In general, property owners look to their own activities in determining the taxable status of their use of the property under the Excise Tax Act (ETA). Landlords who lease their property for commercial purposes are typically considered to be making taxable supplies, and accordingly would charge GST/HST on their rents, pay GST/HST on purchases in connection with the supply, and claim input tax credits (ITCs). In some cases, however, the characterization of the landlord’s use of the property may depend on its tenant’s use.
The case of Prima Properties (92) Ltd. v. The Queen (2019 TCC 4) dealt with a situation in which a landlord was reassessed not because of its own change in use, but because of a tenant’s change in use which was attributed back to the landlord. Luckily for the landlord in this case, the Minister’s reassessment was made beyond the normal four-year reassessment period. As a result, and pursuant to subsection 298(4) of the ETA, the burden was on the Minister to show that the landlord made a misrepresentation attributable to its “neglect, carelessness or willful default” in its return for the reporting period in issue.
The Tax Court of Canada held that the Minister did not have sufficient evidence to show that there was a change in use by the tenant, so the court was not satisfied that there had been a misrepresentation. Further, the TCC stated that even if there had been a misrepresentation, it was not attributable to any negligence or carelessness on the part of the taxpayer landlord. However, the outcome for the taxpayer may have been different if the Minister had reassessed within the normal reassessment period. This case therefore serves as a warning for commercial landlords to be aware of their tenants’ activities and the corresponding GST/HST consequences that may result from a change in a tenant’s use.
Prima Properties was a commercial landlord that purchased and leased a building to a company that operated the property as a hotel. Subsequently, Prima entered into a lease with a new tenant, PHS Community Services Society. PHS was a non-profit organization that operated housing projects and support programs, and it indicated to Prima that it would use the property to provide housing for homeless individuals. Prima charged and reported GST/HST on the rent paid by PHS and claimed ITCs in respect of the lease.
The PHS lease began on May 1, 2010. On June 10, 2016, the Minister reassessed Prima on the basis that when the prior lease ended and the PHS lease began, there was a conversion of the property from commercial to residential use. The Minister therefore claimed that at that time, there was a deemed self-supply of the property and a requirement to have collected GST on the sale, pursuant to subsection 206(4) of the ETA. The Minister initially said that there was a self-supply under subsection 190(1), but later amended its position on the basis that subsection 206(4) was the appropriate provision. In addition, the Minister disallowed ITCs claimed after the start of the PHS lease, which the landlord ultimately decided not to challenge. Therefore, the only issue before the court was the GST reassessment on the deemed self-supply under subsection 206(4).
In taking the position that there was a change in use, the Minister alleged that PHS was making exempt supplies under paragraph 6(a) of Part I of Schedule V of the ETA. This provision indicates that a supply is exempt where it is a supply “of a residential complex or a residential unit in a residential complex by way of lease, licence or similar arrangement for the purpose of its occupancy as a place of residence or lodging by an individual, where the period throughout which continuous occupancy of the complex or unit is given to the same individual under the arrangement is at least one month”. The Minister argued that the leases, licences, or other similar arrangements under which PHS gave possession of the units to the homeless individuals was for periods of more than one month, as indicated in PHS’s operations management plan. This document also referred to the operation of the property as a “long-term supportive housing project”.
Pursuant to the “head lease” exemption in section 6.11 of Part I of Schedule V, a supply of a residential complex (or part of a residential complex) by way of lease, licence or similar arrangement to a person who uses or intends to use the property to make exempt supplies is itself exempt. The Minister’s position was that by leasing the property to PHS, who was making exempt supplies using the property, Prima’s supplies under the PHS lease were also exempt under section 6.11.
The making of exempt supplies is excluded from the definition of “commercial activity” in subsection 123(1) of the ETA. Therefore, the change from the prior use of the property as a hotel to the making of exempt supplies would be a change in use that triggers the self-supply provision in subsection 206(4) of the ETA. Subsection 206(4) applies where a registrant last acquired property for use in commercial activities and then begins to use the property exclusively for other purposes, and it deems the registrant to have sold and reacquired the property at this time and to have collected GST on the sale.
The alleged change in use occurred in 2010, and the CRA reassessment was not made until 2016, which was beyond the 4-year time limit for reassessments in subsection 298(1) of the ETA. In order to reassess beyond the 4-year limit, the Minister was required to show that Prima made a misrepresentation attributable to neglect, carelessness or wilful default pursuant to subsection 298(4).
The TCC held that there was no misrepresentation because the Minister failed to meet its burden of showing a change in use. There was insufficient evidence provided to show that PHS was intending to rent the units on a long-term basis (i.e., for periods of over one month, as required under paragraph 6(a) of Part I of Schedule V) rather than just as transitory housing until the homeless individuals could find something more permanent. Further, the TCC held that even if there was a misrepresentation and Prima was required to report a deemed self-supply, the evidence did not support the conclusion that Prima’s representative, in acting for the company, was careless or negligent in making the misrepresentation. The TCC found it to be significant that Prima did not change its own use of the property – it was still entering into a commercial lease of the whole property, and it had no further involvement in the day-to-day operations of the tenant. It was reasonable that Prima’s representative saw no difference between the two leases. Also, the fact that PHS’s intended use of the property would trigger GST consequences is not something that a lay person would reasonably be expected to know: the relevant provisions of the ETA are highly technical, complex, and challenging to understand even for lawyers and accountants, let alone for someone without a professional legal or accounting background. The Minister therefore did not meet its burden to show that a reasonable person would have known to make inquiries about the issue of self-supply or change in use. (Arguably, Prima’s accountant was careless or negligent in making the misrepresentation, but this was not sufficient to reopen a statute-barred return – there must be carelessness or negligence on the part of the taxpayer itself.)
In this case, the taxpayer was fortunate that the Minister’s reassessment took place beyond the normal time limit. Otherwise, the burden would not have shifted to the Minister to show misrepresentation, and in those circumstances, it is possible that the Minister would have prevailed. The clear takeaway is for commercial landlords to get advice when determining how GST/HST applies to their rents. Here, a look-through provision could apparently apply to create a change in use even if the landlord itself had not changed its use of the property. (And arguably, the proper analysis is even more complicated, and was not even touched on by the TCC in its judgement.)
Where the look-through rules properly apply, they can lead to counterintuitive results that have the potential to catch commercial landlords unawares — and leave them on the hook for a significant GST/HST assessment.
Robert G. Kreklewetz is a Partner and Rebecca Loo is an Associate at Millar Kreklewetz LLP.