Section 190

A pre-1990 building with 30 residential rental units and one commercial unit rented for use as a convenience store (the “Commercial Unit”) is sold on January 1, 2019 to “NewCo” which, on January 1, 2020, terminates the Commercial Unit lease and then hires a construction company to convert the unit into four residential units, with first occupancy on December 1, 2020.

Will such conversion of the Commercial Unit constitute a conversion to residential use per s. 190, requiring the application of the self-supply rules in s. 191 and not the change of use rules in s. 206?

Note that:

• S. 136(2) apparently applied to deem there to be separate supplies to NewCo of (1) the residential units and (2) the Commercial Unit.
• S. 206 would appear not to apply as s. 195.1(1) provides that the completed residential complex is deemed not to be capital property of the builder unless the builder was deemed under s. 191 to have received a taxable supply of the residential complex.
• If s. 206 were to apply, tax would be computed on the basic tax content of the space no longer used in commercial activities (plus the GST/HST paid on the costs of converting the space) - and this would appear to be contrary to the policy of imposing tax on the FMV of new residential property.

In finding that s. 190(1) would not apply, CRA stated:

[T]he [s. 190(1)] preamble requires that a person begins to hold or use real property as a residential complex and paragraph 190(1)(b) requires that immediately before the person begins to hold or use real property as a residential complex, the property was not a residential complex. It may be true that, as the Commercial Unit was deemed a separate property per subsection 136(2), immediately before the Commercial Unit is converted to residential units, that property was not a residential complex. However … since there is already a residential complex in the building, the Commercial Unit will never begin to be used as a residential complex in its own right. It will be converted to residential units, which will not create a new residential complex, rather, the new units will become part of the existing residential complex.

Since NewCo thus is not considered to have constructed or substantially renovated the residential complex, it is not a “builder” under paras. (a) nor (b) of the definition - nor is it under (d)(ii) since the former part of the residential complex was previously occupied.

Accordingly, s. 195.1(1) would not apply to preclude the application of s. 206, and NewCo would be deemed by s. 206(4) to have made a supply of the former Commercial Unit space and to have collected tax equaling the basic tax content of that property.

S.190(1) would apply to the conversion of a hotel to a nursing home. Accordingly, s. 191(1) would require the builder to self-assess on the entire complex when the first unit was rented out or occupied.