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RC4081 - GST/HST Information for Non-Profit Organization
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Real property

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This section explains the GST/HST rules for sales and leases of real property made by non-profit organizations. It provides information on ITCs and subsidized residential complexes. It also explains the special election that allows you to treat certain exempt supplies of real property as taxable supplies.

Taxable supplies of real property

Generally, most sales and leases of real property made by non-profit organizations are exempt. However, the following supplies are subject to GST/HST:

  • sales of new or substantially renovated (90% or more) residential property;
  • sales of used residential property when the non-profit organization is a builder who claimed ITCs on the last acquisition of the property and/or on any improvements made to the property;
  • deemed supplies of real property such as a change in primary use from commercial to exempt (non commercial) activities;
  • sales of land to an individual or a personal trust when there is no structure on the property that the organization used as an office, or in commercial or exempt (non commercial) activities;
  • supplies of real property that, immediately before the time of the supply, the organization used primarily in its commercial activities;
  • short-term accommodation of less than one month, unless it is provided to relieve the poverty, suffering, or distress of individuals, or it is a residential unit that is rented to an individual for $20 or less per day of occupancy;
  • leases of real property (other than short-term accommodation), when the continuous possession or use of the property is for a period of less than one month and the supply is made in a business carried on by the non-profit organization;
  • licences to use real property (other than short-term accommodation) when the supply is made in the course of a business of the non-profit organization such as evening rentals of a banquet facility or the rental of an ice rink to a hockey club every Monday night;
  • parking spaces made by way of lease, licence, or similar arrangement in a business carried on by the organization (other than the long-term lease of a parking space to a residential tenant or the occupier of a residence where the space forms part of the residence, or the supplier of the space is an owner or occupier of the residence and the use of the space is incidental to the use and enjoyment of the residence or, in the case of a condominium unit, the space forms part of the condominium complex);
  • sales of real property that the non-profit organization has seized or repossessed (unless the sale of the property is exempt such as the sale of a used residential complex); and
  • real property where a non-profit organization has filed an election to treat the supply as taxable. For more information, see the section "Election for real property of a public service body".

ITCs for real property

The rule for calculating ITCs on purchases of capital real property is the same as for calculating ITCs on purchases of other capital property (the primary use rule):

  • If you intend to use the property more than 50% in commercial activities, you can claim a full ITC.
  • If you intend to use the property 50% or less in commercial activities, you cannot claim an ITC.

It is possible that the use of the real property will change over the years. If the use of the real property changes from non-commercial to primarily commercial, you can claim an ITC at the time of the change in use. On the other hand, if the use changes from commercial to non-commercial, you may have to remit part of the ITCs you claimed earlier.

The other expenses related to real property such as maintenance and utilities are subject to the usual rules. You can claim ITCs based on the percentage of use of those expenses in your commercial activities, see the section "General operating and overhead expenses".

Subsidized residential complex

The following rules apply to non-profit organizations that receive government funding to build (or build an addition to) a residential complex where at least 10% of the residential units are intended to be leased to seniors, youths, students, or individuals with a disability or limited financial resources.

Government funding means financial payments from a grantor that can be measured and identified in your financial statements as government funding, and includes the following:

  • a grantor's payment to support your project of building a residential complex for lease to seniors, youths, students, or individuals with a disability or limited financial resources; and
  • a forgivable loan you receive from a grantor.

A grantor can be from any level of government--federal, provincial, and municipal. It also includes Indian bands and bodies established by federal, provincial, or municipal governments or bands to fund charitable or non-profit activities for Indian bands or the government. However, we do not consider federal and provincial Crown corporations that perform substantially all (90% or more)commercial activities to be grantors.

During the construction phase, you can register for the GST/HST and claim ITCs for the goods and services you buy that relate to the construction of the complex. When the construction is substantially completed, and you first give possession of a unit in the building under a lease to an individual as a place of residence, a deemed sale occurs and you have to calculate and account for the GST/HST based on the greater of the following:

  • GST or HST on the fair market value of the residential complex; and
  • the total of all the tax you paid or owe on the acquisition of the land, on the construction of the building, and on any improvement to the property.

Example
Your non-profit organization in New Brunswick registers for the GST/HST and constructs a multiple-unit residential building for which you receive government funding. You paid $25,000 HST on the purchase of the land and $30,000 HST on the construction of the building. You claimed ITCs to recover the total tax paid. The building's fair market value is less than the cost of the land and the construction of the building. Therefore, when you first give possession under a lease of a unit in the building to an individual as a place of residence, you have to self-assess HST equal to the amount of HST you paid or owe on the land and on the construction of the building or on any other improvement to the property.

Election for real property of a public service body

As a non-profit organization, you can choose to file an election that allows you to treat certain exempt sales and leases of real property as taxable supplies. This election allows you to claim ITCs for the GST/HST you paid or owe when you acquired the property, or for any improvements to it, to the extent that the property is used to make taxable supplies (as long as it is used at least 10% in commercial activities). This election applies to the following real property:

  • capital real property;
  • real property held in inventory for the purpose of supplying it; and
  • real property acquired by way of lease, licence, or similar arrangement to resupply the property by way of lease, licence, or similar arrangement or for the purpose of assigning the arrangement.

To make this election, you have to complete and file with us Form GST26, Election or Revocation of an Election by a Public Service Body to Have an Exempt Supply of Real Property Treated as a Taxable Supply.

Note
You cannot use this election to make all of your supplies of real property taxable. For example, the election cannot apply to make long-term residential rents taxable. Information on the types of supplies the election can apply to will be included in GST/HST Memorandum 19.6, Real Property and Public Sector Bodies.

When you make this election for a particular real property, the following rules apply:

  • You charge GST/HST on the sale, lease, or licence of the property.
  • The primary use rule you usually follow for claiming ITCs on the acquisition of the property does not apply. Instead, you calculate and claim your ITC based on the percentage of use of the property in your commercial activities (you have to use it at least 10% in commercial activities to be able to claim an ITC).
  • This election allows you to claim ITCs on purchases and expenses related to the real property (such as maintenance and utilities) after you make the election, to the extent the property is used in commercial activity.

You can make the election when you acquire the real property, or in later reporting periods.

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Election effective the day of acquisition

If the election becomes effective on the day when you acquire the real property, you claim your ITC based on the percentage of use of the property in your commercial activities (as long as it is used at least 10% in your commercial activities).

Example
Your non-profit organization is engaged only in exempt (non commercial) activities. You buy real property that contains a four-storey building, the first floor of which you use for your business. You lease the other three floors to businesses for periods of more than one month (exempt activity). Since the entire property is used only for non commercial activities, you cannot claim an ITC to recover the GST/HST paid on acquiring the property.

However, if you file Form GST26 and make the election effective on the day you acquire the property, GST/HST applies to the leases of the offices on the second, third, and fourth floors. If you determine that 75% of the property is now used in commercial activities, you can claim an ITC for 75% of the GST/HST paid on the acquisition of the property. You can also claim ITCs to recover the GST/HST paid on utilities and maintenance that relate to the second, third, and fourth floors.

Election effective after the day of acquisition

If the election becomes effective after you acquire the real property, you can generally claim an ITC to recover all or part of the GST/HST you paid or owe on the last acquisition and were not able to recover because the property was not used primarily (more than 50%) in commercial activities.

Before calculating your ITCs, you have to determine the basic tax content of the property. This formula is explained in the section "Capital property" under "Change in use".

When you make this election effective at some time after the day of acquisition of the property, the following rules apply:

  • You are deemed to have made a taxable sale of the property immediately before the effective date of the election and to have collected GST/HST on the sale equal to the basic tax content of the property on the effective date of the election. You are also deemed to have purchased the property on the effective date of the election and to have paid GST/HST on the deemed purchase equal to the basic tax content of the property on the effective date of the election. If the deemed acquisition is in respect of real property to be used primarily in your commercial activities, report the tax on line 205 of your GST/HST return. If the deemed acquisition is in respect of real property for use otherwise than primarily in commercial activities, you must file Form GST60, GST/HST Return for Acquisition of Real Property , and report the deemed tax collected on line 205.
  • Because of the deemed sale, you are entitled to claim an ITC equal to the basic tax content provided the property was not used primarily in commercial activities immediately before the deemed sale.
  • You are entitled to an ITC for the GST/HST paid on the deemed acquisition based on the extent of use of the real property in commercial activities.

Example
In 2005, you acquired a building in Ontario for $300,000 plus $21,000 GST. At that time, 70% of the building was used in your exempt activities and 30% was leased for periods of at least one month (exempt activity). Since the primary use rule was not met (i.e. the property was not for use primarily in commercial activities), you could not claim an ITC. However, since you are a qualifying non-profit organization, you were entitled to claim the 50% public service bodies' rebate ($21,000 × 50% = $10,500). In 2006, you file the election to treat the exempt leases as taxable. No improvements were made to the property. The building is now used 30% in commercial activities. The fair market value of the property at the time of the election is $310,000.

You first have to determine the basic tax content of the property:

Basic tax content = (A - B) × C
  = ($21,000 − $10,500) × 1
  = $10,500

GST paid on acquisition of the building

=

$21,000

GST paid and collected on the deemed sale

=

$10,500

ITC available at time of the deemed sale

=

$10,500

ITC available on the deemed acquisition, based on the percentage of use of the building in your commercial activities

=

$10,500 × 30% = $3,150

In addition, you can now claim ITCs for 30% of the GST you paid or owe on operating expenses, such as electricity, maintenance, and utilities related to the commercial use of the property.

You cannot claim another PSB rebate for the deemed tax paid for which an ITC was not available.

For the purposes of this election, “real property” means the entire estate or interest in the real property held by the non-profit organization included in the legal description or leasehold interest (which include all structures and other improvements that are fixtures to the land).

Filing the election

To make the election, you have to file Form GST26, Election or Revocation of an Election by a Public Service Body to Have an Exempt Supply of Real Property Treated as a Taxable Supply, no later than one month after the end of the reporting period in which the election is to become effective. You file this election for each property you want to treat as taxable.

You can revoke this election by filing another Form GST26. The revocation will be effective on the day you specify on Form GST26, as long as you file the form within one month after the end of the reporting period in which the election ceases to be effective.

Note
The following change is proposed to apply in respect of elections that are revoked after May 1, 2006. If you cancel your election, you will generally have to account for GST/HST equal to the basic tax content of the property on the day of revocation in your net tax calculation. Before May 2, 2006, the GST/HST was calculated on the fair market value of the property.

Change-in-use rules

The following rules apply only to capital real property for which you made an election to treat exempt supplies of real property as taxable supplies, and if you are registered for the GST/HST.

As explained earlier, when you make the election to treat certain exempt supplies of real property as taxable supplies, ITCs are calculated based on the percentage of use in commercial activities. It is possible that this percentage will change over the years. If you increase the percentage of use in commercial activities, you may be able to claim additional ITCs. On the other hand, if you decrease the percentage of use in commercial activities, you may have to account for tax that you are considered to have paid.

Increasing commercial use

When you increase the commercial use of capital real property by 10% or more cumulatively, you can claim an ITC equal to the basic tax content of the property multiplied by the percentage of increase in commercial use of the real property.

Reducing commercial use

When you decrease the commercial use of real property by 10% or more cumulatively (without ceasing or reducing the total commercial use to 10% or less), we consider you to have collected GST/HST on the part you no longer use in your commercial activities. The amount of GST/HST you have to account for in determining your net tax is equal to the basic tax content of the property multiplied by the percentage of decrease in commercial activities.

Ceasing commercial use

When you stop using the real property for commercial use or decrease the commercial use to 10% or less, we consider you to have sold and reacquired the property.

If the deemed sale is taxable, the amount of GST/HST you have to account for in determining your net tax is equal to the basic tax content of the property. If the real property was used partially in other than commercial activities before the change in use, contact us for more information.

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2006-06-26 		Return to
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