28 August 1997 GST/HST Interpretation HQR000573 - Lease Inducements Paid to Medical Clinics

                                                                        XXXXX
 XXXXX

                                                                        August 28, 1997

Dear XXXXX

Thank you for the letter of February 12, 1997 signed by XXXXX wherein you solicited our views to reply to a query from XXXXX dated December 16, 1996 concerning the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) as it applies to cash lease inducements paid to a medical clinic.

Statement of Facts

In two specific cases encountered by XXXXX , medical clinics have received inducement payments to renew their leases. The clinics provide primarily exempt supplies and are not registered for GST purposes since they are small suppliers. The lease inducement payments received by each clinic are greater than $35,000.

Interpretation Requested

1. Is the $35,000 paid to the medical clinic consideration for a taxable supply or an exempt supply?

2. If the above supply is a taxable supply, does it result in the loss of the small supplier status for the medical clinic?

3. If the clinic is required to register for GST purposes, does it have to remit GST with regard to these lease inducement payments?

Your Analysis

TIB B-054 indicates that "when a lessor makes a direct cash payment to the tenant as an inducement to enter into the lease, the tenant is considered to have made a taxable supply to the lessor, i.e. the service of entering into a lease". The tenant, if a GST registrant, is required to collect and account for the tax on this supply. However, TIB B-054 does not address the situation where the tenant would not otherwise make taxable supplies.

In MNR vs. Taylor, the Court laid out several factors as indicative of an adventure or concern in the nature of trade, and they are usually associated with the activity of buying and selling property for the purpose of gain or profit. However, the Court also notes the following:

•   the fact that a transaction is totally different in nature from the taxpayer's other activities and that the taxpayer has never entered into similar transactions before or after the one in question does not, of itself, preclude it from being an adventure or concern in the nature of trade.

•   if the considerations prompting a transaction are of a business nature, the transaction may be an adventure or concern in the nature of trade even though there is no intention to resell at a profit.

You indicate that if we take the position that the lease inducement is a taxable supply, and the person making the supply (the medical clinic, in the case at hand) provides exempt supplies only, the person would register only for the purpose of remitting the tax on the one taxable supply, and it would deregister immediately afterwards.

You recommend that where a lease inducement is paid to a person in respect of a lease acquired primarily in the course of making exempt supplies and the recipient of the payment (the medical clinic, in the case at hand) would not otherwise be required to register, the payment in respect of the lease inducement should not be subject to GST.

Interpretation Given

Based on the information provided, our interpretation is as follows:

1. The $35,000 amount paid to the medical clinic as lease inducement is consideration for the supply of entering into a lease, a taxable supply from the lessee to the lessor. This position is clear from TIB B-054.

You have brought to our attention that XXXXX takes the position that if the tenant intends to use the leased property in the tenant's non-commercial activities, the supply is considered to have been made in the course of those non-commercial activities and is not taxable, based on its interpretation of the extended definition of "commercial activity" under subsection 123(1) of the Excise Tax Act.

The XXXXX arrives at the incorrect conclusion that the amendments to the definition and extended definition of "commercial activity" excluded the whole activity of making exempt supplies, including all direct and indirect inputs into those supplies. In reality, the new definition is only expanded to include as "commercial activity" all activities made in the course of and in connection with the making of the commercial activity, i.e. it includes all direct and indirect inputs into the commercial activity. In other words, the fact that the medical clinic is using a building in its exempt activities does not change the taxable status of its supply to the lessor of the building of the service of entering into a lease.

2. The above taxable supply results in the loss of the small supplier status for the medical clinic because the consideration for the supply is more than $30,000.

3. After registration, the medical clinic must remit tax with regard to the lease inducement payments.

Should you have any questions on the foregoing, please call me at (613) 952-9587.

Yours truly,

Bao Tran
Real Property
Financial Institutions and Real Property
GST Rulings and Interpretations

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