28 July 2003 GST/HST Interpretation 43557 - Seasonal Leases

Dear XXXXX

Thank you for your letter XXXXX, concerning the application of the Goods and Services Tax/Harmonized Sales Tax ("GST/HST") to seasonal leases of a cottage. We apologize for the delay in responding.

All references are to the Excise Tax Act ("ETA") unless otherwise indicated.

The following scenario is based on your letter and our telephone conversation XXXXX[.]

1. A non-registrant individual owns a cottage located in XXXXX. It is a recreational property that the individual has held for personal use and enjoyment since acquisition.

2. The individual now intends to lease it by the week to different people during July and August every year (the "seasonal leases") and advertises it as such.

3. The individual is licensed by the Provincial Department of Tourism XXXXX XXXXX to run such an establishment.

4. The cottage is fully furnished and the individual provides cleaning services.

5. During the balance of the year (the "off season"), the individual will make personal use of the cottage. The cottage is not advertised for lease during the off season; moreover, the individual does not intend to make any supplies by way of lease during this time.

6. The seasonal leases and off-season personal use of the cottage will continue as described above for an indeterminate period.

Interpretations Requested

You have asked us whether:

1. the cottage would qualify as a residential complex when the individual begins to hold it for the combined purposes of seasonal lease and personal use;

2. there would be GST/HST consequences in respect of the cottage upon the first short-term lease in July and/or upon reversion to personal use at the beginning of September;

3. a subsequent sale of the cottage would be taxable or exempt; and

4. the GST/HST consequences would change if the individual were a registrant.

Interpretation and Analysis

The GST/HST implications of the proposed uses of the cottage largely depends on whether, at any given time, it qualifies as a "residential complex" under the ETA.

1. Determination of "residential complex"

Subsection 123(1) defines a "residential complex", in part, as follows:

(a) 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 reasonably 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 that part of the building is of the whole building ...

(c) the whole of a building described in paragraph (a) ... that is owned by or has been supplied by way of sale to an individual and that is used primarily as a place of residence of the individual, an individual related to the individual or a former spouse or common-law partner of the individual ...

but does not include a building, or that part of a building, that is a hotel, a motel, an inn, a boarding house, a lodging house or other similar premises, or the land and appurtenances attributable to the building or part, where the building is not described in paragraph (c) and all or substantially all of the leases, licences or similar arrangements, under which residential units in the building or part are supplied provide, or are expected to provide, for periods of continuous possession or use of less than sixty days ...

For purposes of the above definition, "residential unit" is defined to include a detached house or any other similar premises that is occupied by an individual as a place of residence or lodging. The definition also includes a premises that is supplied by way of lease, licence or similar arrangement for occupancy as a place of residence or lodging for individuals. Accordingly, the cottage would qualify as a "residential unit", whether it is strictly for personal use or a combination of personal use and short term leases.

As a residential unit, the cottage may qualify as a "residential complex" under either of paragraphs (a) or (c) above, subject to the exclusionary provisions to the definition. As previously mentioned, there are three conditions, all of which must be met, before a particular premises is excluded from the definition:

1. the building or part must be a hotel, a motel, an inn, a boarding house, a lodging house or other similar premises;

2. the building cannot be described in paragraph (c) of the definition; and

3. all or substantially all (generally interpreted to mean 90% or more) of the leases, licences or similar arrangements under which residential units in the building or part are supplied provide, or are expected to provide, for periods of continuous possession or use of less than sixty days.

First condition: hotel, motel or similar premises

Whether a particular premises can be considered to meet this condition is the subject of GST/HST Policy Statement P-099, The Meaning Of "Hotel", "Motel", "Inn", "Boarding House", "Lodging House" and "Other Similar Premises", as used in the Definition Of "Residential Complex" and "Residential Unit" (enclosed).

In this case, many of the guidelines listed in P-099 would appear to be present for the months of July and August. However, the policy also indicates that, where applicable, the conditions described in the guidelines should be generally present throughout the year. Therefore, if the cottage is leased on a short term basis for the months of July and August only, we would not consider it to be a hotel, motel or similar premises. Under the circumstances, the cottage would not be excluded from the definition and would otherwise qualify as a residential complex.

There may be other situations, however, where we would consider a cottage to be a hotel, motel, or similar premises because the conditions in the guidlines in P-099 are generally present throughout the year. In those situations, the second and third conditions (below) would need to be considered in order to determine whether it is excluded from the definition.

Second condition: application of paragraph (c)

Under paragraph (c), an entire building or premises together with related land, appurtenances and common areas may be considered a residential complex where the building or premises is owned by an individual. Under this provision, the building or premises qualifies as a residential complex only if it is used primarily (more than 50%) as a place of residence of the individual, a related individual, or a former spouse.

In establishing how a building or premises is primarily used for purposes of paragraph (c), we would view a time-based calculation as being an appropriate means of making that determination providing it is fair and reasonable in the circumstances and that the individual expects the specified uses to prevail. Further, the calculation should reflect a reasonable allocation of time between the two uses over an indeterminate period (generally a year). The time allocation would not need to be revised unless the actual use is materially different from expectations.

For example, we are of the opinion that a time-based calculation would be appropriate in the present scenario. Given that the cottage is for the combined purposes of short term lease during July and August and off-season personal use, we would view it as being primarily for use by the individual as a place of residence based on the amount of time that the cottage is intended for that purpose (This will be the case even when the cottage remains unoccupied, assuming that there is no other intended use for the cottage during the off season.). Accordingly, the cottage would not be excluded from the definition of "residential complex" since it would be described by paragraph (c). Conversely, a time-based calculation may not be appropriate, were the individual to have no bona fide intention to use the cottage primarily as a place of residence. In that case, the cottage would be excluded from the definition if the first and third conditions were also applicable.

Third condition: all or substantially all of the leases are for less than 60 days

Whether a particular premises can be considered to meet this condition is the subject of GST/HST Policy Statement P-053, Application of All or Substantially All to Residential Complexes (enclosed for your information). The policy provides acceptable methods of calculating the proportion of supplies made by way of lease, licence or similar arrangement of 60 days or more vs. supplies of less than 60 days. It is therefore of assistance when considering a combination of long term and short term leases of a particular premises. In any event, all of the subject leases are for periods of less than 60 days; there would therefore be no need to consult the policy in this case. Given the scenario, the cottage would meet the requirements of the third condition and would therefore be excluded from the definition of "residential complex" if the first and second conditions were also applicable.

2. GST/HST consequences of the change-in-use of the cottage

As stated previously, the GST/HST consequences in relation to the cottage depends on whether it meets the definition of "residential complex" at any given time.

You have indicated that, prior to the decision to start leasing the cottage on a seasonal basis, it was solely for the personal use and enjoyment of the individual. As such, it would have qualified as a "residential complex" during that time pursuant to either of paragraphs (a) or (c) of the definition. Where the individual begins leasing the cottage on a seasonal basis (i.e., during July and August) with reversion to personal use and enjoyment during the off-season, the cottage would continue to meet the definition of "residential complex" as neither of the first nor second exclusionary conditions described above would apply.

Since the cottage remains a residential complex that is primarily for the personal use and enjoyment of the individual, the "change-in-use" provisions of the ETA that might otherwise apply have no effect when the cottage is first leased in July, nor would they have any effect when it reverts to personal use in September. Notwithstanding that the change-in-use rules would not apply, there are GST/HST consequences with respect to the seasonal leases themselves.

Supplies of real property by way of lease are taxable unless specifically exempt. Paragraph 6(a) of Part I of Schedule V exempts a supply of a residential complex or a residential unit in a residential complex by way of lease, licence or similar arrangement for the purpose of its occupancy as a place of residence or lodging by an individual, where the period throughout which continuous occupancy of the complex or unit is given to the same individual under the arrangement is at least one month. Although, the cottage would qualify as a residential complex as established above, the leases are for periods of less than one month and therefore would not be exempt under paragraph 6(a).

Paragraph 6(b) of Part I of Schedule V exempts the supply of a residential unit by way of lease, licence or similar arrangement for the purpose of its occupancy as a place of residence or lodging by an individual, where the consideration for the supply does not exceed $20 for each day of occupancy. Therefore, if the consideration for the supply exceeds $20 for each day of occupancy, this exemption would not apply and the seasonal leases would be taxable supplies.

As you are aware, a recipient that is a GST/HST registrant is generally entitled, pursuant to subsection 169(1), to claim ITCs for tax paid or payable on property and services to the extent (expressed as a percentage) that the property or service is acquired or imported for consumption, use or supply in the course of the recipient's commercial activities (A "commercial activity" is defined in the ETA to include a business carried on by the person, except to the extent to which the business involves the making of exempt supplies by the person.). Although section 208 (discussed below) would apply in the present case to preclude ITC entitlements in respect of the cottage itself, the individual would nevertheless be entitled to claim ITCs for the tax paid or payable on any inputs (i.e., operating expenses) to the extent that they relate to taxable seasonal leases. Note however, that if a particular input is used at least 90% for activities of the individual that are not commercial activities, the individual would not be able to claim any ITCs for the tax paid on the input, pursuant to subsection 141(4).

Registrant vs. non-registrant

Where the individual is a non-registrant, there are no applicable provisions within the ETA that would have an impact on the tax treatment of the cottage. If the individual were a registrant, the change-in-use provisions of section 208 may be considered; however, for the reasons that follow, that section would not apply here.

Section 208 - registrant individual

In certain circumstances, subsection 208(2) permits a registrant individual who begins using real property as capital property in commercial activities, and not primarily for the personal use and enjoyment of the individual or a related individual, to claim input tax credits ("ITCs") relating to the tax paid on the acquisition of, or improvements to, the property.

In keeping with our interpretation of "primarily" relative to paragraph (c) above, if the individual supplies the cottage by way of short term lease (a commercial activity) for the months of July and August and holds it for personal use for the remainder of the year, we would generally view the cottage as being held primarily for the personal use and enjoyment of the individual throughout the year, based on the amount of time during the year that it is dedicated to that purpose, where such a basis is fair and reasonable. Accordingly, section 208 would preclude the claiming of ITCs on the acquisition or improvements to the cottage.

Note that the above conclusion is predicated on the understanding that the actual or expected use of the cottage does not change from year to year. If at the end of a particular year the actual operations are materially different from those which were anticipated (or if the anticipated use were to change), the expected use of the cottage would need to be revised.

For example, in the event that the cottage were no longer expected to be primarily for the individual's personal use and enjoyment, the individual, if registered, may become eligible for ITCs by virtue of section 208. Further, the cottage's status as a "residential complex" would need to be re-evaluated in light of the new expectations. If, for example, all of the exclusionary provisions to the definition became applicable under the revised expectations, the cottage may no longer be considered a residential complex. Although ITCs would become available in that case, there would be tax consequences if the cottage were converted back to primarily personal use or if it were subsequently sold (see below).

Paragraphs 41-47 of the enclosed excerpt from Memoranda Series Section 19.4.2, Commercial Real Property-Deemed Supplies, contains further information concerning beginning use of real property in commercial activities. For more information on conversion to personal use, please see paragraphs 48 to 53.

3. Sale of the cottage

Assuming that the cottage qualifies as a "residential complex" at the time of sale, it may be exempt, subject to section 2 of Part I of Schedule V. Section 2 generally exempts a supply by way of sale of a residential complex by a person who is not a builder of the complex, unless the person claimed an ITC on the last acquisition of the complex or in respect of an improvement thereto.

Given the scenario, the individual would not be considered to be a "builder" since that definition excludes an individual who acquires a complex otherwise than in the course of a business or an adventure or concern in the nature of trade. Although the short term rentals would qualify as a "business", this was not the purpose for which the individual originally acquired the cottage. Therefore, if the cottage qualifies as a residential complex at the time of sale, it would be an exempt supply as long as no ITCs are claimed in respect of its acquisition or an improvement thereto.

Note that if the individual were a registrant, subsection 208(2) would preclude the individual from claiming ITCs as explained above. However, should the use of the cottage change such that it is no longer primarily for personal use and enjoyment, section 208 would permit ITCs to be claimed to the extent that the property is used in commercial activities, pursuant to section 169. Of course, if ITCs are claimed, an exemption under section 2 above may not be available when sold. Since no other exemptions would be available under the circumstances, the sale would be taxable if section 2 did not apply.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above or any other GST or Harmonized Sales Tax matter, please do not hesitate to contact me at (613) 952-8816.

Yours Truly

Paul Hawtin,
Rulings Officer
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate