(2) provides, in part, that where a lease of real property includes a residential complex and other real property that is not part of the residential complex, the residential complex and the other real property are deemed to be separate properties and the supply of each property is separate from the other, neither supply being incidental to the other.
A residential complex is defined in subsection 123(1) to include that part of a building in which one or more residential units are located, together with
(a) that part of any common areas and other appurtenances to the building, as well as land immediately contiguous to the building that is reasonably necessary for the use and enjoyment of the building as a place of residence for individuals, and
(b) that portion of the subjacent land that the residential units and related common areas represent of the entire building vFootnote 5.
It is a question of fact as to whether the lease of each Facility made by LESSOR to OPCO is a supply of a residential complex only or supplies of a residential complex and other real property that is not part of the residential complex. For example, any part of any Facility that is leased to a third party for the operation of a hair/barber shop would not form part of the residential complex. As discussed below, it is only the supply of the residential complex by way of lease that may be exempt under section 6.1, or new section 6.11, of Part I of Schedule V to the ETA. If the supply by LESSOR is that of a residential complex and other real property, the supply is deemed to be two separate supplies and the supply of the real property that is not a residential complex will not be exempt under section 6.1, nor under any other exempting provision, and will be subject to tax. We have not been provided with any information to conclude whether any part of any of the Facilities is not a residential complex. Should you require assistance with this determination, please provide us with a detailed description of the facility in question and the use of all area/rooms that are not residential units that are provided to residents under a Resident Admission Agreement or a Tenancy Residency Agreement.
OPCO's supplies to residents of a nursing home
Section 6 of Part I of Schedule V to the ETA, in part, exempts the supply of a residential unit in a residential complex by way of lease for the purpose of its occupancy as a place of residence by an individual, where the period throughout which continuous occupancy of the unit is given to the same individual is at least one month.
It is our view that the supply by OPCO to a resident made under a Resident Admission Agreement that includes a residential unit is not exempt under section 6 of Part I of Schedule V to the ETA viFootnote 6. Provided that the Resident Admission Agreement is representative of all admissions to the Facilities, or a part thereof, as the case may be, that are licenced as a nursing home under the XXXXX, we consider none of the supplies made under these agreements that include a residential unit to be exempt under section 6 of Part I of Schedule V to the ETA.
OPCO's supplies to residents of assisted living units
It is our view that the supply of the elements listed under "Residential Facilities" in XXXXX to the Tenancy Residency Agreement made by OPCO to a tenant of an assisted living unit at the XXXXX Facility is a single supply of a residential unit. Provided that the Tenancy Residency Agreement is representative of all admissions to assisted living units, OPCO's supplies of residential units made under these agreements at the XXXXX Facilities are exempt under section 6 of Part I of Schedule V to the ETA.
Head lease of the residential complex portion of a Facility prior to the amendments
With respect to supplies for which consideration became due on or before February 26, 2008, or was paid on or before that date without having become due, section 6.1 of Part I of Schedule V to the ETA provided, in part, that the head lease of a residential complex may have been exempt for each lease interval viiFootnote 7. The head lease of the complex for each lease interval was exempt if, throughout the lease interval, the lessee made, or held the complex for the purpose of making, supplies of the complex or parts of the complex and all or substantially all (90% or more) of those supplies were exempt under section 6 of Part I of Schedule V to the ETA.
In determining whether the exemption in section 6.1 of Part I of Schedule V to the ETA applies to any particular lessor's supply, it is necessary to distinguish between the lessee's supplies of property (i.e., rooms in the residential complex) and supplies of services that include the provision of residential units in the complex. It is only the lessee's supplies of property (i.e., residential units) that must be considered in determining whether all or substantially all of the lessee's supplies of property are supplies of the complex that are exempt under section 6 of Part I of Schedule V to the ETA. For purposes of the "all or substantially all" test in section 6.1, supplies of services by the lessee, whether or not they include the provision of residential units, are not taken into account in determining whether the head lease is exempt under section 6.1.
OPCO's supply made under a Resident Admission Agreement, that includes the provision of a residential unit, is characterized as a supply of a service. While the supply of the service includes the provision of a room in a Facility, the supply is nonetheless a service and as such, would not enter into the determination as to whether all or substantially all OPCO's supplies of the complex, or parts of the complex, are exempt under section 6 of Part I of Schedule V to the ETA. If OPCO does not make any supplies that are exempt under section 6 as is the case in the XXXXX Facilities that are licenced as nursing homes, section 6.1 of Part I of Schedule V to the ETA will not apply to any of the lease payments for these Facilities that became due on or before February 26, 2008, or were paid on or before that date without having become due. As no other exemptions apply, these lease payments are in respect of taxable supplies viiiFootnote 8. As the recipient of these taxable supplies made by LESSOR, OPCO was required to pay the tax to LESSOR. The legislation does not provide any means for OPCO to adjust its previously filed GST/HST returns to receive credit for the tax that was properly payable to LESSOR.
With respect to the XXXXX Facilities, the only supplies of the residential complex, or parts of the complex, (i.e., supplies of property) made by OPCO in respect of those Facilities are the supplies of residential units made under the Tenancy Residency Agreements used for the assisted living part of the buildings. Supplies of services that include a room in the part of the building that is licenced as a nursing home under the XXXXX are not supplies of property and as indicated above are not taken into account in applying the all or substantially test in section 6.1 of Part I of Schedule V to the ETA. For each lease interval in question, provided that all or substantially all of OPCO's supplies of residential units in the complex made under a Tenancy Residency Agreement are exempt supplies under section 6 of Part I of Schedule V to the ETA, then the lease of the entire residential complex portion of the XXXXX Facilities from LESSOR to OPCO will be exempt under section 6.1. If any portion of the XXXXX Facilities includes real property that does not form part of the residential complex e.g., any part that is leased to a third party for the operation of a hair/barber shop, any lease payment attributable to that part of the Facility is taxable.
Refund of tax
Since OPCO paid amounts as or on account of GST in error to LESSOR with respect to the residential complex parts of the XXXXX Facilities, OPCO may request a refund or credit of the amounts from LESSOR, subject to the conditions and time limitations provided in section 232. Further information on the time limitations and conditions for claiming refunds and credits is available in GST/HST Memoranda Series Chapter 12.2, Refund, Adjustment, or Credit of the GST/HST under Section 232 of the Excise Tax Act.
If OPCO cannot obtain a refund or credit from LESSOR, section 261 provides that OPCO may apply for a rebate of those amounts from the CRA subject to the conditions and time limitations of section 261. It should be noted that a rebate application made under section 261 cannot include amounts that were paid in error more than two years before the application is filed. If a refund is paid or a credit is issued by LESSOR, OPCO is not eligible to file a rebate application under section 261. Further information on filing a rebate application for tax paid in error is available in guide RC4033, GST/HST General Application for GST/HST Rebates. Both publications are available on the CRA Web site.
Head lease of the residential complex portion of a Facility after the amendments
LESSOR's supplies of the residential complex portion of each Facility will be exempt under section 6.11 of Part I of Schedule V to the ETA for each lease interval in respect of which consideration becomes due after February 26, 2008, and was not paid on or before that date or is paid after that date without becoming due.
INTEPRETATION GIVEN
The ETA contains change in use provisions that may apply where a registrant last acquired capital real property for use in commercial activities and the registrant begins to use the property exclusively for other purposes. Of particular importance in this case is that the change in use provisions apply only in respect of capital property. It should also be noted that the change in use rules, if they apply in this case, would apply only to the residential complex portion of a Facility. Supplies of any part of a Facility that is not part of the residential complex were subject to tax before the legislative changes were made and will continue to be taxable under the legislation.
Section 195.1 provides (other than for certain purposes that are not relevant to this case) that a residential complex is not capital property of a builder of the complex at any particular time unless construction of the complex is substantially complete and at or after the time of substantial completion and at or before the particular time, the builder has received an exempt supply of the complex or was deemed to have made a taxable supply (i.e., a self-supply) of the complex under section 191. Accordingly, the residential complex portion of each Facility will be capital property of LESSOR, and the change in use provisions will apply to LESSOR, only if LESSOR is a builder of the residential complex and LESSOR was deemed to have made a self-supply of the residential complex portion of a Facility prior to LESSOR's supplies of the residential complex portion of the Facility becoming exempt under section 6.11 of Part I of Schedule V to the ETA. ixFootnote 9
Whether LESSOR is a builder
A builder of a residential complex includes a person who, at a time when the person has an interest in the real property on which the complex is situated, carries on, or engages another person to carry on for the person, the construction of the residential complex. A builder also includes a person who acquires an interest in a residential complex at a time when the complex is under construction.
Accordingly, LESSOR is a builder of that portion of each Facility that is a residential complex.
Whether the self-supply rules apply to LESSOR
Prior to the legislative changes announced on February 26, 2008, subsection 191(10) provided, in part, that the self-supply rules in section 191 apply to a builder who makes a supply of a residential complex by way of lease that is an exempt supply under section 6.1 of Part I of Schedule V to the ETA to a recipient who is acquiring the complex or units in the complex for the purpose of making supplies that are exempt under section 6 of Part I of Schedule V to the ETA and gives possession of the complex to the recipient. The builder in this case is deemed to have given possession of the complex or a residential unit in the complex to an individual under a lease, licence or similar arrangement for the purpose of its occupancy by an individual as a place of residence. As a result, the builder is deemed, under either subsection 191(1) or (3), to have made and received a taxable supply of the complex or unit and to have paid and collected tax calculated on the fair market value of the complex or unit.
As provided above, OPCO was making exempt supplies under section 6 of Part I of Schedule V to the ETA only with respect to parts of the XXXXX Facilities. Accordingly, the self-supply rules apply to LESSOR in respect of the entire residential complex portion of each of the XXXXX Facilities. As such, LESSOR was required to account for the tax deemed collected calculated on the fair market value of each residential complex at the time of the self-supply. Based on the information provided, the self-supply of the XXXXX Facility occurred on or about XXXXX. For the XXXXX Facility, the self-supply occurred on or about XXXXX. LESSOR was required to include the tax deemed collected in its net tax calculation for the reporting periods during which the self supplies occurred. It is recognized that LESSOR did not account for the tax deemed collected in respect of these deemed supplies. Where LESSOR has filed, by their due date, its GST/HST returns for the reporting periods during which the self-supplies occurred, the net tax for these reporting periods would be statutebarred in accordance with subparagraph 298(1)(a)(i) subject to the exceptions in subsections 298(3) and 298(4).
With respect to the remaining Facilities (i.e., XXXXX), OPCO made no supplies under section 6 and as such, subsection 191(10), as it read prior to its amendment, does not provide that the self-supply rules apply to the LESSOR. Since OPCO initiated the construction of residential complexes prior to selling the real property on which the complexes are situated, OPCO is also considered a builder for GST/HST purposes. However, the self-supply rules would not apply to OPCO since the conditions of section 191, as it read prior to its amendment, were not met in the circumstances at hand.
Application of section 195.1
As a result, with respect to the residential complex portions of the XXXXX Facilities, section 195.1 does not apply since LESSOR is a builder with respect to the residential complex portions of these Facilities and LESSOR was deemed to have made taxable supplies (i.e., self supplies) of the residential complex portions of these Facilities. As such, these residential complexes are capital property. However, in the case of the residential complex portions of the XXXXX Facilities there is no change in use as the supplies of the residential complex portions of these Facilities made by way of lease by LESSOR were exempt before and after the legislative amendments in question were made.
With respect to the remaining Facilities (i.e., XXXXX), section 195.1 deems the residential complex portions of the Facilities not to be capital property of LESSOR since, as discussed above, the self-supply rules do not apply to LESSOR. As such, the change in use rules do not apply with respect to these Facilities when the supply from LESSOR to OPCO became exempt under section 6.11 of Part I of Schedule V to the ETA.
Application of subsection 221(2) with respect to a supply by way of sale of a partially completed Facility
We wish to add that with respect to OPCO's sales of the partially constructed facilities to LESSOR, the provisions of subsection 221(2) apply to all property that constitutes real property. In your submission, it is stated that OPCO did not collect GST in respect of the sale of land that formed part of each Facility, but that OPCO did collect GST from LESSOR in respect of the partially constructed buildings on the land. Pursuant to subsection 221(2), OPCO was not required to collect any GST in respect of the sales of the partially completed Facilities which are real property. LESSOR was responsible for paying all of the GST payable in respect of the sales of the partially constructed Facilities (land and buildings) directly to the CRA. However, since OPCO collected the GST in respect of the partially constructed buildings on the land, OPCO was required to account for this GST in its GST/HST returns and remit any positive amount of net tax. This information is provided for future references only.
Sale of a Facility
Section 5 of Part I of Schedule V to the ETA exempts the sale of a multiple unit residential complex, or an interest therein, by a person who is a builder of the complex, or an addition thereto, where:
=> the last supply of the complex, or addition, by way of sale to the builder was either an exempt supply or a deemed taxable sale of the complex, or addition, under the self-supply rules in subsection 191(3) or 191(4), unless
=> the builder substantially renovated the complex after the complex was last supplied to the builder, or
=> the builder claimed an ITC in respect of that last acquisition of the complex or addition, or in respect of an improvement thereto since that last acquisition, other than an ITC in respect of the construction of an addition to the complex.
With respect to a future sale of a Facility, or an interest therein, the sale will be taxable if the conditions of section 5 of Part I of Schedule V to the ETA are not met.
For example, the sale of the XXXXX Facility by LESSOR would be a taxable sale. Although, LESSOR is a builder of the XXXXX Facility, the self-supply rules did not apply to LESSOR in respect of this Facility and the last supply of this Facility by way of sale to LESSOR (i.e., the sale by OPCO on XXXXX) was a taxable supply and not an exempt supply.
The foregoing comments represent our general views with respect to the subject matter. The comments included in this part of our letter are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 954-4393. 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,
Hugh Dorward
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
i 1. This position was taken based on OPCO's interpretation of subsections 221(2) and 228(4). Our views on this matter are expressed later in this letter.
ii 2. These parts of the XXXXX Facilities that are residential complexes include the residential units that are located in both the nursing home part of the buildings and the assisted living part of the buildings.
iii 3. Depending on when the lease payment for a supply is made or becomes due, the supply is either exempt under section 6.1 or 6.11 of Part I of Schedule V to the ETA
iv 4. For lease payments that were made on or before February 26, 2008, or that became due on or before that date, the lease payments relating to the part of each Facility that does not form part of the residential complex were also payments for taxable supplies of the Facilities as indicated in the first and second rulings.
v 5. The definition of residential complex contains certain exclusions, i.e., buildings or parts of buildings that would otherwise be residential complexes can be excluded from the definition. The exclusions are not relevant in this case. A complete discussion of the definition of "residential complex" is set out in GST/HST Memoranda Series Chapter 19.2, Residential Real Property. For a discussion on the land included in a residential complex, see policy statement P-069, Land Allowance For Residential Complexes.
vi 6. The supplies made under a Resident Admission Agreement that include a residential unit in the Facility, or that part thereof, that is licenced as a nursing home under the XXXXX are exempt under section 2 of Part II of Schedule V to the ETA. However, the property and services provided and charged for on a "per occurrence" basis as set out in XXXXX to the Resident Admission Agreement used by OPCO are likely separate supplies that may be subject to tax.
vii 7. A lease interval is generally the period of time (e.g., a month) under a lease for which possession or use of the property is given and to which a lease payment is attributable.
viii 8. Paragraph 6.11(b) of Part I of Schedule V to the ETA, as introduced in the legislative changes announced in the budget of February 26, 2008, provides, in part, that the head lease of a residential complex is exempt where the lessee uses the complex in the course of making exempt supplies and as part of the supplies, gives possession or use of all or substantially all of the residential units in the complex under leases, licences or similar arrangements for the purpose of occupancy as a place of residence by an individual. However, where the supplier (e.g., LESSOR) charged, collected or remitted tax on lease payments that became due or were paid on or before February 26, 2008, section 6.11 does not apply to those supplies. In such a case, the coming into force provisions for section 6.11 provide that the section applies only to those supplies for which consideration becomes due after February 26, 2008, without having been paid on or before that date, or is paid after that date without having become due. Supplies for which consideration becomes due, or was paid, on or before February 26, 2008, will not be exempt under section 6.11.
ix 9. LESSOR did not receive an exempt supply of the residential complex portion of any of the Facilities and therefore it is only necessary to determine whether LESSOR was deemed to have made a self-supply of the complex.
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UNCLASSIFIED
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