Section 191

Subsection 191(1) - Self-Supply of Single Unit Residential Complex or Residential Condominium Unit

See Also

Daruwala v. The Queen, 2012 TCC 257 (Informal Procedure)

informal arrangement included

Woods J. determined that a newly-constructed home acquired by the appellants from the corporate vendor ("TRG") had already been subject to the self-supply rule in s. 191(1)(b)(i) in the hands of TRG, so that the appellants were entitled under Sched. V, Part I, s. 4 to a rebate of the GST that had been charged to them on the purchase. For a number of months prior to that purchase, the house had been occupied by TRG's individual shareholder and his family under an informal oral arrangement. Woods J stated (at para. 21) that the phrase "lease, licence or similar arrangement" "encompasses...informal arrangements that give possession of property."

Woods J. also stated that "the term 'residence' has a flexible meaning which is dependant on the context in which it is used" (para. 25), and that the context of s. 191 was very different from s. 2 of the Income Tax Act, i.e. the meaning of "residence" in Thomson (para. 26).

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Tax Topics - Income Tax Act - Section 2 - Subsection 2(1) 138

Administrative Policy

Excise and GST/HST News – No. 91 under "Head leases and subleases of new residential property: who must self-supply and who may be entitled to a rebate?" May 2014

purchase of new housing by head lessor

If a person purchases newly constructed or substantially renovated housing for the purpose of leasing or licensing it to an individual as a place of residence, the person will generally not be a builder of the housing for GST/HST purposes, even if the person hires a property manager as agent for the purpose of renting the housing. However:

If a particular person purchases such housing for the purpose of supplying it under a head lease to another person (lessee/sub-lessor) who in turn leases the housing to an individual as a place of residence, the particular person will be a builder for GST/HST purposes and different rules apply. Where such a builder enters into a head lease that is exempt under section 6.1 or 6.11 of Part I of Schedule V to the Act with a lessee/sub-lessor who is acquiring the housing for the purpose of making exempt supplies that include giving possession or use of the housing (e.g., under a sublease that provides for the continuous occupancy of the housing as a place of residence or lodging by an individual for at least one month) and possession of the housing is given to the lessee/sub-lessor, the builder is considered to have made a taxable sale and repurchase (a self-supply) of the housing.

In such case, the builder is considered to have collected and paid the GST/HST on such deemed sale and repurchase on the fair market value of the housing at the time possession of the housing is given to the lessee (or on completion of construction or substantial renovation, if later) - and if a registrant may claim an ITC for the tax paid on the housing purchase.

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Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Builder purchase of new housing by head lessor 284

4 July 2013 Interpretation Case No. 144290

purported supply of new townhouse on ground lease characterized as mere assignment of leasehold interest

The City leases land to the Developer (with a right to sever and remove improvements on the termination of the lease), and the Developer enters into a "Purchase Agreement" with the Purchaser (conditional upon the Lessor's consent to the transfer of the Lease) for a stipulated purchase price, with the Developer covenanting to construct a townhouse in accordance with specifications. CRA stated:

One of the basic principles of real estate law is that a fixture, such as a building, forms part of the land to which it is affixed, even if the person who affixed the building has retained the right to sever and remove it. …There is no indication in the Lease that the City has given ownership of the building portion of the Unit to the Developer. … The Developer has only an interest in the Unit constructed on the Lot and cannot therefore dispose of something more (i.e., the Developer cannot make a separate sale of the building portion of the Unit). …Instead of the sale of the building portion of the Unit and a lease, or assignment of a lease, in the land portion of the Unit, we would characterize the supply in this case as an assignment of a lease of land on which the building is located (i.e. an assignment of the leasehold in the Unit). As such, neither the condition in subparagraph 191(1)(b)(i) nor the condition in subparagraph 191(1)(b)(ii) is met and the Developer is not required to self-supply the Unit. As there is no self-supply under subsection 191(1), there is no rebate entitlement under section 254.1 (i.e., a… new housing rebate is not permitted). …This is a taxable supply as there are no provisions to exempt the supply.

However, the new housing rebate under section 256 for owner-built homes was available.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 254.1 - Paragraph 254.1(2)(d) supply of new townhouse on ground lease 300
Tax Topics - Excise Tax Act - Section 256 - Subsection 256(2) supply of new townhouse on ground lease 84

GST/HST Memorandum 19.2.3 “Residential Real Property - Deemed Supplies” June 1998

Purpose of self-supply rules: level playing field

5. The self-supply rules.. apply only to "builders" and their purpose is to remove the potential tax advantage a builder would have in constructing or substantially renovating a residential complex and then offering the residential complex for rent or appropriating it for the builder's personal use. A person who is not a builder who wanted to do the same would have to purchase the new or substantially renovated residential complex in a completed state from a builder and would have to pay GST/HST on the purchase. In the absence of the self-supply rules, the builder who constructs or substantially renovates a residential complex would generally experience a competitive advantage through tax savings on the non-taxable value that is added to the residential complex, such as the value of employed labour, financing costs and profit which would otherwise be realized through the sale price established by a builder who sells the residential complex. …

"Rent-to-own" vs "sale" Policy statement P-164 …

16. … Because the self-supply rules apply only where there is a supply by way of lease, licence or similar arrangement, it is necessary to determine if a rent-to-own agreement represents a supply by way of sale or a supply by way of lease, licence or similar arrangement.

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Tax Topics - Excise Tax Act - Section 191 - Subsection 191(9) 122

Government Funding

Cases

High-Crest Enterprises Limited v. Canada, 2017 FCA 88

potential application of purpose test

Owen J had found below that although government assistance for an addition to a Nova Scotia nursing home of the appellant took the form of the government’s agreement to subsidize operating costs relating to the additional residents and not the construction costs:

[T]his does not alter the fact that the dominant purpose of the Department in…agreeing to make these payments was to secure additional long‑term care beds for seniors in Nova Scotia. The immediate result of the payments may have been the provision of the Services but that was not the purpose behind the payments. (para. 93)

Webb JA, after finding that the decision of Owen J was a nullity because the case had been improperly reassigned by the Chief Justice to Owen J away from another judge, noted that the Court had been asked to comment on section 191.1. He declined to do so, but noted (at paras. 49, 51) some issues for the original judge to consider:

In determining whether, in any particular case, there is an amount that the builder can reasonably expect to receive from a grantor for the purpose of making residential units available to the individuals referred to in paragraph 191.1(2)(b) of the ETA, one question that should be addressed is whether it is necessary to determine the primary purpose of the total amount that a builder may reasonably expect to receive from a grantor or whether it is only necessary that the builder may reasonably expect to receive an amount (which could be part of a larger payment) from a grantor and that amount is for the required purpose. …

Also paragraph 191.1(2)(c) of the ETA is a condition that, if satisfied, will result in certain consequences under the ETA. As acknowledged by the Appellant, the amount of tax payable under the ETA is not affected by the amount of the funding that is provided or that is expected to be provided by the grantor. The same result will arise under the ETA whether the government funding is $1,000 or $1,000,000 (or any other amount) or whether it is 1% or 100% (or any other percentage) of the cost of construction. This could also raise the question of whether it is necessary to determine the primary purpose of any expected payments or whether it is only necessary to determine if any expected payments will include an amount for the designated purpose.

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Tax Topics - Other Legislation/Constitution - Federal - Tax Court of Canada Act - Section 14 - Subsection 14(2) CJ had no power to reassign case after trial to 2nd judge 258

Subsection 191(3) - Self-Supply of Multiple Unit Residential Complex

Cases

North Shore Health Region v. Canada, 2008 FCA 2

no exclusive occupancy right

The self-supply rule did not apply to a newly-constructed nursing home when the first residents were given occupancy of their rooms given that the residents had no right to occupy any particular room, and the room that was assigned to a resident could be changed at the will of the facility operator. As the word "'possession' generally implies elements of dominion and control" it followed that the residents were not given "possession" of residential units in the facility as required by s. 191(3)(b)(i).

See Also

Beaudet v. The Queen, 2014 TCC 52

FMV of newly-constructed building equal to direct and indirect costs and excluded developer's profit margin

The appellant ("Beaudet") was a partnership engaged in the construction of four adjoining apartment building, which it then rented out, resulting in a self-supply at fair market value of each building (including land) under ETA s. 191(3) when the first tenant commenced occupancy.

Lamarre J found that in "an ideal competitive market" (para. 81), the fair market value of a building would consist only of costs, including indirect costs such as advertising and leasing costs and the builder's construction management fees (see para. 79). Here, there was no evidence of elements such as zoning restrictions which would establish a significantly higher value for the four buildings as a whole, so that there should be no upward adjustment over such costs.

In particular, Lemarre J included financing and notional project management fees costs (estimated at 1.5% and 5% of total costs), and advertising expenses. Excluded from costs were cost overruns due to substandard ground conditions and a reduction (equal to the remediation cost) was made for problems relating to a leaking roof and substandard soundproofing.

After noting (at para. 81) that it was only in the case of the fourth building that the respondent's expert had made a significant addition for the developer's estimated profit, and after having noted (at para. 79) a statement in an appraisal text that in order to make an addition for the developer's profit "it is essential that the appraiser first verify the market conditions to be sure that such a contractor's profit exists," she rejected such an addition in this case given inter alia that 35% of the units in the building still had not been rented at the time of first occupancy.

The land value was increased to reflect its appreciation over its cost to Beaudet, that had been incurred several years earlier.

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Tax Topics - General Concepts - Fair Market Value - Land FMV of newly-constructed building equal to direct and indirect costs 168

Desjardins v. The Queen, 2010 TCC 521 (Informal Procedure)

new apartment building valued at cost rather than lower income-based valuation

The appellant built a 180-unit apartment building in in Sainte-Thérèse and did not report GST on the resulting self-supply when the first unit was rented. At trial, the Minister’s expert appraiser relied on the estimated replacement cost, as to which the actual cost of $16.03 million (before all GST, QST and rebates) was representative. The appellant’s expert preferred an income approach (i.e., applying a cap rate to normalized income) of $14.9 million. Both experts agreed that the comparison method was unreliable due to there being no close comparables.

In preferring the Minister’s cost approach, Favreau J stated (at paras. 33-35):

The difference between the two values is a significant economic depreciation. Unless there are specific circumstances, I doubt that a building contractor or any business person with the expertise and knowledge required to carry out a project of such scope would agree to sell a new construction at a lower price than the actual cost in the context of a strongly rising property market.

The evidence did not show that there were excesses in the cost of construction or any specific problems with soil contamination or with the connection infrastructure with municipal services, or any errors of development or construction.

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Tax Topics - General Concepts - Fair Market Value - Land new apartment building valued at cost rathr than lower valuation based on cap rate 184

Grafton Developments Inc. v. The Queen, 2006 TCC 356

cost approach not appropriate for valuing renovated portion of old building

A predecessor by amalgamation of the appellant purchased a 40-year old nine-storey commercial property in Halifax on December 1, 1997 for a purchase price of $600,000, and then carried out extensive renovations to the Property, so that four floors were converted into 19 residential units, with the first residential unit being leased effective June 1, 2000.

In determining the amount that was required to be self-assessed under ss. 190(1) and 191(3), Little J noted that both experts agreed that the cost approach was not suitable as the building was not a new building, and in arriving at a FMV based on the income approach, he preferred the approach of the Minister’s expert of using actual rents received and comparable market rents and using a capitalization rate of 10% rather than that of the appellant’s expert, who used estimated rents provided by the appellant and a capitalization rate of 12% and estimates of operating expenses that were found to be too high - but accepted the appellant’s submission that a high vacancy rate (8%) should be used given the absence of parking and the presence of a nightclub in the building.

Kimm Holdings Ltd. v. The Queen, 2006 TCC 152 (Informal Procedure)

FMV of apartment building reduced to reflect prospective costs at the substantial completion time (when 90% of costs incurred)

The appellant constructed a 104-unit apartment building in Calgary. It claimed input tax credits but did not self-assess on substantial completion.

The valuators at trial for both the Crown and the appellant arrived at a value for the building under the cost approach (i.e., the cost required to produce a property with the same utility, location and condition) of around $8.3 million, but indicated that this amount delineated the upper range of value, and instead preferred lower numbers generated under the income or direct comparison approach.

C. Miller J stated (at para. 24) that “for this type of property, the income approach is indeed the most appropriate,” but noted that both valuators had assumed full completion, whereas s. 191(3) required valuation at the later of the time of first occupancy (October 2000) and substantial completion which (at para. 22) he had concluded occurred in January 2011 when roughly 10% of the construction costs remained to be incurred. In adjusting the fully-completed fair market value, he found (at para. 26) that it was preferable to deduct the costs to complete of $500,000 from the fully-completed FMV of $7,050,000, which he considered to be preferable to the “arbitrary” approach suggested by the appellant of deducting the product of the appraised value of the building and 10% (being the inverse of the 90% percentage that had been accepted by CRA and the courts as representing substantial completion) (para. 26).

Bergeron v. The Queen, docket 2002-199(GST)I (Informal Procedure)

construction costs are a reliable measure of value

Before confirming the application of the self-supply rule to three small apartment buildings constructed by the appellant based (in the case of two of the buildings) on the amounts for which they were sold a few months after the time of the deemed supply on first occupancy, Tardif J stated (at para. 14):

Computing the GST on a new building subject to this tax should normally be relatively simple—an exercise based theoretically on construction costs. This approach is all the more acceptable given that the courts have stated a number of times that construction costs are a reliable basis for computing the GST on new buildings.

Le 11675 Societe en Commandite v. The Queen, docket 2000-4081(GST)G

income approach used in valuing the residential Phase I (retirement home) portion of newly-constructed 6-storey building

The appellant constructed a six-storey building in Saint‑Georges, Beauce, Quebec. Its ground floor was occupied by a department store. The second floor had with various administrative areas, common rooms, meeting rooms, a kitchen and a dining room, all designed to meet the needs of the senior citizens who are to occupy the four other floors, each with 17 units, for a total of 68 units. Initially, the project was to have two phases; some Phase I facilities were developed in order to eventually serve Phase II. On the date of the valuation, Phase II was not completed, and what was to be valued under s. 191(3) was the residential part of Phase I (floors two to six).

In accepting the income approach to valuation of the CRA appraiser, Tardif TCJ noted (at para. 61) that “the experts indicated that this was a special case in which it was relatively difficult to use the traditional methods in setting the taxable value.”

Déziel v. The Queen, [2003] GSTC 88, 2000-4691-GST-G, varied on other grounds 2004 FCA 116

cost approach should be given priority for new buildings

From 1993 to 1996, the appellant built 10 complexes containing 108 units in Trois-Rivières, and was assessed for failure to have self-assessed on their fair market value when they “were completed and available for lease beginning in June 1994, for those built on rue Audet, and beginning in July 1994, for those built on rue Marion” (para. 7). Tardif J accepted the valuations of the Minister’ expert, who used the cost approach, rather than that of the taxpayer’s expert, who used poorly-corroborated evidence of a supposedly high vacancy rate and other depressing factors to arrive at lower values using the income capitalization approach. After quoting (at para. 43) from a valuation text that

In brief, the depreciated replacement cost technique can always be used. It is particularly reliable for new buildings.

Tardif J stated (at para. 45) that “since this is a new building, the cost approach should be given priority as previously shown.”

Sira Enterprises Ltd. v. The Queen, docket 98-2463-GST-G

improper for CRA to discount the cost approach to valuation of new apartment buildings

Margeson TCJ accepted that newly-constructed apratment buildings built b the registratn should be valued on the basis of the “cost approach” as being “the best method to be used in calculating the fair market value of the properties in question” rather than accepting the Minister’s reliance on the income and comparison approaches, - except that an upward adjustent should be made to reflect that no management fee was charged for the development work. Margeson TCJ stated (at paras. 54, 77):

When using the cost approach you have a real price. There is no uncertainty. Counsel asked: “Who would value something at more than you built it for?”

When one has due regard to the departmental policy on the fair market value approach … it is clear that this policy approach says that no method should be discounted. In the case at bar the cost method was indeed discounted.

Timber Lodge Ltd. v. The Queen, [1994] GSTC 73 (TCC)

FMV of newly-constructed residential apartments equalled their actual cost

Both sides’ experts relied almost exclusively on the income and comparison methods in valuing newly-constructed residential apartment buildings for purposes of application of the self-supply rule in s. 191(3). However, the values advanced by the Crown in fact were close to the actual cost incurred, whereas those advanced by the appellant were lower. Before dismissing the appellant’s appeal, Taylor TCJ stated (at p. 73-4 to 73-5):

[T]he fact is that on both of these buildings, construction was completed on the very date on which appraisal is required. Of course there would be little if any value to a restructuring of an amount to accomplish "replacement or reproduction costs", and no purpose would be served in going through that exercise. But to eliminate, ignore, or denigrate the usefulness for appraisal purposes of that very total actual cost which had been accumulated during construction and culminated on that very day (144 Maypoint, March 31, 1991, and 148 Maypoint, July 31, 1991) leaves me in serious disagreement….

[F]air market value, must first of all be fair, and amounts of $490,000 each for the buildings' stretches credibility when the actual cost is the starting point, and there is no requirement for depreciation, etc….

Administrative Policy

17 May 2017 Interpretation 174642

headlease structure of a student residence avoided triggering self-supply rule

Holdco is a privately-held corporate registrant that has contracted with an arm’s length person to develop a project on its land an apartment complex (with no retail component) the units in which will be occupied by individuals attending one or more of the post-secondary institutions located nearby. The building and land on which the building is constructed (“the Residence”) is represented to be a “multiple unit residential complex.” (“MURC”) On its completion, Holdco will sell it to a registered limited partnership (“LP#1”), whose only use thereof will be its lease (under the “Master Lease”) to a second registered limited partnership (“LP#2”).. A professional management company (“MgmtCo”) will manage and operate the Residence.

It is estimated that during the regular academic session from September to May, more than 10% of the units will be supplied for short-term stays (generating rentals of more than $20 per day) and, during June through August, that 90% or more of the apartment units will be supplied for short-term stays (under one month) – with the balance for long-term stays.

In finding that LP#1 will not be subject to the self-supply rule in s. 191(3) when it leases the Residence to LP#2, CRA noted that LP#1 was a builder because it acquired its interest in the Residence (before any occupancy) for the primary purpose of leasing it other than to an individual and that the conditions in s. 191(3)(b)(i) will not be met given that LP#1 and LP#2 entered into the lease of the multiple unit residential complex (the Residence) for the purpose of managing and leasing the residential units and not for the purpose of occupancy of a unit by an individual as a place of residence. Furthermore, s. 191(3)(b)(i.1) is inapplicable, nor will s. 191(3)(b)(ii) be met given that LP#1 is not an individual.

Furthermore, s. 191(10) would not deem the builder (LP#1) to give possession of the residential units to an individual under a lease for occupancy as a place of residence LP#1 given that the builder will not be making exempt supplies described in Sched. V, Pt.1, s. 6.1 or 6.11. S. 6.1 does not apply as it applies only to a supply of property that is land, or a building (or that part of a building) that consists solely of residential units, whereas here there is a supply of a MURC. S. 6.11 will not apply given inter alia that more than 10% of the apartment units will be leased for short-term stays during the regular academic session (and that percentage will increase to 90% or more during the summer). In this regard, CRA stated that s. 6 “does not deal with the situation where the residential complex is supplied to a person under a head lease (such as the Master Lease) for a subsequent supply to another person.” Therefore, LP#2 will be required to pay GST on its lease payments to LP#1.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 169 - Subsection 169(1) ultimate exempt use did not deny ITCs 199
Tax Topics - Excise Tax Act - Schedules - Schedule V - Part I - Section 6.11 headlease of MURC not exempt where used by lessee more than 10% in short-term rentals 124
Tax Topics - Excise Tax Act - Schedules - Schedule V - Part I - Section 5 claiming of ITC generated subsequent taxable sale 148

GST/HST Notice 224 under "Issue no. 3 – "Factors for determining whether possession is given." September 2007

If the facts of a particular case indicate that an individual is not given possession of a room or suite in the facility, then section 191 of the Act will not apply, even if the remaining conditions of that section are met. It is important to note that it is possible for an individual to have possession of a room or suite in a residential care facility even if the operator has access rights to that room or suite to perform their obligations under the agreement (e.g., cleaning, changing linens, responding to emergency situations).

Some residential care facilities (e.g., nursing homes) often contain private and semi-private accommodations. The type of room or suite in which an individual stays is not necessarily determinative of whether that individual has been given possession of a room or suite for purposes of section 191 of the Act. In the case of shared rooms, the above factors and any other relevant factors should be considered in determining whether individuals are given possession of a shared room or suite.

4 April 2005 Ruling Document No. 52246

Ruling that a subsidized seniors' apartment was substantially renovated, so that s. 191(3) deemed the builder to make a taxable supply of the building. Given the limited degree of structural connectivity with an adjoining structure, the two structures were to be treated as separate buildings.

GST/HST Policy Statement P-165R Fair Market Value for Purposes of Part IX of the Excise Tax Act (Revised) March 1998

Cost method can be used in determining FMV under self-supply

Briefly, there are three general methods or approaches to market valuation that are used: the cost method; the direct comparison method; and the discounted cash flow method (also called the income method). There may be different approaches used for different components of the object being valued. The Department recognizes that no method should be excluded categorically.

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Tax Topics - General Concepts - Fair Market Value - Land 69

Subsection 191(5)

See Also

Coates v. The Queen, 2011 TCC 74 (Informal Procedure)

Builder not subject to self-supply rule due to use of home as place of residence

The appellant built three houses in New Brunswick, moved into them and sold them in the years 2000 to 2006, and also built the home that he resided in. He was assessed under s.191(1) in respect of the construction of the fourth house as a self-supplying builder.

Hogan J. concluded that the appellant was a builder on applying the six tests in Happy Valley Farms of what constitutes an adventure in the nature of trade: the nature of the property sold, the length of ownership, the frequency or number of other similar transactions by the taxpayer, the work performed on or in connection with the property, the circumstances giving rise to the sale and, finally, motive, stating (at para. 10):

The evidence before me reveals a clear pattern adopted by the Appellant of building a home, living in it for a period of time and reselling it at profit.

However, Hogan J. allowed the appeal on the basis that s.191(5) operated as an exception to s.191(1), stating (at paras. 14-15):

That provision requires that the property actually be used first by the individual (who is a builder as defined) as a place of residence…A secondary intention to resell the property at a later date is irrelevant to the determination as to whether or not the exception applies.

The exception only comes into play after an individual has been found to be a builder… This means that an individual can benefit from the exception even if he has the secondary intention, at the time of its construction, of reselling the property, provided he actually uses it as a place of residence after the construction is completed.

Hogan J. recognized (at para.16) that:

[T]his may lead to an incongruous result, with tax being avoided simply because an individual actually uses a residential construction or home as a place of residence and then, for example, decides to sell it at a later date.

Subsection 191(9)

Administrative Policy

GST/HST Memorandum 19.2.3 “Residential Real Property - Deemed Supplies” June 1998

Time of "substantial completion"

11. Generally, substantial completion occurs before occupancy is given to the first individual. For GST/HST purposes, "substantial completion" means that the construction or substantial renovation of the complex is at a stage of completion (generally, 90% or more) so that an individual is able to reasonably inhabit the premises. Minor repairs, adjustments or upgrades that are still outstanding do not reasonably impair the use and enjoyment of the housing unit as a place of residence. If possession is given before substantial completion, the tax liability does not arise from self-supply until the time of substantial completion. In any case, substantial completion is deemed to occur no later than the time when 90% of the units in the complex are occupied.

Words and Phrases
substantial completion
Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 191 - Subsection 191(1) 211

23 February 1998 Interpretation HQR0000488

application of s. 191(9) where no substantial completion at time of first occupancy

In the course of a general discussion, CRA stated:

In the case of substantially completed multiple unit residential complex, the builder is treated as having made a taxable supply of the entire complex at the time the first unit is rented out. The builder is in this case also required to remit the GST on the fair market value of the complex at that time. If a multiple unit residential complex is not substantially completed for the purposes of the self-supply rules in subsection 191(3) of the Act, then subsection 191(9) of the Act treats the construction as having been substantially completed when 90% or more of the residential units therein are occupied after construction is begun.