Section 191

The definition of “builder” in s. 123(1) includes a person who carries on the “construction” of a “residential complex,” which is defined to include that part of a building which is a residential condominium unit, thereby potentially triggering self-assessment under s. 191.

An individual with an interest in a multiple unit residential complex (“MURC”) converts the MURC into condominium units (intended for residential rental), so that the legal ownership of the units is changed and there are physical alterations to the MURC units (but without substantial renovation of the MURC).

a) Does conversion of a MURC into condominium units without substantial renovation constitute “construction” of a residential complex, namely, residential condominium units?

b) Does the answer depend on whether the conversion changes the number of units, e.g., converting a 4-unit MURC into a 5-unit condominium complex?

c) If this constitutes construction of a residential complex, would 5, or only the 1 additional unit, be considered to be constructed?

d) If there is construction of a residential complex, is there an exemption from self-assessment under s. 191(1) upon residential rental?

a) CRA indicated that “construction” is “the creation of something new, and can be distinguished from repair, improvement, recombining or rearranging of something that already exists.”

After indicating that under the definition of the term, “only intention is required for there to be a residential condominium unit,” CRA stated that [w]here there is an intention to create residential condominium units in a building, the CRA would determine separately whether each residential condominium unit was constructed or substantially renovated for purposes of subsection 191(1) of the ETA, rather than whether the MURC as a whole was constructed or substantially renovated for purposes of subsection 191(3) of the ETA.

b) CRA stated:

Whether the conversion of a MURC into residential condominium units constitutes “construction” or a substantial renovation of a residential condominium unit does not depend on whether there is a change in the number of units, but rather on the work performed on a particular residential condominium unit in the condominium complex. … A substantial renovation is generally considered to have taken place where all or substantially all of the interior of a residential condominium unit has been removed or replaced and, upon completion, the renovated or altered unit is, or forms part of, a residential complex.

c) CRA stated:

Where a conversion occurs, the number of units the person is considered to have constructed or substantially renovated is a question of fact that depends on the work performed on each individual unit.

d) CRA indicated that the only exemptions from the self-assessment rule in s. 191(1) were those in ss. 191(5) to (7).

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.

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.

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.

CRA was described as denying builders of purpose-built residential rental housing ITCs for GST/HST paid on appliances (fridge, stove, dishwasher and washer/dryer) for each unit and furniture, fixtures [sic] and equipment (FF&E) for common areas on the basis that the appliances and FF&E are for use in making an exempt supply of a rental. However, on the later of first rental and substantial completion there is a deemed self-supply by the builder, so that all inputs to bring the building to such state are for use in commercial activity). On what basis does CRA distinguish appliances and common area FF& E from all other building inputs, such as windows, doors and flooring?

After discussing the common law as to when personal property becomes a fixture and thus becomes annexed to the real property, CRA stated:

Any property inside a residential complex that remains personal property would not form part of the residential complex. Consequently, appliances and common area furniture and equipment that are not fixtures to the real property and remains personal property, would not be included as inputs in the construction of the residential complex.

At a prior Roundtable, CRA indicated that on receipt of a builder's objection to a reassessment under s. 191(3), where the issue is the FMV of the property, the Appeals Branch will automatically refer to, or otherwise involve, a different appraiser than the particular appraiser who performed the valuation for CRA Audit.

When asked for confirmation that CRA Appeals Officers have been made aware that, on an appeal, the valuation issue should be referred to a second appraiser, rather than the original appraiser, CRA described its educational and review processes in this regard.

When asked whether “the Appeals Officer be required to obtain a full second appraisal of the property from a different appraiser in the CRA Appraisal Group,” CRA responded:

Where the Objector provides a new valuation or appraisal report at the Objection Stage, the Appeals Officer in discussion with their Team Leader will request assistance from the Regional Real Estate Appraisal section. They may assign a valuator or appraiser, other than the individual who prepared the value conclusion at the audit stage, who will perform the review and prepare the appropriate report to ensure impartiality and objectivity. If the new report includes additional information that was not previously available to the CRA valuator or appraiser, the existing CRA report will be updated.

When asked whether “neither (a) the original CRA Real Estate Appraiser nor (b) any appraiser within the same group/office of the initial CRA appraiser will be involved or provide input respecting the objection or appeal and that if CRA’s Appeal Division requires input in respect of the GST-registrant’s Objection or Appeal, such advice will be provided by a wholly independent CRA appraiser from a different CRA Real Estate Appraisal Group/Office, without contact with … the initial CRA appraiser,” CRA responded only by indicating that its appraisers were required under their professional standards to be impartial and unbiased.

The definition of “fair market value” in s. 123(1) excludes those taxes that are excluded by s. 154 from the value of consideration paid for a supply, so that GST/HST is not to be included in the fair market value of a MURC under s. 191(3).CRA’s auditors are reluctant to accept that a valuation that is derived under the “direct comparison method” and the “discounted cash flow” method (income method) are inclusive of GST/HST. Does CRA agree that where the “income method” is used to determine the FMV of a MURC, that the FMV thereby derived should be considered to be inclusive of GST/HST, so that such GST/HST should then be backed out for purposes of coming to a reduced corrected FMV for purposes of s. 191(3)?

CRA responded:

It is the CRA’s position that the fair market value (FMV) derived from the income approach is net of GST/HST assuming the market comparables used in deriving the overall capitalization rate (OCR) are exempt sales.

It is important to distinguish between GST/HST imposed under Part IX in respect of a taxable supply and an amount in respect of GST/HST that may be imbedded in the consideration for a supply as a result of the GST/HST having been imposed at an earlier time.

Section 154 refers to the GST/HST imposed under Part IX in respect of a taxable supply, not to any amount imbedded on account of HST that may be attributable to a prior supply. Therefore, when arriving at FMV, section 154 does not provide a legislative basis to discount the consideration of an exempt supply in an attempt to remove an amount imbedded in the consideration of that supply.

For example, where the consideration of a taxable supply of a residential complex is used as a comparable in a valuation methodology, the GST/HST imposed on that supply, even where the supply was “GST/HST included”, is excluded from the consideration. However, if a comparable used in the valuation method is an exempt sale of a residential complex, section 154 does not permit the consideration of that exempt sale to be discounted to remove an amount imbedded on account of HST as a result of a prior taxable supply.

Where a person is the operator of a joint venture for the construction of a multiple-unit residential complex by virtue of having managerial or operational control of the JV and does not have an interest in the real property on which the MURC is situated, CRA indicated that such operator cannot account for the GST/HST tax on the deemed self-supply under ETA s. 191(3) (on substantial completion and first tenant occupancy), and claim the new rental housing (s. 256.2(3)) rebate. Its reasoning:

Based on … the operator … not hav[ing] an interest in the real property on which the MURC is situated, the operator does not meet the conditions set out in paragraph (a) of the definition of “builder.” The CRA will not administratively accept that a person is a builder of a MURC for GST/HST purposes where the person does not meet the conditions set out in the definition of “builder.”

Where a builder was invoiced, after the time that it self-assessed for the fair market value of a newly-constructed multiple unit residential complex (at the time of substantial completion and first tenant occupancy) for work done before that time, CRA explained the availability of an input tax credit therefor on the basis that, by virtue of s. 133:

where a builder of a MURC agrees to acquire property or a service for consumption or use in constructing the MURC, the supply of the property or service is generally considered to be made to the builder at the time that the agreement is entered into (that is, the builder is considered to be the recipient of the supply at that time).

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.

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.

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.

A person other than an individual with an interest in a multiple unit residential complex (“MURC”) physically reconfigures the space within the MURC so that new residential units (intended to be rented for individuals’ residential use) are created, but without substantial renovation of the MURC and without expanding the building envelope.

a) How should the meaning of “addition” be interpreted in the context of a MURC?

b) Does internal reconfiguration of a MURC resulting in new residential units but not expanding the building envelope not constitute an addition to the MURC?

c) Where there is an addition to a MURC requiring self-assessment, does CRA agree with Revenu Quebec’s statement (TVQ.226-1/R12, June 29, 2012) that the fair market value does not include the original land if the addition is constructed on the original land that was reasonably necessary for the residential use of the existing building?

CRA responded:

a) … Paragraph (a) of the definition of “residential complex” … includes that part of a building in which one or more residential units are located. In this context, the CRA would consider the construction of an addition to a multiple unit residential complex (MURC) that expands the building envelope of the existing MURC to be the construction of one or more “residential units” as defined in subsection 123(1) of the ETA.

b) An internal reconfiguration of units within a MURC which results in new residential units but which does not expand the building envelope is not considered to be the construction of an addition to a MURC.

c) Where there is a construction of an addition to a MURC requiring self-assessment under subsection 191(4) of the ETA, the fair market value of the addition under paragraph 191(4)(e) of the ETA would not include the land if the addition to the MURC is constructed on land that is contiguous to the existing building and that was reasonably necessary for the use and enjoyment of the existing building as a place of residence for individuals.

An individual (A) purchased a property in trust with other individuals including her husband (B), for development as a condominium complex. On completion of construction, A and B took title to two of the units (Units 1 and 2) jointly, with a view to using the two units functionally as a single place of residence (with sleeping quarters in one unit and living quarters in the other) - and (“Fact 5”) the units 1 and 2 will not be used for any other purpose between the time of construction and A and B moving in, and no ITCs will be claimed on the construction of the units.

After noting uncertainties as to whether the two units constituted two, or a single, residential complex, and a single place of residence, CRA stated:

If each of Unit 1 and Unit 2 is a residential complex, and if each of A and B is a builder of each unit, then both A and B are subject to the self-supply rules of subsection 191(1) of the ETA. However, as long as a builder of the residential complex, whether it is A or B, or a related person (recall A and B are related as spouses) uses the unit primarily as a place of residence, and otherwise satisfies the conditions of subsection 191(5) of the ETA, they will be excluded from having to make a self-supply under any of subsections 191(1) to (4).

In other words, for each unit that qualifies as a residential complex, if either A, B, or both A and B uses the unit primarily as a place of residence, both A and B as builders and owners of the unit will be excluded from having to make a self-supply under any of subsections 191(1) to (4) of the ETA per virtue of the personal use exception of subsection 191(5), provided they meet all the other requirements at paragraphs (a) to (d).

In that regard, while Fact 5 provides an indication that the condition of paragraph 191(5)(c) of the ETA is met, under certain circumstances, this may not be the case, particularly if there is partitioning of the builders’ undivided interest in the real property or condominium units prior to possession of the units by the builders. …

If A and B are not builders of a residential complex because of paragraph (f) of the definition of “builder” … they will not be subject to the self-supply rules in any of subsections 191(1) to (4), and accordingly, they will not be subject to the personal use exception in subsection 191(5).

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.

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.