14 December 2000 GST/HST Interpretation 32658 - Section 211 and Registration for the GST/HST

Thank you for your letter of August 25, 2000, concerning the eligibility of a charity to claim input tax credits (ITCs) where a certain election is filed on the same day as the charity registers for the Goods and Services Tax (GST)/Harmonized Sales Tax (HST).

All legislative references are to the Excise Tax Act (the Act).

You have presented two hypothetical situations in which a charity files an election under section 211. You have correctly interpreted the provisions with respect to 'situation A' identified in your letter. Our response is therefore limited to 'situation B' presented in your letter.

Our understanding of the situation is as follows:

1. A non-registrant charity acquires real property and pays tax in respect of the acquisition.

2. The charity immediately begins to use the real property exclusively in the course of making exempt supplies (leases of the property). The charity is engaged in no other activities.

3. The charity files an election under section 211 to effectively make taxable the leases of the real property. The election becomes effective on a particular day, which is after the day the charity acquired the property, and the charity registers for the GST/HST effective on the particular day. We will assume that the particular day is the first day of a lease interval and that tax in respect of the supply becomes payable on that day. The charity continues to supply the real property by way of lease after registering for the GST/HST.

Issue

You are enquiring as to whether the charity can be considered to have paid tax on the real property at the time of registration under the provisions of subsection 171(1).

Response

The charity will be considered to have paid tax in respect of the real property under the provisions of subsection 171(1) and will be eligible for an ITC under the provisions of subsection 169(1).

Analysis

Where a charity, or any public service body, files an election under section 211, supplies of the real property are excluded from the general exemption in section 1 of Part V.1 of Schedule V to the Act. As you pointed out, the deeming provisions of paragraphs 211(2)(a) and (b) do not apply in the situation you described because the charity also becomes a registrant on that day. (The deemed sale and repurchase in subsection 211(2) occur provided that the charity "does not acquire the property on the particular day [the effective date of the election] or become a registrant on the particular day" (emphasis added)).

However, while a deemed sale and repurchase do not occur under section 211, similar deeming provisions exist in subsection 171(1). That subsection reads as follows:

Where at any time a person becomes a registrant and immediately before that time the person was a small supplier, for the purpose of determining an input tax credit of the person, the person shall be deemed

(a) to have received, at that time, a supply by way of sale of each property of the person that was held immediately before that time for consumption, use or supply in the course of commercial activities of the person; and

(b) to have paid, at that time, tax in respect of the supply equal to the basic tax content of the property at that time.

If, immediately before the time at which the charity becomes a registrant, it can be considered to have held the real property for consumption, use or supply in commercial activities of the charity, the deeming provisions of subsection 171(1) will apply to effectively allow the charity a recovery of tax.

Where a charity files an election under section 211 to take effect on a certain day and supplies of the real property made on or after that day will not be exempt under Schedule V to the Act, there is a clear indication that any supplies of the property made by the charity will be taxable supplies. As such, upon filing the election, the charity can be considered to hold the real property for the purpose of making a supply of the property in a commercial activity. Accordingly, one of the conditions in subsection 171(1) (i.e. that immediately before registration, the property be held for consumption, use or supply in the course of commercial activities of the person) is met. Provided that the charity was a small supplier immediately before it becomes a registrant, the charity is deemed to have received a supply of the elected property by way of sale and to have paid tax in respect of the supply equal to the basic tax content of the real property at that time.

Having been deemed to have paid tax upon registration in respect of the real property which, on that date, is used in commercial activities, the charity will be eligible for an ITC under the provisions of subsection 169(1).

Should you require further information, or have any questions regarding this matter, please contact me at (613) 954-4393.

Yours truly,

Hugh Dorward
Real Property Unit
Financial Institutions and Real Property Division