30 October 2000 GST/HST Interpretation 25883 - Supply by Way of Sale

We write in response to your request of August 23, 2000 that we review your correspondence with the above client and provide our opinion.

From the client's letters of XXXXX and the draft GST/HST Interpretation prepared by XXXXX, we understand the circumstances in question to be as follows:

1. Company A, a registered person for GST purposes, is a developer of residential lots.

2. Company B, also a registered person, is a home builder.

3. Companies A and B have the same shareholders, shares of the companies are owned in the same proportion by these shareholders and the companies have the same officers and directors. Companies A and B do not own any part of each other.

4. Company A holds the legal title to lots ("the lots") on which Company B constructs houses. The client states that Company A has legal title only for "liability purposes".

5. Company A is responsible for servicing the lots, such as installing roadways and curb work. It is claiming input tax credits for the GST paid on those services.

6. Company B enters into agreements with individuals ("the purchasers") for the purchase and sale of the lots and the houses constructed on them. The agreements only reflect the names of Company B and the purchasers.

7. Company B collects and remits GST based on the total sale price under the agreements with the purchasers. Under those agreements the GST/HST new housing rebate is transferred to Company B.

8. At the time of the closing of Company B's sales, the lots are transferred directly from Company A to the respective purchasers. The client has stated that, although there is no formal agreement, the lots are in substance purchased by Company B from Company A, at fair market value, on the closing date; the lots and the houses are then sold to the purchasers by Company B.9. The client has stated that no money changes hands from Company B to Company A, but that at the end of the year both companies make adjusting entries in their books: Company A has an account receivable and Company B has an account payable, each in the amount of the value of the lot. As and when Company A may require for its purposes, Company B will transfer cash to Company A which will be recorded as payments against these accounts.

10. Legal title to the lots does not pass from Company A to Company B in order to avoid incurring land transfer fees on that transaction.

11. The client has stated that the arrangement between Company A and Company B is neither a joint venture nor a bare trust. It is assumed that there is also no agency arrangement between Company A and Company B.

Issue

You have requested our comments on your draft response to the client, in which you state:

"Pursuant to section 165 of the Excise Tax Act (ETA), every recipient of a taxable supply, other than a zero-rated supply (taxed at the rate of 0%), made in Canada is required to pay tax at the rate of 7% (or 15% if the supply is made in a participating province) on the value of the consideration of the supply.

"Even though there may be no explicit agreement between Companies A and B to transfer legal ownership of the lot, in order for Company B to sell the lot to the purchaser, a supply must have taken place for purposes of the GST. Under subsection 123(1) of the ETA, supply 'means ... the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition'.

"In accordance with subsection 221(2) of the ETA, Company A is not required to collect tax where the purchaser (Company B) is registered for GST/HST purposes and the supply is not a supply of a residential complex made to an individual. Pursuant to subsection 228(4) of the ETA, Company B is required to self-assess the GST payable on the acquisition of the residential lots. It may then claim an offsetting input tax credit, to the extent that it is for the consumption, use or supply in the course of commercial activity, so that no payment actually needs to be remitted to the Receiver General."

Response

In the given circumstances, it is our view that:

1. There is a supply by way of sale of an equitable interest in the lot from Company A to Company B. Pursuant to subsection 168(5) of the ETA, tax will be payable by Company B at the time of the transfer of the equitable interest.

2. Pursuant to subsection 221(2) of the ETA, Company A will not be required to collect tax on the sale to Company B. Company B will be required by subsection 228(4) to account for the tax payable on its acquisition of the interest in lot, but will be entitled to an offsetting input tax credit.

3. Company B is required by subsection 221(1) of the ETA to collect GST from its purchaser based on the full consideration for the sale. Although Company A is supplying the legal title to the purchaser, it does so for no consideration and therefore without tax liability.

4. If all the other conditions of section 254 of the ETA are met, the purchaser will be entitled to a GST/HST new housing rebate based on the full purchase price. Company B will be able to pay or credit the amount of this rebate to the purchaser under subsection 254(4).

Analysis

1. A sale of property is defined in subsection 123(1) of the ETA to include a transfer of ownership of the property and a transfer of possession of the property under an agreement to transfer ownership of the property. In the circumstances at hand, it is our view that Company A is transferring ownership of an equitable interest in the lot to Company B and is therefore making a supply by way of sale of real property.

Pursuant to subsection 168(5), tax is payable on the supply of real property by way of sale at the earlier of the day ownership is transferred to the recipient and the day possession is transferred under a written agreement for the supply. In the given circumstances, tax is payable by Company B at the time the equitable interest in the lot is transferred from Company A.

The tax on the sale from Company A to Company B may be calculated on whatever value of consideration the companies may determine. As Company B is a registrant and is acquiring the equitable interest exclusively for use in commercial activities (i.e. a taxable supply of real property) section 155 would not require that the tax be based on the fair market value of the lot.

2. Because Company B is registered for GST purposes and is not an individual receiving the supply of a residential complex, Company A is relieved by paragraph 221(2)(b) of the ETA from the obligation to collect tax from Company B. Company B is required by subsection 228(4) to account for and pay the tax due on the supply to the Receiver General. As Company B is acquiring the property primarily for supply in the course of its commercial activities, it will report the tax on the return for the reporting period in which the supply takes place. At that time, Company B will be able to claim a full input tax credit under subsection 169(1), which will effectively offset the tax due on the acquisition.

3. Company B is liable under subsection 221(1) of the ETA to collect GST from the purchaser of the newly constructed residential complex. Company B acquired an interest in the residential complex before it was occupied by an individual, for the primary purpose of making a supply of that interest by way of sale, and is therefore, by definition under subsection 123(1), a "builder". Consequently, the sale to the purchaser of its equitable interest in the residential complex is a taxable supply. The applicable tax is calculated on the full purchase price of the residential complex.

Company A is also a "builder": it had an interest in the real property when the residential complex was constructed. By transferring the legal title to the purchaser, it makes a taxable supply of an interest in the residential complex by way of sale. However, in this case, as the transfer is made for no consideration, no tax will be payable by the purchaser.

4. The taxable supply of the residential complex by Company A and of the equitable interest in the residential complex by Company B will allow for a GST/HST new housing rebate under section 254 of the ETA where the conditions of the rebate are otherwise satisfied. It is our view that in these circumstances Company B will be able to pay or credit the rebate to the purchaser under subsection 254(4).

XXXXX[.] We trust that the above will be of assistance to you. If you have any questions or concerns please do not hesitate to call me at (613) 952-9212.

Michael Wolff
Technical Analyst
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate