Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
XXXXX
XXXXX
XXXXX
Case Number: 111605
Business Number: XXXXX
Attention: XXXXX XXXXX
December 23, 2009
Dear XXXXX:
Subject:
GST/HST RULING
Value of consideration for the sale of real property
Thank you for your XXXXX (with attachments), and additional information provided XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a particular sale of real property. Please accept my apology for the delay in providing our response.
Your submission refers to XXXXX, in which we determined that the transaction was subject to the GST. The present ruling deals with the value of the consideration on which the GST was applicable.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Statement of Facts
We understand the facts as follows.
1. The XXXXX (the Association) is a non-profit organization that has been registered for GST/HST purposes since XXXXX, under Business Number XXXXX.
2. Until XXXXX, the Association was the owner in fee simple of a parcel of real property legally described as XXXXX.
3. The Association suffered financial difficulties XXXXX, forcing it to seek financial assistance from XXXXX (the City) in the amount of $XXXXX. The City's assistance was conditional on the transfer of legal title of the Property to the City and the execution of a lease agreement between the parties.
4. On XXXXX, the City entered into a lease agreement (the Lease) with the Association for the Property, for a term of XXXXX years with an option to renew the Lease for an additional XXXXX years.
5. XXXXX of the Lease identifies the $XXXXX owing to the City as the XXXXX.
6. XXXXX of the Lease specifies that the Association is required to pay:
(a) XXXXX, and
(b) XXXXX.
This provision further specifies that XXXXX shall be credited on account of the Purchase Price in respect of the option to purchase (described in Fact 8 below) and shall also be deemed to be applied in reduction of XXXXX. None were actually paid.
7. XXXXX of the Lease stipulates additional amounts for which the Association was liable, including property taxes, utilities, and the cost of repairs and maintenance.
8. XXXXX of the Lease provides for an option to purchase the Property. Under XXXXX of the Lease, in consideration for the sum of $XXXXX paid by the Association to the City, the City grants the Association the sole, exclusive and irrevocable option to purchase the Property at any time during the term or renewal term of the Lease (the Option) on the condition that the Association provides written notice of its intention to accept the Option.
9. Pursuant to XXXXX of the Lease, if the Association exercises the Option, there shall be a binding agreement on the part of the City to sell and the Association to purchase the Property at the Purchase Price.
10. XXXXX of the Lease specifies that the Purchase Price shall be XXXXX.
11. XXXXX of the Lease states in part that on the closing date of the purchase, the Association shall deliver to the City XXXXX
(a) XXXXX, and
(b) XXXXX.
12. Whether or not the Association exercises the Option, XXXXX.
13. XXXXX stipulates that should the Option lapse or expire, the City is required to XXXXX.
14. XXXXX, the Lease was amended to XXXXX. However, the amendment did not change any of the conditions set out in the Lease in respect of the Option.
15. XXXXX, the Association provided written notice to the City of its intention to exercise the Option.
16. In accordance with the formula set out in XXXXX of the Lease, the Purchase Price for the Property was determined to be $XXXXX.
17. The adjustment date for the sale occurred XXXXX. In accordance with XXXXX of the Lease, the Association was required to XXXXX to the City, calculated as follows:
XXXXX.
18. The final Statement of Adjustments reflects a credit to the Association in the amount of XXXXX.
19. Title to the Property was transferred from the City to the Association XXXXX.
20. The Association calculated the GST payable on the transaction to be $XXXXX, which it reported on line 103 of the GST/HST return for its quarterly reporting period ending XXXXX, and remitted XXXXX. As of XXXXX, the Association had not claimed any input tax credits (ITCs) or other rebates or refunds in relation to this amount.
21. The Association has not made an election under section 211 with respect to the Property.
Ruling Requested
You would like to know if, for GST/HST purposes, the value of the consideration payable for the sale of the Property was XXXXX.
Ruling Given
Based on the facts set out above, we rule that for GST/HST purposes, the value of the consideration payable for the sale of the Property is $XXXXX.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
Explanation
As noted in our previous correspondence to which you refer, it is important to distinguish between the entering into a lease agreement that includes a right to purchase and the actual execution of a purchase and sale agreement for real property. These are separately identifiable supplies for GST/HST purposes.
Pursuant to subsection 123(1), a sale of property includes "any transfer of the property and a transfer of possession of the property under an agreement to transfer ownership of the property". For GST/HST purposes, a transfer of real property generally refers to the legal ownership (that is "titled" ownership) of the real property.
As explained in policy statement P-164, Rent-To-Own Agreements, an agreement to transfer ownership of property may arise only where there is a binding purchase and sale agreement with the transfer of the ownership at or before the end of a specified period. A lease agreement with an option to purchase property is not a binding purchase and sale agreement.
As such, there was no agreement between the City and the Association to transfer ownership of the Property, and therefore no purchase and sale agreement for the Property, until XXXXX, when the Association exercised the Option to purchase the Property. XXXXX of the Lease stipulates that a binding agreement to sell the Property at the Purchase Price is created when the Association exercises the Option.
Having identified two distinct supplies in the case at hand, it is necessary to distinguish the consideration payable under the purchase and sale agreement from that payable under the lease.
"Consideration", as defined in subsection 123(1) of the ETA, includes any amount that is payable by operation of law. "Amount" is also defined in subsection 123(1) to mean money, property or a service, expressed in terms of the amount of money or the value in terms of money of the property or service. Under paragraph 153(1)(a) of the ETA, where the consideration or that part is expressed in money, the value of the consideration is the amount of money. It is noteworthy that the value of the consideration for a supply of real property may be an amount that is different from the purchase price of the property iFootnote 1 . A determination as to the value of the consideration must take into account all of the facts of the situation.
For the reasons that follow, we conclude that although XXXXX XXXXX of the Lease establishes a Purchase Price of $XXXXX that serves the parties' needs from an accounting perspective, it does not correctly identify the value of the consideration payable for the sale on which the GST is to be calculated.
In this case, the provisions of the Lease ensured that the Association could regain full ownership of the Property should it choose to exercise the Option to purchase the Property and repay all amounts paid or credited to the Association by the City. XXXXX.
The Association exercised the Option to purchase and fulfilled its obligation to repay the XXXXX by means of:
• XXXXX, and
• XXXXX.
The XXXXX stipulates that the Purchase Price includes XXXXX. However, these amounts were all due and payable by the Association in the ordinary course of its status as a tenant of the Property under the terms of the Lease, regardless of whether the Association ultimately exercised the Option. Despite the wording of XXXXX of the Lease and that of the Statement of Adjustments, these payments would therefore be properly characterized as forming part of the consideration payable by the Association for the City's supply of the Property by way of lease. They do not form part of the consideration for the subsequent sale of the Property to the Association.
As such, the consideration payable for the sale of the Property does not include the consideration payable for the Lease and is $XXXXX. XXXXX.
The Association was obligated to self-assess and remit the GST payable on this amount. Provided the Association acquired the Property for use or supply primarily in the course of the Association's commercial activities, the Association would have been required to report the tax payable on line 205 of its regular GST/HST return for the period ending XXXXX. In any other case, the Association would have been required to pay the tax on or before the last day of the month following the calendar month in which the tax became payable, using form GST60, GST/HST Return for Acquisition of Real Property.
Because the Association calculated its tax liability on XXXXX, it is considered to have reported and remitted an excess amount as or on account of tax for this transaction.
You had previously been advised verbally that the Association may be eligible to claim a rebate to recover this overpayment, provided it did so within two years of the original payment. We confirm that section 261 provides a rebate to a person who has paid or remitted an amount as or on account of tax where the amount was not payable or remittable by the person, where all of the conditions are satisfied. However, paragraph 261(2)(a) prevents a rebate from being paid to the extent that the amount was taken into account as tax or net tax for a reporting period of the person and the Minister has assessed the person for the period under section 296. As the Association included the excess amount in calculating its net tax for the reporting period ending XXXXX, and as the CRA has assessed the Association for that period, the Association is not eligible to claim a rebate under section 261 to recover the excess amount it remitted.
As an alternative, a person who has been assessed for a reporting period may request a reassessment pursuant to subsection 296(1) of the ETA, and this option is available to the Association. The request should be made in writing to your local tax services office and provide the details of any requested adjustments to the previously filed GST/HST return. Subsection 298(1) requires that a reassessment be made within four years after the later of the day the return was required to be filed and the date the return was filed. You may wish to attach a copy of this ruling to your request for reassessment.
ADDITIONAL COMMENTS
Although not the subject of your enquiry, you confirmed XXXXX, that the Association has not claimed any ITCs for the tax payable on the purchase of the Property as you were unsure of the governing legislation in this regard. You further indicated that, to the best of your knowledge, the Association is not a "qualifying non-profit organization" as defined in the ETA, and thus not eligible for a public service body rebate.
For your reference, GST/HST registrants may be eligible to claim ITCs for the GST/HST paid or payable by the registrant in respect of the acquisition of, or improvements to, capital real property to the extent that the property is for use or supply in the course of the registrant's commercial activity.
Special rules apply to public service bodies (such as a non-profit organization) in this regard and, as discussed below, these rules may vary depending on whether an election under section 211 is in effect for the property in question. The following discussion pertains to public service bodies such as yours that are neither a financial institution nor a government.
Primary use rules - Acquisition of capital real property
Where an election under section 211 is not in effect for capital real property acquired by a GST/HST registrant public service body, the property is subject to the rules found in subsections 199(2) to (4), subsections 200(2) and (3) and, effective February 1, 2004, section 141.2 with any modifications that the circumstances require. In these circumstances, capital real property of a public service body is treated for GST/HST purposes as if the property were capital personal property.
Personal property that is acquired or imported for use by a registrant as capital personal property primarily in commercial activities of the registrant is considered to have been acquired or imported for use exclusively in commercial activities. Conversely, where the capital personal property is for use less than primarily in commercial activities, the registrant is considered to have acquired the property for use exclusively in non-commercial activities. Primarily means more than 50%.
Because capital real property is treated as if it were capital personal property, a registrant public service body may therefore only claim ITCs in respect of the GST/HST paid or payable on acquisitions of its capital real property if it intends to use the real property primarily in its commercial activities. If the property is to be used primarily in commercial activities, the body is deemed to have acquired the real property for use exclusively in commercial activities and is eligible to include 100% of the tax paid or payable in respect of the acquisition of the real property when calculating its ITCs. If the capital real property is not acquired for use primarily in commercial activities, the body is precluded from claiming ITCs in respect of the property at the time of its acquisition. The body may nevertheless become eligible for ITCs at a later date, should it subsequently begin to use the property primarily in its commercial activities.
Primary use rules - Improvements to capital real property
In accordance with paragraph 169(b), ITCs may be claimed for tax paid or payable on property or services acquired, imported, or brought into a participating province for use in improving capital real property of the person to the extent (expressed as a percentage) to which the person was using the real property itself in the course of commercial activities of the person after it was last acquired.
This measure is uniformly applied to determine ITCs for all improvements to a particular capital property. Thus, it does not matter whether the improvement to the capital property can be attributed entirely to a commercial activity, entirely to the making of exempt supplies, or some combination thereof. Paragraph 169(b) treats all improvements acquired in respect of capital property as though they relate to every part of the capital property equally, and requires that the "extent of use" percentage used for ITC purposes be based solely on how much the capital property, as a single input, is used in commercial activities.
Unless an election under section 211 is in effect for capital real property acquired by a GST/HST registrant public service body, subsection 199(4) applies to improvements to the property as if the real property were personal property.
Therefore, where a public service body acquires, imports or brings into a participating province an improvement to capital real property and an election under section 211 is not in effect, an ITC for tax payable in respect of the improvement is only available if the underlying capital real property to which the improvement is made is being used primarily in commercial activities of the public service body at the time that tax becomes payable, or is paid without having become payable.
Where a public service body has acquired the improvement for capital real property that is being used primarily in commercial activities, the public service body is deemed to have acquired the improvement for use exclusively in commercial activities and is entitled to claim an ITC equal to 100% of the tax paid or payable in respect of the improvement.
On the other hand, no ITC is available for tax paid or payable on improvements to capital real property that is not used primarily in commercial activities.
Effect of section 211 election - Acquisition of and improvements to real property
An election under section 211 is available for public service bodies, and can be filed by registrants and non-registrants alike by means of Form GST 26, Election or Revocation of an Election by a Public Service Body to Have an Exempt Supply of Real Property Treated as a Taxable Supply. The election has multiple effects, some of which are one-time events, but most of which continue for as long as the public service body chooses to keep the election in effect.
One of the principal purposes of a section 211 election is to allow a public service body to opt out of the primary use rules for capital real property, and to thus qualify for ITCs based on the actual extent (expressed as a percentage) that the property is used by the body in its commercial activities. Accordingly, apportioned ITCs would be available for tax payable by the body on the acquisition of, or improvements to, capital real property even where the body's commercial activities do not constitute the primary use of the property, as long as the property is used more than 10% in commercial activities.
Determining extent of use
The CRA's published policy iiFootnote 2 for determining if capital real property is used primarily in a business for purposes of paragraph 9(2)(a) of Part I of Schedule V sets out a multi-factor approach to determining the extent of use of capital real property. Such a multi-stage approach may be equally applicable to the matter at hand.
A "space-based" method may be recognized as an acceptable method of determining the extent to which certain portions of capital real property are dedicated to either commercial or non-commercial activities. In some cases other (non-space-based) factors may need to be introduced to arrive at a fair and reasonable method of measuring the extent of use of the capital real property. This would occur, for example, where all square meters of the property are not equal in terms of expressing the extent of use of the property in commercial activities, or where there are time-based considerations. Where this is the case, the CRA's policy is to permit the use of additional factors necessary to provide an accurate measurement of the extent of use of the capital real property in commercial activities. Some of the additional factors mentioned include time spent, value of unimproved land used, and value of improvements previously made.
Regardless of whether an election under section 211 is in effect, the method used by a public service body in a fiscal year to determine the extent to which capital real property is used, or is intended to be used in the course of the body's commercial activities must be fair and reasonable and must be used consistently by the body throughout the year.
Recovering previously unclaimed ITCs
Provided that the Association intended to use the Property primarily in its commercial activities, the Association would have been entitled to claim as an ITC on its GST/HST return for the period ending XXXXX, 100% of the tax payable by the Association on the value of the consideration payable for its purchase XXXXX.
You indicated that you will now establish whether the Association was eligible for an ITC in this regard. If the Association is entitled to claim an ITC, the Association may claim the ITC in a future GST/HST return, as long as it is filed by the due date of the return for the last reporting period that ends within four years after the end of the reporting period in which the ITC could have first been claimed.
With the exception of the ruling above, the foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at XXXXX. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
XXXXX
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
i 1. Refer to paragraph 52 of GST/HST Memorandum 19.1, Real Property and the GST/HST
ii 2. GST/HST Memorandum 19.5 - Land and Associated Real Property - Appendix A - Guidelines for determining if capital real property is used primarily in a business
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