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GST/HST — input tax credits on purchase of old home for new project

My client was a residential condominium developer. It bought several adjacent properties to assemble a new condominium project. One of these properties was an old home that was rented out to residential tenants. As part of the purchase of this old home, my client agreed to allow the tenants to stay for a number of months, until construction of the new project was to begin.

My client obtained the rights to purchase the properties through an Assignment Agreement, and HST applied to the assignment fee. As a result, my client had input tax credits (ITCs) to claim. It claimed these ITCs.

CRA Audit denied almost $200,000 of the ITCs on the basis that the home was rented out to residential tenants, and thus was an “exempt residential rental property”. At this point the client came to me for help.

I filed a Notice of Objection on behalf of the client, explaining that the project as a whole was going to be a taxable supply when completed, and thus was a “commercial activity” entitling my client to 100% ITCs to recover all HST paid on the inputs. The fact that the old home was still rented out did not matter.

I demonstrated that the rental revenues were completely trivial compared to the expected sale price of the new project, and were clearly not part of the reason for buying the old home. They were not even reported as revenue on the client’s financial statements, but were capitalized as an offset to the development costs.

I also showed that section 141 and paragraph 141.1(3)(a) of the Excise Tax Act both supported my position that the client was entitled to full ITCs.

The Appeals Officer who reviewed the file agreed when she reviewed my submission, before even contacting me. She immediately allowed the ITCs.

Problem solved!

(2024)