Section 206

Aco changes its use of a building, which had been used 100% in making exempt supplies, so that thereafter it is used 90% for making exempt supplies and 10% in the course of commercial activities. Two years later, it further changes the building’s use so that it commences to be used 80% for making exempt supplies and 20% for commercial use. Can Aco claim a 10% ITC pursuant to: (a) s. 206(2) in the first scenario; and (b) s. 206(3) in the second?

The questioner noted that s. 197 indicates that changes of “less than 10%” are not to be taken into account, suggesting that a change of 10% is to be recognized for purposes of the change in use rules. However, s. 141 is to the effect that a use of 90% (under the CRA administrative practice) for exempt uses is equivalent to 100% for exempt use. S. 141 suggests that in the first scenario, Aco could not claim an ITC of 10%, whereas in the second scenario it could claim an ITC of 20%.

CRA responded:

While a change in use of 10% or more is normally considered to be a significant change in use (i.e. because section 197 considers any change of less than 10% to be insignificant), section 141 nevertheless considers that the entire use of the capital property is not commercial activities. In practice, therefore, there is no change in use.

Therefore, with respect to a registrant that is not a financial institution, subsection 206(2) only applies where the registrant begins to use capital property in commercial activities to an extent greater than 10%.

Therefore, Aco cannot claim an ITC when it begins to use 10% of its capital property in its commercial activities.

However, CRA went on to note that if Aco instead was a financial institution (to which the s. 141 rules do not apply), the rules in s. 206(2) would apply to the reduction in exempt use from 100% to 90% (and s. 197 would not apply because the percentage of use of the capital property assigned to commercial purposes was 10%., being a significant change in use), so that Aco would be entitled to claim an ITC for some of the tax that is deemed to have been paid pursuant to s. 206(2).

Regarding the second scenario, CRA stated:

Assuming that Aco is not a financial institution, the additional 10% use of capital property in its commercial activities, in addition to the first 10% change in use in its commercial activities, results in a significant cumulative change in use, allowing subsection 206(2) of the ETA to apply. In effect, Aco has changed its use of capital property from 100%, to 80% for exempt purposes and 20% for commercial purposes. Aco is therefore entitled to claim an ITC for some of the tax that is deemed to have been paid pursuant to subsection 206(2).

If Aco were a financial institution, it would have already begun using the capital property in its commercial activities after the first 10% change in use in its commercial activities. Under subsection 206(3) of the ETA, Aco is deemed to have received a supply of 10% of the capital property for use exclusively in its commercial activities and, assuming the supply is not an exempt supply, is deemed to have paid tax in respect of the supply. Aco is then entitled to claim an ITC for the additional 10% increase in use of the capital property in its commercial activities.

In a corporate reorganization involving a GST registrant that is engaged exclusively in commercial activities, assets are first transferred to a NewCo who immediately thereafter is amalgamated with another corporation ("SuccessorCorp") who will use the assets exclusively in a commercial activity. After noting the CRA position that NewCo may not be eligible to register or clqim ITCs, the question asked whether SuccessorCorp would be entitled to claim ITCs for GST that was payable by NewCo. CRA responded:

It appears that NewCo will not be engaged in commercial activity as defined in subsection 123(1) of the ETA. As a result, SuccessorCorp would not be eligible to claim ITCs with respect to the property that NewCo acquired unless SuccessorCorp is using the property in commercial activity and a change-in-use provision applies. For example, if all other conditions of the provisions are met, SuccessorCorp may be eligible to claim ITCs on the change of use of capital personal property under subsection 199(3) and of capital real property under subsection 206(2) based on the basic tax content of the property.

Change of use reflected in specified method applied to computer use

• Example (Example 13) of application of s. 206(3) so that a financial institution claims an ITC based on the commercial use of a computer increasing from 3% to 15% based on the number of employees, using dedicated portions of the computer, increasing due to changed product lines.

Deemed self supply resulting from naturopathic services becoming exempted after February 10, 2014

Where a decrease of 10% or more in the use of the capital real property in taxable activities occurs (but there is no cessation of use, which is described in the section below), a corporation or partnership that is a GST/HST registrant is deemed under subsection 206(5), immediately before the change in use occurs, to have sold a portion of the property that reflects the decrease in use in taxable activities. In addition, unless the sale is exempt, the corporation or partnership is deemed to have collected, at the time the change occurs, the GST/HST equal to the basic tax content of the property on the portion of the property that is no longer used in taxable activities.

As indicated above, the deemed sale effectively requires the registrant to account for all, or part, of the GST/HST previously claimed as an ITC on the original purchase of, or on any later improvements made to, the property.