If you are a Public Service Body (PSB) who receives rental income from real property, make sure you are not missing out on a tax planning opportunity to maximize your input tax credits (ITC).
Due to the complexity of the rules surrounding the public sector, it may not come as a surprise to learn that we often come across PSB clients who are unaware of the compliance requirements and planning opportunities that may apply to them. In the past year, we have seen an increase in situations where PSBs have not reviewed their eligibility for the election under Section 211 of the Excise Tax Act (ETA) and were therefore unable to take advantage of the potentially significant tax recovery opportunity.
What is a Section 211 election and who benefits from making the election?
Section 211 of the ETA grants PSBs the option to elect to treat certain supplies of real property that would otherwise be exempt as taxable supplies.
Where an election has not been made, supplies of real property by a PSB are generally exempt and are subject to the general ‘all or nothing’ rule for capital property, whereby an ITC is available in full if the property is used ‘primarily’ (more than 50 per cent) in commercial activities and no ITC is available otherwise.
Section 211 allows a PSB to claim a partial ITC based on actual use of the property in commercial activities. Therefore, this election may be of great benefit for PSBs who does not use real property more than 50 per cent in commercial activity, but does use it at least 10 per cent in commercial activity.
What are the criteria for making the election?
You must be a Public Service Body, which is defined in Subsection 123(1) of the ETA as “a non-profit organization, a charity, a municipality, a school authority, a hospital authority, a public college or a university”.
In general, PSBs are eligible to make an election in respect of real property that is:
- capital property;
- inventory held for the purpose of supply; or
- real property acquired by way of lease (or similar arrangement) for the purpose of making a lease (or similar arrangement).
What are the immediate effects of the election?
The PSB is deemed to have made a taxable supply of the real property by way of sale and collected tax on the ‘basic tax content’ of the property. At the same time, the PSB is deemed to have paid tax in respect of the sale of real property of an equal amount.
In other words, to account for the deemed sale of the real property, the PSB is required to report a tax equal to the basic tax content. However, this tax is generally offset by an input tax credit of the same amount by way of Section 193(2). In addition, the second part of the effect allows the PSB to claim an ITC for the GST/HST paid on the real property to the extent that the real property was used in commercial activity.
To illustrate, we use an example of a charity in Alberta who uses a building 70 per cent in exempt activities and 30 per cent in commercial activity by way of lease to a commercial business. At the time that the charity purchased the building, they paid $75,000 in GST on the acquisition and paid $25,000 in GST for improvements. The charity has claimed a PSB rebate of $50,000.
The charity is deemed to have sold the building and collected GST of $50,000 (the amount of remaining tax that the charity was unable to recover through the rebate). The charity may offset the tax with an ITC of $50,000. As well, the charity is entitled to claim an additional ITC to the extent that the building is used in commercial activity i.e. 30 per cent of $50,000. The result is an immediate refund of $15,000 for the charity.
What are the prospective effects of the election?
The PSB is required to charge GST/HST on the supply of real property. Where the tenant is in commercial activities (as with the above example) the tenant will be indifferent to this change as they will be entitled to claim an ITC.
The PSB will be entitled to claim an ITC on the expenses (including utilities) to the extent that the real property is used in commercial activities.
The PSB will be subject to the general ‘change-in-use’ rules, which come into play where there is an increase, decrease or cease the use of the real property in commercial activity.
The 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” must be filed within one month of the end of the reporting period in which the election is to become effective. For GST/HST registrants, the reporting period is the same as your reporting period for filing GST/HST returns.
This election may be made on a property-by-property basis, but attention should be paid on legal form.
Contact a professional to discuss how the election may affect your PSB.