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FROM:
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Mike Place
HQ Rulings and Interpretations
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Subject:
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Self Assessment of Residential Pty / s. 207
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We have the following comments in reply to your query of March 11, 1996. Thank you for your patience in awaiting our reply.
Background
As we understand it, your query relates to a former personal residence that was purchased prior to GST implementation. After 1990, it was converted to a 'Bed&Breakfast' ("B&B") with taxable accommodation, and ITCs were claimed on improvements. The B&B will continue to be operated; however, the owner wishes to deregister because annual taxable revenues are under $30,000.
You request confirmation that the amendment to ss.207(1) applies; that is, the owner is required only to remit GST on improvements acquired since last acquisition (and not GST on the FMV of the previous used residential complex upon which no GST was paid or ITC claimed).
Reply
In reply, we should first point out that pursuant to subsection 208(1), there will be no ITCs allowed to the owner (where the owner is an individual) in respect of the GST paid on the acquisition of real property where it was used primarily for the individual's personal use and enjoyment (e.g., as a personal residence). This is the case even where the remainder of the property is used for making taxable supplies. Subsection 208(4) precludes ITCs with respect to improvements under the same circumstances. There will, of course, be ITCs allowed with respect to purchases related to ongoing operations (e.g. hydro), based on the extent of commercial activity, in accordance with subsection 169(1).
Upon deregistration, even though the "use" of the property has not changed, para 171(3)(b) will deem the owner to have ceased using the property in commercial activity. This will result in the application of subsection 207(1) and the owner will be deemed to have sold the property and (subject to the following comments) may be required to remit GST. Although subsection 207(1) sets out the calculation of the tax deemed collected and paid, this tax amount is limited in this situation by section 198.1 to be no greater than any input tax credits claimed with respect to the acquisition of real property and any improvements thereto.
Accordingly, if the B&B were being used primarily as a personal-use residence, there should have been no ITCs claimed with respect to the acquisition or improvements to the property, and consequently there would be no "recapture" (no tax to be remitted) under subsection 207(1) upon deregistration, and no tax deemed paid either.
If the B&B had been used primarily in commercial activities (i.e. taxable supplies of accommodation), the self supply under subsection 207(1) and resulting tax to be remitted will be limited by the provisions of section 198.1, as described above.
With respect to your question as to whether the amendment to subsection 207(1) is applicable in this situation, the correct answer is that it is. However, this point isn't significant due to the application of section 198.1 in these circumstances.
If you have any questions or comments concerning the above, please reply by E-Mail or phone me at (613) 954 7936.
FILE COPY REVIEWED/APPROVED BY JOHN BAIN, A/MANAGER
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