Written By: Lisa Watzinger
When landlords change the tenants to whom they lease their buildings, they need to consider how the new tenant will use the property. This is a lesson Prima Properties Ltd. (almost) had to learn the hard way.
Prima Properties is a decision of the Tax Court of Canada dealing with the GST implications to a landlord where a change in tenants caused a change in use of the property. Fortunately for the Taxpayer, the CRA reassessed outside of the normal period. Had that not been the case, the CRA was seeking GST of $892,350.00 plus interest.
The Taxpayer, a developer and lessor of real estate, acquired the Bosman Hotel (the “Bosman”) located in downtown Vancouver in 2007. It leased the Bosman to Sunset Motor Inn Ltd. until April 30, 2010 who operated it as a hotel. The lease terms specified that it could be used as a hotel, restaurant, paid parking, and a business ancillary to the hotel.
On May 1, 2010, the Taxpayer changed its tenants. It leased the Bosman to PHS Community Services Society (“PHS”), a non-profit housing organization. The lease terms provided that PHS could use it as a “funded and managed housing program” and could operate the Bosman as per the City approved operational plan. The Taxpayer did receive a copy of the operational plan which stated that it was a “supportive long-term housing project for 100 homeless adults living with mental illness.”
So, while the prior tenants used the Bosman as a hotel, the new tenants used it as a residence. This caused the Canada Revenue Agency (the “CRA”) to reassess the Taxpayer on the basis that it was required to self-assess and remit GST on the basic tax content of the property at the time of the change in use, in accordance with subsection 206(4) of the Excise Tax Act (“Act”).
When the CRA reassessed the Taxpayer, it was after the normal reassessment period. This reversed the onus of proof and required the Minister of National Revenue (the “Minister”) to show that the Taxpayer had misrepresented the change in use of the Bosman and was negligent in filing its tax return.
Lucky for the Taxpayer, the Court could not find that the Taxpayer misrepresented the change in use since the Minister did not have enough evidence to prove that PHS was using the Bosman as a residential property. The Court also stated that had there been a misrepresentation, the Taxpayer was not negligent since from its perspective it had a commercial lease with PHS, was charging GST on the rent, and the sections of the Act relied on are complex. As a result, the reassessment was vacated.
The Moral
The Taxpayer did get lucky here; it’s not just a matter of charging GST/HST on rent. If the new tenant is using the property in a different way than the previous tenant, the landlord may be required to self-assess and remit additional GST/HST.
These comments are of a general nature and not intended to provide legal advice as individual situations will differ and should be discussed with a lawyer.