File No. 11870-5/11950-1
Case No. HQR0000449
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Subject:
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HST Transitional Provisions - Real Property
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Dear XXXXX
This is further to the E-mail from XXXXX to Mr. John Bain dated December 4, 1996 in which XXXXX requested our views concerning the application of the XXXXX transitional provisions for sales of real property straddling April 1, 1997.
Facts
We understand the facts to be as follows:
1. A subdivision developer (the "Developer") allows a builder (the "House Builder")access to a vacant lot, situated in XXXXX to begin construction of a house.
2. The Developer owns the lot upon which the house is to be constructed.
3. The House Builder enters into an agreement of purchase and sale (the "Agreement") with a consumer (the "Customer") on December 4, 1996 for a residential complex (i.e., house and land) which is to be built. The closing/completion date for this transaction is April 30, 1997.
4. The Developer does not have a written agreement with either the House Builder or the Customer.
5. On the closing date (April 30, 1997), the lawyers will treat the Agreement as two transactions:
- a supply by way of sale of the lot from the Developer to the Customer
- a supply of construction services from the House Builder to the Customer.
6. The Developer did not engage the House Builder, through a bona fide verbal agreement or as an agent of the Developer, to construct the residential complex.
7. The consideration payable to the House Builder under the Agreement was not collected by the House Builder on behalf of the Developer
Issue
XXXXX has asked us to provide comments concerning the application of the HST transitional rules for sales of real property, and in particular, the application of proposed section 350 of the Excise Tax Act as drafted for First Reading of Bill C-70 (December 2, 1996).
Interpretation Given
Based on the facts set out above, our response is that neither ownership nor possession of the residential complex will have been transferred under the Agreement to the Customer prior to the implementation date for XXXXX (i.e., April 1, 1997). Consequently the tax will be payable at the HST rate of 15% under subsection 165(1) in conjunction with proposed subsection 165(2) in respect of the supply of the residential complex to the Customer.
Explanation
Under subsection 168(5), GST on a sale of real property is payable on the day on which possession or ownership of the property transfers to the buyer, whichever is earlier. Proposed section 350 confirms that the provincial component of the HST is not payable in the case of real property sold in a participating province XXXXX where ownership or possession of the property is transferred under the agreement to the recipient before April 1, 1997.
As indicated in Policy Paper P-111, "ownership" generally refers to the legal ownership (i.e., "titled" ownership) in the case of the underlying real property, rather than equitable ownership of property, for purposes of the provisions relating to supplies of real property which refer to transfers of ownership, such as subsection 336(1) as well as proposed section 350. Accordingly, references to agreements of sale or agreements to transfer ownership of the underlying real property are generally to be ownership of the property that is transferred on the closing of the transaction. In this case, the closing is to occur on April 30, 1997. As a result the ownership of the residential complex is transferred to the Customer under the Agreement after the HST implementation date of April 1, 1997.
Policy Paper P-111 also discusses whether there has been a transfer of possession relating to supplies of real property by way of sale. A person may be in possession of real property if that person is entitled to hold, control or occupy the property either with or without the right of ownership to the property.
Determining if and when possession is transferred in the case of real property is a question of fact, dependent on several indicia. Factors such as the payment of property taxes, the right to alter the land, the planting of crops or trees, the collection of rents, repairs to the property, the maintenance of the lot, etc., by the recipient serve to indicate, but are not necessarily conclusive, that possession has been transferred.
In this particular case, the Developer allowed the House Builder access to the Developer's lot to begin construction of a residential complex. However, given the lack of evidence indicating that the Customer was entitled to hold, control or occupy the real property at issue prior to the date of closing on April 30, 1997, it is difficult, therefore, to argue that the possession of the real property was transferred to the Customer prior to April 1, 1997. As a result, we conclude that possession of the residential complex is transferred to the Customer under the Agreement after April 1, 1997.
Proposed subsection 351(1) does not apply in this case, since the Agreement was entered into after the announcement date (i.e., October 22, 1996).
Since neither ownership nor possession of the residential complex will have been transferred under the Agreement to the Customer before April 1, 1997, the tax on the newly constructed residential complex will be payable at the HST rate of 15% on the consideration for the complex.
If you require any further information concerning this matter please contact me at (613) 957-8226.
Costa Dimitrakopoulos
Senior Policy Officer
Financial Institutions & Real Property Division
GST Rulings and Interpretations
XXXXX
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