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22. Joint use of subsection 190(2) and 136(2) of the ETA

In the Interpretation Letters 23-062957-001 (dated November 28, 2023) regarding GST/HST and QST rules for conversion and change of use in bed & breakfast operations, and 23-063179-001 (dated December 20, 2023) regarding GST/HST and QST interpretation for change of use in mixed-use properties, Revenu Québec appears to indicate that when a property includes both a residential complex and a non-residential portion, and the non-residential portion is appropriated for personal use by the owner (who is an individual), subsections 136(2) and 190(2) of the ETA can be used together.

Questions

  1. Can you comment on the joint application of these two subsections in such a case?
  2. Can you explain why the CRA considers that subsection 136(2) of the ETA cannot be used jointly with subsection 190(1) of the ETA when analyzing the latter provision?

CRA Comments

Subsection 136(2) provides that where a supply of real property includes a residential complex (the “Residential Part”) and other real property not part of the residential complex (the “Other Part”), the provision of the Residential Part and the Other Part are each deemed to be separate properties, separate supplies, and neither supply is incidental to the other. As such, where the last acquisition (including a deemed acquisition) by a person was a combined supply such that subsection 136(2) applied at the time of acquisition, subsection 136(2) will continue to apply on an ongoing basis, subject to a subsequent change-in-use of the real property.

Subsection 190(2) requires that immediately before the property is appropriated for the personal use or enjoyment of the individual,3 the property:

  1. was held for supply, or was used or held for use as capital property, in a business or commercial activity of the individual, and
  2. was not a residential complex.

As noted above, where the last acquisition by a person was a combined supply such that subsection 136(2) applied at the time of acquisition, subsection 136(2) will continue to apply causing the Residential Part and the Other Part to be separate properties of the person subsequent to acquisition.

Where there is an appropriation of the Other Part by the individual, this will permit it to meet those two conditions even though at the time of the appropriation the converted part becomes part of a residential complex that includes the original residential complex.4 Specifically, this is because these two conditions only need to be met immediately before the appropriation occurs.

In such a case where subsection 190(2) applies, it would deem the individual to have made and received a taxable supply by way of sale of the property (the Other Part) immediately before the time of the conversion, and to have paid and collected tax in respect of the supply based on the fair market value of the property (the Other Part) at the time of conversion.

The difference in the application of subsection 190(1) to a property that was previously subject to subsection 136(2) stems from the different wording used in that provision.

Pursuant to subsection 190(1), where a person begins to hold or use real property as a residential complex, the person may be deemed to be a builder who substantially renovated the complex. For these deeming provisions to apply, all of the following conditions must exist:

  1. the property was
    1. last acquired by the person to hold or use as a residential complex, or
    2. immediately before that time, held for supply, or used or held for use as capital property, in a business or commercial activity of the person,
  2. immediately before that time, the property was not a residential complex, and
  3. the person did not engage in the construction or substantial renovation of, and is not, but for section 190, a builder of, the complex.

A “residential complex” is defined in subsection 123(1), in part, as “...that part of a building in which one or more residential units are located.” Where a building has more than one residential unit within it, the residential complex is the aggregate of all the residential units therein. Except where the building contains units that are, or are intended to be, separate parcels or other division or real property owned or intended to be owned apart from other units in the building (such as in a condominium complex), there will not be multiple residential complexes in a building, rather, all the residential units would together form a single residential complex.

It is our opinion that, since the former Other Part becomes part of the existing residential complex once it is converted to personal use, the condition present in the preamble as well as in paragraph 190(1)(b) would not be met. More specifically, the 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 Other Part was deemed a separate property per subsection 136(2),5 immediately before the Other Part is converted to personal use, that specific property was not a residential complex. However, since there is already a residential complex in the building, the Other Part 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.

Accordingly, the deeming provisions of subsection 190(1), which would have potentially deemed the person to be a builder and to have substantially renovated the residential complex (which includes the former Residential Part), would not apply in such situations.

End Notes

3 Or for the personal use or enjoyment of another individual related to the individual or a former spouse or common-law partner of the individual.

4 Where the appropriation by the individual was for use as additional space in their place of residence.

5 Where the last acquisition (including a deemed acquisition) by a person was a combined supply such that subsection 136(2) applied at the time of acquisition, subsection 136(2) will continue to apply on an ongoing basis, subject to a subsequent change-in-use of the real property.