A builder-operator will typically acquire land upon
which it will build a residential care facility or
engage another person to do so (such as a general
contractor). The builder-operator should register for
GST/HST before acquiring the land or incurring any costs
regarding the construction of the facility. By doing so,
the builder-operator will be entitled to recover the HST
payable on the purchase of the land and the costs
relating to the construction of the facility by claiming
input tax credits (“ITCs”) during the construction
phase, which is a significant benefit from a cash-flow
perspective.
To receive its tax refunds earlier, the builder-operator
should elect to file its GST/HST returns on a monthly
basis (as opposed to quarterly or annually). During the
construction phase, the builder-operator should not
claim ITCs for HST on costs that do not relate to the
construction of the facility (e.g., furniture, hiring
and training facility operations staff and promotional
expenses to attract potential tenants). The CRA is
unlikely to consider these costs related to the
construction of the facility and, therefore, will deny
ITC’s for HST on those costs.
Once construction of the facility is substantially
completed, and the first tenant moves into the facility,
the builder-operator is usually required to self-assess
13% HST calculated on the fair market value (“FMV”) of
the facility at that time. The builder-operator is
considered to have made a taxable sale of the facility
to itself (i.e. a self-supply) and is required to remit
to the CRA the HST deemed to have been paid and
collected on that sale.
The builder-operator may also be entitled to claim the
New Residential Rental Property (“NRRP”) rebates to
recover a portion of the HST payable on the self-supply
of the facility. The following section provides
additional details on the NRRP.
After the self-supply date, the builder-operator would
cease to be a “builder” and become solely the “operator”
of the residential care facility. As such, the operator
would no longer be able to claim ITCs and should
consider whether it should deregister for GST/HST
purposes. [See the “Other GST/HST considerations”
section.]
If you purchase a newly-built residential care facility
The sale of a newly-built residential care facility will
generally be subject to GST/HST whereas the sale of a
used residential care facility will normally be GST/HST
exempt. As the facility will be situated in Ontario13%
HST would be payable on the purchase price of the
facility.
As noted earlier, the purchaser may be entitled to claim
the NRRP rebates to recover a portion of the HST
payable. The purchaser may file the NRRP Rebate
applications within two years after the end of the month
during which HST became payable on the purchase, but
must satisfy some other conditions.
The NRRP rebates in Ontario include a federal component
and an Ontario component. Both rebates are calculated
based on the FMV at the time of purchase of each
qualifying residential unit (generally, each
bedroom/suite) within the facility. For units with a FMV
of $350,000 or under, the federal rebate is equal to
1.8% of the FMV of the unit.
For units with a FMV between $350,000 and $450,000, the
federal rebate is gradually reduced. No federal rebate
is available for a unit having a FMV of $450,000 or
more.
The Ontario rebate is equal to 6% of the FMV of each
unit up to a maximum rebate of $24,000 for a unit having
a FMV of $400,000 (i.e. 6% x $400,000). The Ontario
rebate is not reduced if the FMV of the unit exceeds
$400,000; it remains at $24,000.
The purchaser of a newly-built residential care facility
will generally never have to register for GST/HST
purposes given the GST/HST exempt nature of the rental
of residential units and related services that are
typically provided to the tenants of a residential care
facility. However, there may be other GST/HST
considerations, which are clarified in the following
section.
Other GST/HST considerations
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It is not always
clear if the operator of a residential care facility
provides solely GST/HST-exempt services. There may
be circumstances in which an operator also provides
GST/HST taxable services or accommodation (for
example, offering optional cable television) or
where part of the facility is used for commercial
purposes unrelated to the use of the facility as a
place of residence (such as operating a convenience
store or a bar within the facility or leasing space
to the operators of such outlets). A thorough
analysis of all the facts may be necessary to
determine if the operator should remain GST/HST
registered and charge the tax.
-
The FMV of the
residential units for purposes of the self-supply by
a builder-operator is extremely important as it is
the basis upon which the HST and the NRRP rebates
are calculated. The determination of the FMV is
dependent on estimates, and different methodologies
may be used resulting in different conclusions. The
CRA is not bound to accept the FMV determined by the
builder-operator, even if the builder-operator has
engaged a professional appraiser. In our experience,
the CRA has challenged the GST/HST filings of many
self-assessments and the builder-operator should be
prepared to deal with the audit of same and its
implications.
Conclusion
There are many GST/HST implications associated with the
construction or purchase of a new residential care
facility by a builder-operator. To summarize, the key
factors include:
i) whether a cost relates to the construction of the
facility (eligible for ITCs) or to the future operation
of the facility (not eligible for ITCs),
ii) the appropriate date that the self-supply takes
place, which triggers a tax liability and the ability to
claim partially offsetting rebates, and
iii) the FMV of the facility.
It is also important to comply with the various
conditions to claim those rebates and, finally, to
understand the nature of the services provided to the
residents of the facility going forward. There may be a
requirement to maintain GST/HST registration and charge
same. This topic will be addressed in a future article.
Please note that this article should not be considered a
substitute for personalized tax advice related to your
particular situation. We strongly recommend that you
discuss these changes with your Crowe Soberman advisor.
Source:
Mondaq News Alerts, dated 31/10/2015. |