XXXXX
This is in response to your E-mail correspondence of July 26, 1994, regarding the self-supply rules and the change-of-use rules as they might apply to a residential unit in a multiple unit residential complex that is for use partly in long-term residential supplies and partly for use in non-residential commercial activities.
Statement of Facts
1. In 1992, XXXXX (hereafter referred to as XXXXX a GST registrant, "substantially renovated" (within the meaning of subsection 123(1) of the Excise Tax Act (the "Act")) a building comprising three stories plus a basement. Full input tax credits (ITCs) were claimed by XXXXX in respect of the substantial renovation of the building.
2. The basement and the first floor were designed, and subsequently leased, for commercial purposes.
3. The upper two floors were designed, equipped (washers, dryers, Jacuzzi's) and intended for residential use. Each of the upper two floors is comprised of XXXXX suites.
4. All XXXXX suites were intended to be used for supplying long-term residential accommodation. However, XXXXX suites were rented for long-term residential use with one suite on the second floor initially rented for use as an office.
5. XXXXX has indicated that some of their current advertising for the residential suites is directed towards commercial tenants. It is probable that suites previously leased for residential purposes will be rented under commercial leases or conversely, those suites rented under commercial leases will revert to long-term residential rent.
6. It is assumed that XXXXX is not a public sector body.
Interpretations Requested
The following questions arise from the above scenario.
1. What portion, or part of the building, is considered to be a residential complex?
2. Is XXXXX required to self-supply on the residential portion of the building under subsection 191(3) of the Act?
3. Does GST apply to the suite that was intended to be rented for residential purposes but was leased for commercial purposes?
4. If that same suite is converted back from commercial lease to long-term residential lease, without further constructing or renovating the complex, would XXXXX be deemed to have substantially renovated the unit under section 190 of the Act and thereby liable to self-assess pursuant to section 191?
Interpretations Provided
1. The top two floors of the building consisting of XXXXX suites, which are residential units and were intended to be leased on a long-term residential basis, would be considered a "residential complex" for GST purposes as defined in subsection 123(1) of the Act . Further, this part of the building would constitute a "multiple-unit residential complex" as defined in that same subsection.
2. Where a suite in the portion of the building that qualifies as a residential complex is first rented for residential purposes, under subsection 191(3) of the Act XXXXX shall be deemed to have made and received, at the later of the time the construction is substantially completed and the time possession of the unit is first occupied, to have made a taxable supply of the portion of the building that is a residential complex and to have paid as a recipient and to have collected as supplier tax in respect of the supply calculated at the fair market value of the portion of the building that is a residential complex.
3. Where the suite was intended to be rented for residential purposes, but is subsequently rented for commercial purposes, the change-of-use rules under subsection 206(3) of the Act will apply. This subsection deems XXXXX to have paid tax on the portion of the property that changes from non-commercial to commercial use. The amount of tax that is deemed to have been paid is equal to the lesser of the tax previously paid on the portion of the property that is being changed to commercial use and 7% of the fair market value of such property provided the change-in-use is not less than 10% of the total use of the property. As a result, XXXXX is entitled to claim an input tax credit equal to the tax deemed to have been paid at such time the change is more than 10%.
4. Where a suite is to be converted back from commercial to long-term residential lease, without constructing or renovating the complex or the suite, XXXXX would not be deemed to have substantially renovated the unit under subsection 190(1) of the Act and thereby liable to self-assess pursuant to subsection 191(1). However, the change-of-use rules under subsection 206(5) of the Act would apply which deem XXXXX to have made a supply and to have collected tax on that portion of the property that is no longer used in a commercial activity provided the change-in-use is not less than 10%. The GST deemed collected, and to be remitted on XXXXX GST return at such time as the change is more than 10%, is equal to the lesser of the tax that would apply if that part of the property were sold at its fair market value and the total tax previously payable on that part of the property.
Analysis
The following provides the basis for the conclusions discussed above.
1. Residential Complex
For purposes of the GST, subsection 123(1) of the Act defines a "residential complex" to be:
... that part of a building in which one or more residential units are located, together with
(i) that part of any common areas and other appurtenances to the building and the land immediately contiguous to the building that is reasonable necessary for the use and enjoyment of the building as a place of residence for individuals, and
(ii) that proportion of the land subjacent to the building that part of the building is of the whole building, ...
Subsection 123(1) defines a "multiple unit residential complex" to mean:
... a residential complex that contains more than one residential unit, but does not include a condominium complex ..,
Therefore, based on the above definitions, only the top two floors of the building comprise a "multiple unit residential complex" which has been substantially renovated. The one suite which was eventually rented out as an office initially forms part of the multiple unit residential complex as it is a residential unit and remains so until such time it is converted to commercial use. (Note that the definition of residential unit for GST purposes defined under subsection 123(1) of the Act includes an apartment that, "... has never been used or occupied for any purpose, but is intended to be used as a place of residence or lodging for individuals ...".)
2. Self-Supply of Multiple Unit Residential Complex
For purposes of GST, subsection 123(1) of the Act defines a "builder" of a "multiple unit residential complex" to include:
(a) 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
(iii) the ... substantial renovation of the complex, ...
Therefore, as XXXXX is a "builder" for GST purposes, subsection 191(3) of the Act will apply when a supply of the building by way of lease, licence or similar arrangement is made by XXXXX.
Provided that the first suite in the part of the building that qualifies as a residential complex is rented for residential purposes, XXXXX as the builder, is deemed under subsection 191(3) of the Act to have made and received a taxable supply by way of sale of the residential complex (including the one suite that will be eventually rented out for commercial purposes) at the later of the time the suite is given to a particular person for residential purposes or the construction or substantial renovation of the complex is substantially completed. As well, XXXXX is deemed to have paid as recipient, and collected as supplier, tax in respect of the supply calculated on the fair market value of the complex.
3. Increasing Use in Commercial Activities
A registrant, other than an individual or a public sector body that is not a financial institution, which increases the extent to which capital real property is used in commercial activities, is deemed to have received a supply by way of sale of real property and, except where the supply is subject to an exemption under Part I of Schedule V, to have paid tax on the acquisition. As a result, XXXXX is eligible to claim an ITC equal to the GST deemed to have been paid on that portion of the property under section 206(3) of the Act.
Note that commencing to use a "residential complex" in commercial activities will not normally trigger an input tax credit because the deemed acquisition will be an exempt supply under one of the provisions of Part I of Schedule V to the Act. However, the suite in question that was intended for residential use and is being converted to commercial use cannot be considered, for purposes of GST, a "residential complex" as defined in subsection 123(1) of the Act. While the suite is a "residential unit" for GST purposes as defined in subsection 123(1), it is not in its own right a "residential complex". Therefore, subsection 206(3) of the Act will apply because the deemed acquisition is not an exempt supply of a residential complex.
(The definition of "residential unit" under subsection 123(1) of the Act includes a wide array of property descriptions and in some cases, a "residential unit" will also be a "residential complex". For example, a "single unit residential complex" qualifies as both a "residential unit" and a "residential complex" and therefore, any deemed acquisition under subsection 206(3) of the Act would be exempt if the "single unit residential complex" was sold by a person other than a builder or a person who had claimed ITCs in respect of their last acquisition of or an improvement to the complex.)
Pursuant to section 197 of the Act, where the extent to which a registrant changes the use of capital property is less than 10% of the total use of the property, the registrant will be deemed not to have changed the use of the property. (The extent of each change will be accumulated from the last acquisition or last significant change of use of the capital property.) Therefore, based on section 197, the change-of-use rules under subsection 206(3) of the Act will be applicable where the suite is converted from residential to commercial use provided the change is not less than 10% of the total use of the property.
From the scenario described in your letter, where only one of the twenty suites in the building is converted from non-commercial use capital property to commercial use capital property, the 10% or more change would not appear to effect a deemed supply and allow XXXXX the corresponding ITC. Further information, such as the actual square meterage of each suite, would be required to determine the application of this requirement.
When dealing with section 197 of the Act, it is important to keep in mind that in determining whether a change-in-use is insignificant, previous insignificant changes that did not trigger the application of any change in use rules are, in effect, accumulated under subsection 197(1). For example, where the change-in-use of one suite represents a of 6% increase in the amount of capital real property being used in commercial activities, such a change will be considered insignificant and subsection 206(3) would not apply. However, if this change-in-use was followed by another increase in use of the capital real property of 6%, the latter change would not be considered insignificant for it has been preceded by a 6% increase in use. Accordingly, as the total change-in-use of the property is now in excess of 10%, there will be a deemed acquisition under subsection 206(3) and ITCs equal to the GST deemed to have been paid on the 12% may be claimed.
4. Decreasing Use In Commercial Activities
Subsection 190(1) of the Act applies where a person converts non-residential real property into a residential complex without constructing or substantially renovating the complex. Subsection 190(1) deems the person to be a builder and to have substantially renovated the complex. However, paragraph 190(1)(b) requires that a person begin to use real property as a residential complex, that, "... immediately before that time, ... was not a residential complex, ...".
In the previous interpretation, there was an increase in the amount of capital real property used in the course of commercial activities. A suite which was intended to be rented as a place of residence for an individual, and thereby considered to be a residential unit for purposes of GST, was rented commercially. (The change-in-use rules made available an ITC where the change-in-use was greater than 10% of the total use of the property.) With the exception of this suite, which is rented out in the course of commercial activity and no longer considered to be a residential unit, the remaining nineteen suites continue to form a "residential complex". As these nineteen suites, which are situated on the top two floors of the building form a "residential complex", it can not be said that the property was not a "residential complex". Accordingly, section 190 is excluded from applying.
As section 190 of the Act does not deem XXXXX to be a builder or to have substantially renovated the complex, and as XXXXX has not constructed a residential complex, section 191 of the Act does not apply. XXXXX would not be liable for GST calculated on the fair market value of the suite when it is converted from commercial to residential use.
However, where XXXXX reduces the extent to which capital real property is used in commercial activity without ceasing to use it in a commercial activity, they are deemed under subsection 206(5) of the Act to have made a supply and to have collected tax on that portion of the property that is no longer used in commercial activity. (Subsection 136(2) of the Act provides that, where a supply of real property includes a "residential complex" and other real property, the provision of the "residential complex" is treated as a separate supply. As such, the GST status of the deemed supply of the real property used in the course of commercial activity must be determined separately.) The GST deemed collected is equal to the lesser of the tax previously paid on that portion of the property that is no longer being used in commercial activity and 7% of its fair market value. However, as in the previous question, where the extent to which XXXXX changes the use of the capital real property (the part used in commercial activities) is less than 10% of the total use of the property, they will be deemed not to have changed the use of the property. Again, further information would be required to determine the application of this requirement.
As previously discussed, insignificant changes-in-use must be accumulated for purposes of subsection 197(1) of the Act. Therefore, if the decrease in use of the capital real property was determined to be 6%, and then was followed by another decrease of 6%, because the accumulated total is in excess of 10%, section 197 would not be applicable and there would be a deemed disposition of the 12% no longer used in the commercial activity of XXXXX[.] The GST deemed collectible would be equal to the lesser of the tax previously paid on that 12% portion of the property no longer being used in commercial activity and 7% of its fair market value.
Note that the deeming rules under section 195.1 of the Act would not be applicable. This section clarifies that the change-in-use rules under section 206 do not apply at the same time as the self supply rules for builders of a residential complex or an addition to a "multiple unit residential complex" under section 191. To achieve this, section 195.1 in certain instances deems a complex not to be capital property thereby excluding the change-of-use rules under section 206 from applying. However, this section is not applicable as both exclusionary paragraphs 195.1(1)(a) and (b) are satisfied.
Should you require further information on this matter, please contact John Bain at (613) 954-8852, or myself at (613) 954-3772.
S. Farber
Manager, Tax Policy
Real Property
Policy and Legislation
| c.c.: |
J. Bain
S. Farber
All Regional I&S Managers
XXXXX |
11870-4-2 c.n.755(JB)
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