Building and operating a residential care facility in Canada has many challenges, including unforeseen GST/HST implications. The focus of this article is to provide a brief overview of some of the more significant GST/HST implications for operators who build residential care facilities (i.e. a builder-operator) and for those who purchase newly-built facilities. While the GST/HST implications may be similar in the other provinces, for greater clarity this article was prepared addressing the specific rules for Ontario only.
According to the Canada Revenue Agency (the "CRA"), a "residential care facility" includes, but is not limited to: continuing care centres; retirement residences; nursing homes; lodges; extended care facilities or homes for the aged. These facilities generally provide "property and services" together with a room or suite for an individual who intends to reside there for an indefinite period. Such "property and services" may include: meals; nutritional, housekeeping, laundry, security monitoring and nursing care services; scheduled transportation, social, recreational, educational and religious services; personal supervision and care; and assistance with the activities of daily living (e.g., bathing, dressing, grooming, eating, ambulating).
If you are a builder-operator of a residential care facility
A builder-operator will typically acquire land upon which it will build a residential care facility or engage another person to do so (such as a general contractor). The builder-operator should register for GST/HST before acquiring the land or incurring any costs regarding the construction of the facility. By doing so, the builder-operator will be entitled to recover the HST payable on the purchase of the land and the costs relating to the construction of the facility by claiming input tax credits ("ITCs") during the construction phase, which is a significant benefit from a cash-flow perspective.
To receive its tax refunds earlier, the builder-operator should elect to file its GST/HST returns on a monthly basis (as opposed to quarterly or annually).
During the construction phase, the builder-operator should not claim ITCs for HST on costs that do not relate to the construction of the facility (e.g., furniture, hiring and training facility operations staff and promotional expenses to attract potential tenants). The CRA is unlikely to consider these costs related to the construction of the facility and, therefore, will deny ITC's for HST on those costs.
Once construction of the facility is substantially completed, and the first tenant moves into the facility, the builder-operator is usually required to self-assess 13% HST calculated on the fair market value ("FMV") of the facility at that time. The builder-operator is considered to have made a taxable sale of the facility to itself (i.e. a self-supply) and is required to remit to the CRA the HST deemed to have been paid and collected on that sale.
The builder-operator may also be entitled to claim the New Residential Rental Property ("NRRP") rebates to recover a portion of the HST payable on the self-supply of the facility. The following section provides additional details on the NRRP.
After the self-supply date, the builder-operator would cease to be a "builder" and become solely the "operator" of the residential care facility. As such, the operator would no longer be able to claim ITCs and should consider whether it should deregister for GST/HST purposes. [See the "Other GST/HST considerations" section.]
If you purchase a newly-built residential care facility
The sale of a newly-built residential care facility will generally be subject to GST/HST whereas the sale of a used residential care facility will normally be GST/HST exempt. As the facility will be situated in Ontario13% HST would be payable on the purchase price of the facility.
As noted earlier, the purchaser may be entitled to claim the NRRP rebates to recover a portion of the HST payable. The purchaser may file the NRRP Rebate applications within two years after the end of the month during which HST became payable on the purchase, but must satisfy some other conditions.
The NRRP rebates in Ontario include a federal component and an Ontario component. Both rebates are calculated based on the FMV at the time of purchase of each qualifying residential unit (generally, each bedroom/suite) within the facility.
For units with a FMV of $350,000 or under, the federal rebate is equal to 1.8% of the FMV of the unit. For units with a FMV between $350,000 and $450,000, the federal rebate is gradually reduced. No federal rebate is available for a unit having a FMV of $450,000 or more.
The Ontario rebate is equal to 6% of the FMV of each unit up to a maximum rebate of $24,000 for a unit having a FMV of $400,000 (i.e. 6% x $400,000). The Ontario rebate is not reduced if the FMV of the unit exceeds $400,000; it remains at $24,000.
The purchaser of a newly-built residential care facility will generally never have to register for GST/HST purposes given the GST/HST exempt nature of the rental of residential units and related services that are typically provided to the tenants of a residential care facility. However, there may be other GST/HST considerations, which are clarified in the following section.
Other GST/HST considerations
- It is not always clear if the operator of a residential care facility provides solely GST/HST-exempt services. There may be circumstances in which an operator also provides GST/HST taxable services or accommodation (for example, offering optional cable television) or where part of the facility is used for commercial purposes unrelated to the use of the facility as a place of residence (such as operating a convenience store or a bar within the facility or leasing space to the operators of such outlets). A thorough analysis of all the facts may be necessary to determine if the operator should remain GST/HST registered and charge the tax.
- The FMV of the residential units for purposes of the self-supply by a builder-operator is extremely important as it is the basis upon which the HST and the NRRP rebates are calculated. The determination of the FMV is dependent on estimates, and different methodologies may be used resulting in different conclusions. The CRA is not bound to accept the FMV determined by the builder-operator, even if the builder-operator has engaged a professional appraiser. In our experience, the CRA has challenged the GST/HST filings of many self-assessments and the builder-operator should be prepared to deal with the audit of same and its implications.
Conclusion
There are many GST/HST implications associated with the construction or purchase of a new residential care facility by a builder-operator. To summarize, the key factors include:
- whether a cost relates to the construction of the facility (eligible for ITCs) or to the future operation of the facility (not eligible for ITCs),
- the appropriate date that the self-supply takes place, which triggers a tax liability and the ability to claim partially offsetting rebates, and
- the FMV of the facility.
It is also important to comply with the various conditions to claim those rebates and, finally, to understand the nature of the services provided to the residents of the facility going forward. There may be a requirement to maintain GST/HST registration and charge same. This topic will be addressed in a future article.
Please note that this article should not be considered a substitute for personalized tax advice related to your particular situation. We strongly recommend that you discuss these changes with your Crowe Soberman advisor.
About the Authors
Frédéric Pansieri, BBA, CPA, CA, Director, Commodity Tax, Crowe Soberman LLP – Frédéric has extensive commodity tax experience, as well as corporate income and capital tax experience at the federal level and in various provincial tax jurisdictions across Canada.
Alan Wainer, CPA, CA, CPA (Illinois), Alan Wainer Professional Corporation, Partner, Crowe Soberman LLP – Alan is a partner with Crowe Soberman and co-leader of the Healthcare Group. His particular focus is on Residential Care Facilities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
