Subsection 190(1) - Conversion to Residential Use
Administrative Policy
7 April 2022 CBA Roundtable, Q.9
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.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Excise Tax Act - Section 195.1 - Subsection 195.1(1) | s. 195.1(1) could not apply where a commercial unit in an apartment building was converted to additional apartment units | 300 |
| Tax Topics - Excise Tax Act - Section 206 - Subsection 206(4) | s. 206(4) rather than s. 191 applied where a commercial unit in an apartment building was converted to additional apartment units | 238 |
5 March 1998 Headquarters Letter RITS HQR0000928
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.
Paragraph 190(1)(e)
Administrative Policy
GST/HST Memorandum 19.2 “Residential Real Property” February 1998
Meaning of “place of residence”
15. “Place of residence” is a key concept in the definitions of “builder”, “residential complex”, “residential unit” and “short-term accommodation”. Also, as discussed in Section 19.2.3, Residential Real Property—Deemed Supplies, place of residence is a key concept in the application of the change-in-use rules under section 190 (conversion to residential use) and the self-supply rules under section 191 as GST/HST liability under these sections is triggered only if the tenant occupies the complex as a place of residence, rather than as a place of lodging.
Residence vs. lodging
Policy statement P-13016. The meaning to be attributed to a “place of residence”, as opposed to “lodging”, is based on a determination of the purpose of the stay, the amount of time of the stay, and physical presence. In considering these factors, the following principles need to be considered:
No vacation/transient purpose
(a) While an individual has only one primary place of residence, it is possible for an individual to have more than one place of residence. To be considered an individual's place of residence, the place should be used for purposes of habitation or dwelling, but would not normally include an abode of a transient nature. (For example, subject to other factors considered below, short-term hotel accommodation would not normally be considered an individual's place of residence.)
Indicators of permanency
(b) Factors which indicate that a place is a person's place of residence and not being used for transient purposes include:
- the place in question is the only residence of the individual;
- the individual who is the occupant owns or leases the premises, as opposed to occupying the premises under a licence (such as a hotel room);
- if leased, the lease entered into between the landlord and tenant is of a long-term nature;
- the place is furnished by the occupant;
- the occupant is responsible for payment of utilities;
- there has been a change of address for postal, municipal/school tax and other purposes (e.g., driver’s licence, medical insurance);
- there is a telephone listing for the occupant at the place of residence;
- the individual has taken out an insurance contract for the home and/or its contents.
…
Examples
Example 1
An individual leases a cottage in the country on a continuous basis over several years. The cottage is fully furnished by the individual, and the individual's personal belongings (such as most of his casual clothing and his sports equipment for fishing and skiing) are located in the cottage. The individual occupies the cottage only one weekend a month. The rest of the time, the cottage remains unoccupied or is occupied occasionally (for a weekend) by a friend or relative of the individual. This cottage qualifies as a place of residence of the individual since he has his personal belongings there and will use the cottage for an indefinite period of time. (It is not likely, however, that this is his “primary” place of residence.)
Example 2
An individual rents a cottage in the country for a month from a co-worker. The individual brings clothing, groceries, hiking equipment and her reference guides to birds and wildflowers. She occupies the cottage for the entire month. In this situation, the cottage is not being occupied as a place of residence of this individual as the stay is of a transient and temporary nature. Rather, it would be considered to be a place of lodging.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Residential Complex | 233 | |
| Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Residential Unit | 61 |