13 December 1996 GST/HST Interpretation 11585-35[1] - Ruling Request from

                                                                        HQR0000301
File: 11585-35; 11585-13; 11870-4-2; 11950-1
s. 183, 254

This letter is in response to your office's fax of September 26, 1996 from XXXXX requesting we review and advise you on the ruling request you received from XXXXX. The request is on behalf of their client, XXXXX (the "Company"), XXXXX, and with respect to the applicability of GST to the purchase of certain properties (new residential housing) by the Company.

In view of the fact that the information we received did not provide specific details (e.g., copies of the contracts, etc.), we suggest your office issue an interpretation rather than a ruling.

Background

1. The Company provided financing to a builder of residential housing (the "Borrower") on XXXXX properties (the "Properties") by way of XXXXX registered mortgages.

2. The Borrower defaulted on XXXXX properties and on XXXXX the Company exercised the power of sale contained in each mortgage.

3. The Power of Sale is conferred to the mortgagor by section XXXXX. This section also allows the mortgagor to "buy in" at his own auction.

4. As a result of the Company "buying in" at their own auction, the Company was successful at purchasing the Properties (it was the highest bidder at the auction).

5. Title transferred from the Borrower to the Company on XXXXX and the Company is now the registered owner of the XXXXX properties.

6. The Company is now in the process of selling the Properties through a real-estate agency.

7. The Properties are new residential complexes that are substantially complete (90% or more completed) and have not been occupied as a place of residence.

Issue

Is GST payable by the Company as a result of the Company buying in at their own mortgage sale [auction]?

Our Comments

It is the Department's view that the Company is making a taxable supply of property and that GST becomes payable on the sale of the Properties by the Company at the time of the auction conducted under the power of sale (as conferred by section XXXXX[.] Since the Properties are residential complexes that are new and have not been occupied as a place of residence, the supply of the Properties is taxable, and GST at the rate of 7% of the value of the consideration paid (or payable) would be applicable at the time of the auction sale.

Because of the unique nature of XXXXX the fact that the Company was the successful bidder at the auction (and thereby acquired title to the Properties) does not alter the tax status of the supply. In discussions between XXXXX and myself while reviewing this case, she said that the Company indicated that it was unclear as to how it (the Company) should account for the GST, if the supply of the Properties are determined to be a taxable supply. More precisely, the Company wanted to know if (and how) it was required to remit GST as a result of having received a taxable supply of property, if it could recover any of the GST it would have to remit by way of an input tax credit ("ITC") and if it would be required to charge GST on any subsequent sale of the Properties. To this purpose, we offer the following comments:

Pursuant to subsection 183(10) of the Act, a creditor who causes the supply of a debtor's property, such as in the case of a power of sale, is deemed to have seized the property immediately before the sale. Further, subsection 183(10) also deems the Company to have made the supply of the seized Properties [at the auction] and not the Borrower.

XXXXX is unique in that it allows the mortgagee to bid and purchase the property being sold under a power of sale. As a result, in circumstances where the mortgagee does become the successful purchaser at the auction sale, the issue is whether the mortgagee must pay tax on the property at the time of auction sale or whether it must self-assess under subsection 183(4) of the Act. Because section XXXXX allows the mortgagee to acquire ownership of the property as a result of being the successful bidder at the auction of the seized property, we are of the view that a supply of the seized property occurs at the time the mortgagee is declared the successful bidder (i.e., at the auction).

If we look at subsection 183(4) of the Act, it states that "... [W]here a creditor who has seized or repossessed real property in which subsection (1) applies [...] begins at any time to use the property otherwise than in the making of a supply of the property, the creditor shall be deemed to have made a supply of the property at that time [...]". Due to the fact that at the time of the auction sale, the mortgagee is actually seizing the property and making a supply of the seized property it is our view that the provisions of subsection 183(4) would not apply as the mortgagee is not "using the seized property otherwise than in the making of a supply of the property". The mortgagee, therefore, would not have to self-assess under subsection 183(4) of the Act.

Accordingly, as stated earlier, since the residential complexes are new and have not been occupied as a place of residence, the supply of such complexes is taxable and GST would be applicable at the time of the auction sale. Therefore, the Company, as purchaser, would be required to pay GST on the value of the consideration paid (or payable) on the acquisition of the residential complexes purchased at the auction pursuant to subsection 165(1) of the Act.

Since the Company is a registrant, it will have to account for the tax by way of the GST form GST 60 Goods and Services Tax Return for Acquisition of Real Property. (As all the properties were purchased at the same time, only one form is needed, as all the properties could be listed on the single form.) The Company can also claim a corresponding ITC for the purchases, as the acquisition was made in the course of a commercial activity.

The Company, as the supplier, will also be able to claim ITCs on the tax payable on inputs related to the supply of the seized properties at the auction. It will not be able to claim ITCs on the tax payable on supplies related to the seizure of the properties however. See policy statement P-175: Costs that fall Within the Scope of [S]ubsection 183(2) for a further discussion on what costs the Company can claim ITCs on in relation to the seizure and subsequent supply pursuant to the power of sale. A copy of this policy statement is enclosed for your convenience.

When the Company, as owner of the Properties, later sells the Properties, the Company is making a taxable supply of the Properties and will have to collect GST on the consideration for the supply pursuant to section 221 of the Act.

Further, if the Company sells one of the properties - each of which qualifies as a residential complex - to an individual, a GST new housing rebate may be available to the purchaser. As the residential complex is substantially complete, if all the conditions of subsection 254(2) of the Act are met, a GST new housing rebate is available to the purchaser of the residential complex under section 254 of the Act since, according to subparagraph (d)(ii) of the definition of "builder" in subsection 123(1) of the Act, the Company becomes the builder for purposes of the Act. Alternatively, if, for some reason, the residential complex is not substantially complete (for example, if one of the residential complexes is only 80% complete), a GST new housing rebate under section 256 of the Act may be available to the purchaser once all the conditions of subsection 256(2) of the Act are met.

If you require any further information, please do not hesitate to me at (613) 954-4393.

Karl P. Marten
Rulings Officer
Financial Institutions & Real Property
GST Rulings & Interpretations Directorate