During the summer season, several public service bodies (PSBs) take advantage of this moment to organize day camps on their premises, or to rent them to third parties who organize day camps there. This difference can have a significant impact on the ITC/ITR to which an PSB is entitled. On the other hand, a change in this operation could lead to unfortunate consequences that are often unforeseen, particularly in terms of taxes to be remitted following a change of use.
The building of an OSP is treated according to the rules applicable to capital assets (movable property), that is to say, the rules on the main use (more than 50%). If the immovable is used primarily as part of the “commercial activities” (as defined in the ETA) of the PSB, then all GST/QST payable for its acquisition and improvements are refundable as ITC/ITR and conversely, if the building is not used mainly in the context of “commercial activities”, then no ITC/ITR can be claimed. A partial refund of GST/QST paid can generally be claimed by the PSB according to the activity rate applicable to this organization.
The rule on negligible changes of use does not apply to capital assets (immovables) of a PSB for which the choice of section 211 ETA and 272 AQST has not been made. For example, if a 2% change in use means that a PSB’s capital asset (building) is no longer used primarily in “commercial activities”, the change is material for the purposes of the rules on the change of use, since the ITC/ITR claimed may have to be remitted to the tax authorities. Similarly, if a 25% change of use does not change the principal use of the building, the change is negligible for the purposes of the change of use rules.
Where a camp operated by a PSB does not include night supervision (i.e. a day camp), the supply of the camp will be exempt if the camp is primarily aimed at children 14 years of age or younger. This therefore means that there is a reduction in the use of the building in the context of “commercial activities”.
However, several PSBs rent their premises during the summer period to another entity, which operates a day camp there. This rental of premises can have significant impacts for the PSB, depending on the rental period and the tax elections in effect at the time of rental.
A supply of immovable property for a continuous period of one month or more, by a PSB (other than a municipality), is usually exempt (subject to certain exceptions), unless, among other things, the PSB has made the section 211 ETA and 272 AQST election for this immovable.
If such an election is in effect for a PSB’s immovable, the immovable supplies are usually taxable, meaning that this may increase the use of the immovable in the context of commercial activities.
An increase of 10% or more in the use in “commercial activities” of real property (building) is deemed to be the same as receiving a supply of that part of the building equal to the increase. The PSB is deemed to have paid the GST/QST on the deemed acquisition of the part of the immovable whose use changes from non-commercial to commercial. The PSB may request ITC/ITR equivalent to the amount of deemed taxes.
If this use decreases, as for example if a PSB ceases these rentals to third parties, then the opposite may occur. Indeed, if the PSB reduces, by 10% or more, the use of the capital asset (building) within the framework of “commercial activities”, without ceasing it completely, the PSB is deemed to have sold part of the immovable property (building) up to the reduction and having collected the GST/QST on the part of the building which is no longer subject to commercial use. The PSB must therefore remit these taxes to the tax authorities.
As you can see, significant tax consequences can therefore arise following the establishment of a day camp operated directly by the PSB, the negotiation of new rentals of premises for a third party to operate a day camp there, or upon the cessation of such rentals.
As this summary is only a simplification of the application of rules, do not hesitate to consult a tax professional to discuss your situation.
Michel Lavigne, M. Tax., CPA
