26 September 2005 GST/HST Interpretation 63157 - Eligibility of two corporations to elect under section 156 of the Excise Tax Act

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

This is in response to your XXXXX regarding the application of subsection 208(4) of the Excise Tax Act (ETA) and our views as expressed in a memorandum to XXXXX XXXXX. All references are to the ETA.

As you suggest, the point of subsection 208(4) is to disallow input tax credits (ITCs) on improvements to real property of an individual should the property be used primarily for his or her personal use and enjoyment or that of a related individual. On review of your XXXXX, it would appear that the only source of contention might lie in the determination of "primarily" for purposes of subsection 208(4). I've attempted to address this by responding to your concerns (in bold font) point by point.

"... On page 3, the letter says "... it is our view that the deemed sale of the Property under subsection 208(4)) would generate a deemed acquisition ..." Then the rest of the comments re Scenario 1 indicate you view the Property to be not primarily for the personal use and enjoyment of the individual. Am I understanding that correctly?"

We did not take the view that the Property was not primarily for the personal use and enjoyment of the individual. We would agree with you that, based strictly on the limited facts described in Scenario 1, the Property was primarily for the personal use and enjoyment of the individual. However, as the scenario presented by the correspondent was hypothetical, we intended only to describe the GST/HST treatment of the Property where it is determined to be primarily for the personal use and enjoyment of the individual and where it is not (4th paragraph of the memorandum). The alternate treatments were considered in Scenario 1 under the subheadings, "Property primarily for the personal use and enjoyment of the individual" and "Property not primarily for the personal use and enjoyment of the individual". In the 4th paragraph of the interpretation provided in the memorandum, we indicated that Appendix A of GST/HST Memoranda Series Section 19.5, Land and Associated Real Property should be consulted in determining how a particular property is primarily used to ensure that all of the facts of a particular case are addressed and not only those identified in Scenario 1.

"... If so, can you explain for me a little more fully what factors helped you determine that a 1-acre Property with a house where the individual resides, with a detached garage used 60% in commercial activities, i.e. a relatively small part of the acre and/or structures is being used in commercial activity, can be viewed as being primarily used for commercial activities?"

Again, we did not make that determination; the memorandum was intended only to explain the GST/HST treatment in the case where the Property is, hypothetically, not found to be for the personal use and enjoyment of the individual. Please note that the guidelines delineated in Appendix A of GST/HST Memoranda Series, Section 19.5 indicate that it is entirely possible to employ criteria other than land area in determining how a particular property is primarily used (please see paragraph 7 of the Appendix for details). As such, there is a possibility, albeit remote, that other factors not identified in Scenario 1 could lead to a conclusion that the Property is not primarily for personal use and enjoyment of the individual. We acknowledge that for greater clarity it may have been best to address the GST/HST treatment by introducing a more appropriate fact pattern than the one provided to us in Scenario 1 to better illustrate the application of the GST/HST where the Property is not primarily for use and enjoyment of the individual.

"... If we're going to view every part of an appurtenance used in commercial activity to be not part of a "residential complex", it would help if you could provide an example or two where 208(4) would apply to deny [an] ITC in a situation where a person makes an improvement to his [residential] complex, i.e. an improvement to be used in commercial activity.

"... To me, the whole point and spirit of having 208(4) and 169(1) (B(b) part of formula) is to disallow ITC[s] in these cases where [someone's] property is mainly being used as a residence ..."

It would appear that we have a common understanding of how subsection 208(4) should function. With reference to the Property in Scenario 1 as described in the memorandum, subsection 208(4) would apply to preclude ITCs on improvements if it is determined that the Property (including the residential complex and any appurtenances that may or may not form part of the complex), is primarily for the personal use and enjoyment of the individual.

However, if (again, hypothetically speaking) upon review of Appendix A of GST/HST Memoranda Series, Section 19.5 one is able to determine the Property is, after putting part of the garage to use in a commercial activity, not primarily for the personal use and enjoyment of the individual, then the change-in-use provisions will cause the chain of events described in the first 3 paragraphs beginning on page 3 of the memorandum, under the subheading "Property not primarily for the personal use and enjoyment of the individual". Given the circumstances of Scenario 1, these events can be summarized as follows:

•   subsection 208(2) would apply to deem the individual to have received a supply by way of sale of the Property and, except where the supply is an exempt supply, to have paid tax in respect of the supply equal to its basic tax content (BTC);

•   the deemed sale of the Property under subsection 208(2) would generate a deemed acquisition of two separate properties by virtue of subsection 136(2); and

•   the deemed acquisition of the Commercial Portion would be taxable, whereas the deemed acquisition of the residential complex would be exempt.

Since subsection 208(2) deems the individual to have paid tax on the acquisition of the Commercial Portion equal to its BTC (based on a fair and reasonable allocation of the property's BTC), ITCs would become available on the Commercial Portion pursuant to subsection 169(1). The ITC claim would be based on the BTC of the Commercial Portion, which would include tax originally paid on the Property (if any) that is reasonably attributable to the Commercial Portion, plus any tax paid on improvements to the Commercial Portion.

Lastly, please note our position, as mentioned in footnote no. 4, that real property acquired as a combined supply of a residential complex and other property that is not part of the residential complex will continue to be recognized as separate properties even after subsection 136(2) has applied. This treatment would allow the Commercial Portion and the residential complex to continue to be recognized as separate properties. For a full explanation of our position on subsection 136(2), please see RITS 37913.

I hope this will be of some help. If you require further information or clarification please do not hesitate to contact me at (613) 952-8816.

2005/10/01 — RITS 63687 — Use of the Election in Section 156 of the ETA