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GST/HST — no "substantial renovation" of apartment building

My client was a small family-owned company. It had bought a 21-unit apartment building in Ontario that was in disrepair. It had then renovated all the units, dividing the apartments into more bedrooms so as to be able to rent them to students at a nearby university (but without changing the size of each apartment).

The CRA saw that the building had gone from 26 to 47 bedrooms and decided that this meant it had been "substantially renovated". The CRA wanted to have its appraiser inspect the building and determine its value, to apply the "self-supply" rule and impose HST. The potential tax cost to my client would have been about $400,000.

In one afternoon, I reviewed the facts with my client and wrote a strong letter to the auditor, showing that the definition of "substantial renovation" in the Excise Tax Act was not met. The increase in the number of bedrooms was irrelevant; there simply had not been removal or replacement of anywhere near 90% of the "insides" of the building (ignoring certain structural elements that have to be ignored under the legislation, like the outside walls, floors and roof).

The auditor had told me over the phone that she was quite sure this was a substantial renovation. However, on receiving my letter, she called me back an hour later and told me she agreed with it. There was no substantial renovation and there would be no HST assessment. The CRA closed its file.

Problem vanished!

(2014)