Subsection 256.2(3.1) generally provides that the GST/HST rental rebate that is paid under subsection 256.2(3) is enhanced to 100% of the GST in situations where there is a taxable supply of “purpose-built rental housing – being prescribed property”; prescribed conditions are met; and if:
- the taxable supply is a supply by way of sale of a residential complex or an interest in a residential complex to a person that is not a builder of the residential complex, or of a residential complex or an addition to a residential complex to a person that is, otherwise than by reason of subsection 190(1), a builder of the residential complex or addition, as the case may be, and the construction or last substantial renovation of the residential complex or addition, as the case may be, begins after September 13, 2023 but before 2031 and is substantially completed before 2036; or
- the taxable supply is a supply by way of sale of a residential complex that is deemed to be made to a person that has converted real property for use as the residential complex and is, as a result, deemed under subsection 190(1) to be a builder of the residential complex and the construction or alteration necessary to effect the conversion begins after September 13, 2023 but before 2031 and is substantially completed before 2036.
In the following situation, please advise if the requirement for construction to begin after September 13, 2023 would be satisfied:
- In 2021, Corporation A commenced excavation and shoring of a residential complex with the intention that it would be comprised exclusively of condominium units.
- Corporation A’s sole intention was to construct the residential complex to make taxable sales of the newly constructed condominium units and, consistent with this intention, Corporation A entered into agreements of purchase and sale with prospective purchasers (i.e., Corporation A did not intend on constructing the condominium units to rent the units to tenants).
- By mid-2023, Corporation A was facing financial difficulties and in December 2023, a “receiver”, as the term is defined in subsection 266(1) of the ETA, was appointed to operate and manage the property.
- Prior to Sept. 13, 2023, all construction activities ceased and the construction site was boarded up.
- At the time Corporation A ceased all construction activities, there was a 10-storey concrete shell located on the property (the Building Shell).
- From August 2023 until August 2024, the property remained dormant, and no further construction was undertaken to the Building Shell.
- In August 2024, the land and Building Shell were sold by the receiver (on behalf of Corporation A”) to an arm’s length party (Corporation B).
- Corporation B has not commenced any construction activities and is considering various alternatives relating to the further development of the property including (i) continuing the project as a condominium project; (ii) demolishing the Building Shell and selling the land; or (iii) changing the project to a long-term rental project that involves Corporation B using the existing Building Shell to construct a “multiple unit residential complex”, as defined in subsection 123(1), that will result in Corporation B making a deemed supply of the residential complex pursuant to subsection 191(3) of the ETA.
- In order for Corporation B to proceed with alternative (iii) – namely, using the existing Building Shell to construct a “multiple unit residential complex” for rental purposes, Corporation B will need to (i) review building plans and unit layouts to determine feasibility as a rental building; (ii) engage contractors to complete the construction; (iii) engage a 3rd party property manager; and (iv) enter into leases with tenants for the occupancy of the units as their place of residence for periods of 12 months.
- Once construction of the multiple unit residential complex is completed, it can be assumed that (i) each unit being leased to a tenant will be a “qualifying residential unit” as defined in subsection 256.2(1); (ii) the multiple unit residential complex will be a “purpose-built rental housing – being prescribed property” as defined in subsection 4(2) of the Real Property (GST/HST) Regulations; and (iii) construction of the multiple unit residential complex will be completed before 2036.
Analysis
To qualify for the enhanced rebate, there are different requirements that apply with respect to (i) properties that undergo a “conversion”; and (ii) new construction of an apartment building that does not satisfy the conversion rules.
A. Conversion rules
With respect to conversions, paragraph 256.2(3.1)(b) requires Corporation B to be deemed to be a “builder” pursuant to subsection 190(1) of the residential complex and paragraph 4(1)(b) of the Real Property (GST/HST) Regulations imposes, as a “prescribed condition”, a requirement for the property that is being converted for use as the residential complex to be, on September 13, 2023:
- in existence;
- not in the process of being constructed; and
- not being used as a residential complex.
Although Corporation B will be converting the project to a long-term rental project, it does not appear that Corporation B will be eligible to obtain the enhanced rebate pursuant to the conversion rules as Corporation B would not be deemed by subsection 190(1) of the ETA to be a “builder” as Corporation B cannot say that it “did not engage in the construction or substantial renovation of, and is not, but for this section, a builder of, the complex”. Rather, Corporation B would be considered a “builder”, as defined in subsection 123(1), of the residential complex since it is engaging another person to carry on for it the construction of the multiple unit residential complex. Although construction ceased prior to September 13, 2023, it is also possible that the “prescribed conditions” may not be satisfied on the basis that the residential complex was in the process of being constructed.
B. New Construction rules
For a newly constructed multiple unit residential complex to qualify for the enhanced rebate, paragraph 256.2(3.1) requires construction of the residential complex to begin after September 13, 2023. In GST/HST Notice 336, the CRA states that “generally” construction commences at the time excavation work relating to the residential complex begins. Although Corporation A ceased all construction activities in August 2023, Corporation A commenced construction of what it intended would ultimately be a residential complex prior to September 14, 2023. The issue is whether paragraph 256.2(3.1)(a) should be interpreted in a manner which accepts the fact that construction of a project can cease and a new owner, with entirely different intentions (i.e., the intention to construct a rental property when the original owner had no such intention), can be said to commence construction of a residential complex at a later date particularly when all construction activities ceased prior to September 13, 2023 and a receiver was appointed to sell the property through an auction process.
Given that the object and purpose of the enhanced rebate is to encourage builders to construct “purpose-built rental housing”, it is submitted that paragraph 256.2(3.1)(a) should be interpreted broadly such that the requirement for “construction to begin after September 13, 2023” should be interpreted based on what the particular owner of the property does with the property on and after September 14, 2023. In particular, in situations where the construction of a residential complex commenced prior to September 14, 2023 and construction of the property has clearly ceased prior to September 14, 2023, we believe that an arm’s length party that acquires the property can be considered to have commenced construction of a residential complex at a later date.
In this respect, when a person acquires land on which a building is partly constructed and has remained in that state for a significant period of time, they are under no obligation to construct a residential complex nor “purpose-built rental housing”. Accordingly, to the extent the person decides to use the partly constructed building (i.e., the Building Shell) to construct purpose-built rental housing and they retain a third-party contractor to commence construction by completing the project, we believe that construction of the residential complex should be considered to have commenced after September 13, 2023.
Based on the foregoing, please confirm that Corporation B would be considered to have started construction of the residential complex after September 13, 2023 and that the activities conducted by Corporation A would not taint Corporation B from qualifying for the enhanced rebate when Corporation A ceased all construction activities prior to September 14, 2023.
CRA Comments
A. Conversion rules
We agree that Corporation B will not be eligible for the enhanced rebate, now referred to as the purpose-built rental housing (PBRH) rebate, pursuant to the “conversion rules” found in subsection 190(1). The rules in subsection 190(1) apply where a person converts non residential real property into a residential complex without constructing or substantially renovating the complex and the person is not, but for subsection 190(1), a builder of the complex.
As a residential complex is in the process of being constructed and Corporation B is a builder of the complex in accordance with paragraph (b) of the definition of builder in subsection 123(1), the rules in subsection 190(1) do not apply.
Therefore, paragraph 256.2(3.1)(b) does not apply and the prescribed conditions described in paragraph 4(1)(b) of the Regulations are not relevant.
B. New Construction rules
The PBRH rebate may be available for the GST or federal part of the HST payable in respect of a taxable supply of purpose-built rental housing, subject to certain conditions. One of those conditions requires that the construction of a multiple unit residential complex begins after September 13, 2023, but before 2031, and is substantially completed before 2036.
For purposes of the PBRH rebate, the CRA generally considers construction to begin at the time the excavation work related to a multiple unit residential complex begins.
The timing of when construction begins in subsection 256.2(3.1) does not refer to a particular builder who begins construction of a residential complex. Therefore, it does not matter who begins construction of the residential complex but rather when construction was begun by anyone.
Where construction had already begun for a particular building (Building A) and the work is used instead to construct a different building (Building B), the CRA would generally consider construction of Building B to have begun when the excavation work for Building A began. In such a case, where the excavation work related to Building A began before September 14, 2023, a PBRH rebate would not be available for any residential unit within Building B because construction of Building B would not have begun after September 13, 2023.