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.
To:
[Client]
FROM:
Hugh Dorward
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
CASE NUMBER:
129978
DATE:
May 12, 2011
Subject:
GST/HST RULING
Construction activities undertaken by a charity
Further to the response from the [...] GST/HST Rulings Centre, dated February 4, 2010, case number [...], we would like to provide you with the following comments with respect to certain leasehold improvements undertaken by the [...].
All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder unless otherwise specified.
We understand as follows:
1. [...] (the Trust) is a charity as defined in subsection 123(1) and is registered for GST/HST purposes.
2. The Trust has entered into a lease agreement (the Agreement) with the [...] (the City) whereby the City will lease to the Trust certain real property (the Property) municipally located at [...]. The Agreement includes the following provisions:
(a) The term of the lease is [...] years, commencing on [mm/dd/yyyy] and ending on [mm/dd/yyyy], unless extended in accordance with the terms of the Agreement.
(b) The Trust is required to pay rent of $[...] per month, payable in advance, for the first [...] years of the term. In subsequent years, the Trust is required to pay rent on a basis that takes inflation into account. The Trust is also required to pay additional rent as set out in the Agreement.
(c) Under section [...], the Trust is permitted to use the Property only for the purposes of [...], which is operated by the Trust, and administrative offices used by the Trust in relation to all activities carried on by the Trust.
(d) Under section [...], subject to written consent from the City, the Trust is permitted to construct certain improvements to the Property, including the construction of a [...] square foot addition. Upon installation, all such improvements become the property of the City and the City is not required to pay any amount for the improvements either during the term or at the expiration of the lease. The cost of the improvements is estimated to be $[...].
(e) Section [...] reiterates that any improvements or alterations (Improvements) made by the Trust may only be made upon written consent being received from the City. Further, the Trust must submit to the City plans, specifications and designs that sufficiently describe the Improvements they propose to make. The City has the right to inspect any Improvements made and to require any deficiencies to be corrected. On each anniversary of the first day of the term of the lease, the Trust must provide the City with a complete set of updated drawings of the Property as altered by the Trust, including electrical, mechanical and architectural drawings. Paragraph [...] reiterates that the City will not compensate the Trust for any Improvements made to the Property and that all Improvements become the property of the City.
3. While the City has allocated funding in the amount of $[...] towards construction of improvements on real property that the Trust has leased from [...], it is our understanding that none of this funding is attributable to the Improvements the Trust is carrying out on the Property. There is no evidence that the City paid or is required to pay a leasehold improvement allowance to the Trust or to any other person in respect of the Improvements that the Trust will make to the Property.
4. The Trust has not made an election under section 211 in respect of the Property.
ISSUE
You are enquiring as to the application of the GST/HST to the supply of leasehold improvements made by the Trust in respect of the construction of the Improvements.
You are also enquiring as to the Trust's eligibility to claim input tax credits (ITCs) in respect of the GST/HST that is paid or payable by the Trust in respect of the construction of the Improvements.
RESPONSE
As a result of constructing the Improvements on the Property, the Trust has made an exempt supply of a service to the City. As such, the Trust would not charge or collect the GST/HST in respect of constructing the Improvements on the Property.
The Trust is not entitled to claim ITCs in respect of the GST/HST payable on the construction of the Improvements if the Trust is using the Property otherwise than primarily in the course of commercial activities of the Trust. Subject to the general provisions of the ETA, the Trust is entitled to claim full ITCs in respect of the GST/HST paid or payable on the acquisition of property and services that form the Improvements if the Trust is using the Property primarily in its commercial activities.
Explanation
Supply of leasehold improvements
Subject to certain provisions that are not relevant to this discussion, the term "supply" is defined in subsection 123(1) as the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition. The term "service" is defined in subsection 123(1) to mean anything other than property, money, and anything that is supplied to an employer by a person who is an employee of the employer in relation to the employment of that person. Therefore, service is broadly defined and relevant to this discussion.
There is an established principle at common law that where a tenant affixes a fixture to land, the fixture becomes part of the real property and reverts to the titled owner of the land. A fixture is a chattel which is annexed or fastened to the real property. In the absence of an agreement to the contrary, fixtures are either a tenant's fixtures and removable or landlord's fixtures and non-removable.
There is nothing in the Agreement to suggest that the Trust retains ownership of the Improvements and in fact, the vesting provisions of sections [...] and [...] support the presumption that the Improvements become the property of the City. In the present case, to the extent that the Improvements are not tenant's fixtures, the Improvements would form part of the real property interest of the titled owner, i.e., the City.
Based on the facts of this case and the information above, we consider that the Trust has made a supply to the City as the Trust has provided the City with a service of constructing the Improvements. Section 1 of Part V.1 of Schedule V to the ETA exempts all supplies made by a charity, other than those supplies listed in paragraphs 1(a) to (n). The supply of the service made by the Trust to the City in this case is not excluded by any of the provisions of section 1 and the supply is therefore exempt.
ITCs on construction of the Improvements
Subsection 169(1) sets out the general provisions for entitlement to ITCs. With respect to the acquisition of an improvement to capital real property of a person, the ITC is based on the extent to which the person was using the capital property in commercial activities after the property was last acquired by the person.
Under the provisions of subsection 199(4), read in conjunction with subsection 209(1), the tax payable by a charity in respect of an improvement to capital real property cannot be included in determining an ITC unless the charity uses the capital real property primarily in commercial activities. Under the provisions of 199(2), a charity that uses capital real property primarily in commercial activities is considered to use such property exclusively in commercial activities.
The effect of the foregoing provisions is that a charity can only claim an ITC in respect of an improvement to capital real property if the capital property is used primarily in commercial activities. If the capital real property is used otherwise than primarily in commercial activities, no ITC can be claimed. If the capital real property is used primarily in commercial activities, the person will generally be entitled to a full ITC.
As these provisions apply to the Trust in the matter discussed herein, the ITC entitlement in respect of the Improvements will be determined by the extent to which the Trust uses the Property in the course of its commercial activities. For this purpose, it is necessary to determine how the Property is used: if the Property is used primarily in commercial activities, a full ITC is available; in any other case, no ITC is available.
The Trust will be viewed as using the Property for two purposes: making an exempt supply of the Improvements to the City; and using the Property in the course of the Trust's ongoing activities, i.e., operating [...] and as administrative offices. The allocation between the exempt supply to the City (see below for determining the extent of use for this purpose) and the ongoing activities must be made on a fair and reasonable basis.
Supply to City
In some circumstances, a fair and reasonable manner to determine the extent to which improvements are considered to be for making a supply to the landlord would be based on that portion of the tenant's cost of making the improvements that is reimbursed by the landlord. In other circumstances, other factors may need to be taken into consideration.
In this case, we note that there is no reimbursement paid by the City to the Trust with respect to the construction of the Improvements and that the Trust will use the Improvements for a period of [...] years. As such, in this case, it would be fair and reasonable to allocate the Trust's costs of making the Improvements to the use of the Property in the ongoing activities of the Trust.
Use in ongoing activities of the Trust
Supplies made from [...] may or may not be exempt depending on the nature of the products sold, whether they are sold as part of a fund raising activity and whether they are sold for more than their direct cost. These exemptions can be found in Part V.1 of Schedule V to the ETA. If you need further assistance in determining whether any of the exemptions in Part V.1 apply to the Trust's supplies at [...], please contact the GST/HST Rulings Centre in your office.
In determining the extent to which the Trust uses the administrative offices in the course of commercial activities and making taxable supplies for consideration, it will be necessary to consider all the activities of the Trust. If the Trust is involved in making taxable supplies for consideration and exempt supplies, it will generally be necessary to allocate the administrative offices for use in one activity or another. Such an allocation must be fair and reasonable.
Once all uses of the Property are determined, the Trust will not be able to claim an ITC in respect of the tax payable on the Improvements if the Property is used otherwise than primarily in commercial activities. In such a case, however, the Trust will normally qualify for the 50% GST/HST public service body rebate available to charities. If the Property is used primarily in commercial activities of the Trust, full ITCs may be claimed in respect of the GST/HST paid or payable by the Trust on the construction of the Improvements, subject to the general provisions of the ETA.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-954-8852.
UNCLASSIFIED
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