Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 196196
Dear [Client]:
Subject: GST/HST RULINGS & INTERPRETATIONS
Assignment of a right to purchase a residential unit with a lease-back option
Thank you for your [correspondence] of [mm/dd/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to your client’s assignment of an interest in a residential property.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
Based on the documentation you have provided and our telephone conversations, we understand the following:
1. You are the authorized representative of […](the Assignor).
2. The Assignor is a non-resident of Canada and is not registered for the GST/HST.
3. On [mm/dd/yyyy], the Assignor entered into an Agreement of Purchase and Sale (the APS) with […](the Vendor) to purchase a residential condominium unit (the Unit) that was to be built in […][province X](Footnote 1) ,[…].
4. The purchase price of the Unit was $[…].
5. On [mm/dd/yyyy], the Assignor and the Vendor entered into the […](the Amendment), which provides for the deletion of certain terms and the insertion of other certain terms, within […] the APS. Specifically, the Amendment provides that, notwithstanding the terms of the APS:
- there will be no Interim Closing Date or Occupancy License arrangements
- the Assignor will have no right to occupy the Unit prior to the Final Closing Date.
6. On [mm/dd/yyyy], the Assignor entered into the […](the Option). The parties to the Option are the Assignor and […](the Tenant). […] to the Option describe that:
- the Assignor has entered into the APS with the Vendor
- the Tenant has agreed to lease the Unit from the Assignor provided the Assignor exercises […] the Option.
Under the Option, if the Unit is leased to the Tenant, the Tenant will pay rent in the amount of $[…] to the Assignor on a monthly basis for the term of the lease, starting on […][Date X].
7. On [mm/dd/yyyy], the Assignor exercised the Option and agreed to lease the Unit to the Tenant under […](the Rental Program) which provides the following:
- [Date X] means the Final Closing Date;
- the terms of the Rental Program will prevail wherever the terms differ from the terms expressed in the APS (and any amendments thereto) or the Option;
- the Assignor will have no right to access, occupy or use the Unit and will not be issued keys or have access to the Unit until the expiry of the Term or the termination of the Rental Program.
8. On [mm/dd/yyyy], the Assignor entered into […](the Assignment) with […](the Assignee) for the assignment of the Assignor’s rights and obligations under the APS. Subject to the Vendor’s consent to the Assignment, the Assignee would pay to the Assignor the amount of $[…], calculated as two components:
- a deposit of $[…] paid at the time of entering into the Assignment,
- the amount of $[…] due on the Final Closing Date.
[…] of the Assignment provides that if the sale is subject to the HST, the tax is included in the purchase price and that the Assignor will certify on or before closing if the sale is not subject to HST. The Assignor made no such certification with respect to the HST.
9. On [mm/dd/yyyy], the Vendor consented to the Assignment under the […].
10. On [mm/dd/yyyy], the Assignor and the Tenant agreed to terminate the Rental Program under a […] whereby the Assignor elected not to proceed with the Rental Program.
11. On [mm/dd/yyyy], the condominium complex was registered as a condominium.
12. On [mm/dd/yyyy], the Final Closing Date, the transaction under the Assignment was concluded. The balance of the assignment amount was paid to the Assignor by the Assignee.
13. The Rental Program was terminated prior to [Date X], therefore the Assignor did not receive any rent revenue from the Tenant.
You have asked a number of questions with regard to the Assignor’s liability for the HST. You have also asked some questions that are general in nature.
RULINGS REQUESTED
You would like to know:
1. Is the Assignment a taxable supply?
2. If the Assignment is a taxable supply, what amounts are subject to the HST: the assignment fee, the reimbursed deposit amount, or both amounts?
3. If the Assignment is a taxable supply, does paragraph 221(2)(a) relieve the Assignor from the liability to charge and collect the HST?
RULINGS GIVEN
Based on the facts set out above, we rule that:
1. The Assignment is a taxable supply.
2. The amount of the HST is calculated on the value of consideration for the Assignment.
3. The Assignor is not required to collect the HST on the value of consideration for the Assignment.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the Canada Revenue Agency (CRA) is bound by the ruling(s) given in this letter provided that: none of the issues discussed in the ruling(s) are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
The CRA will not issue a ruling where it considers that one would not be appropriate; for example, a ruling will not be issued when a request concerns a tax-related calculation. Further, you have clarified that some of your questions are general in nature and are not specific to the subject case. Accordingly, we will address these matters as interpretations following the explanation of our Rulings.
EXPLANATION
1. The Assignment is a taxable supply.
A person who enters into a purchase and sale agreement with the supplier of a residential complex may subsequently assign their rights and obligations under that agreement to another person (an assignee). The assignment of a person’s rights and obligations under such an agreement is generally considered to be a sale of the person’s interest in the complex to the assignee.
The tax status of a sale of a residential complex or an interest in a residential complex is generally dependent on whether the person who makes the supply is a “builder” of the complex. The sale of a residential complex or an interest in a residential complex by a person who is a builder of the complex is generally a taxable supply unless an exemption applies. The sale of a residential complex or an interest in a residential complex by a person who is not a builder of the complex is generally an exempt supply.
Builder
The term “builder” is defined in subsection 123(1). We limit our discussion to paragraph (d) of that definition and specifically, how the definition applies in the case of a residential condominium unit (RCU).
Generally, paragraph (d) of the definition provides that a person is a builder of a residential complex (which includes an RCU) where the person acquires an interest in the complex
(i) in the case of a condominium complex or residential condominium unit, at a time when the complex is not registered as a condominium, or
(ii) in any case, before it has been occupied by an individual as a place of residence or lodging,
for the primary purpose of
(iii) making one or more supplies of the complex or parts thereof or interests therein by way of sale, or
(iv) making one or more supplies of the complex or parts thereof by way of lease, licence or similar arrangement to persons other than to individuals who are acquiring the complex or parts otherwise than in the course of a business or an adventure or concern in the nature of trade.
Paragraph (d) provides that a person’s primary purpose for acquiring an interest in the complex is a factor in finding a person to be a builder. More specifically, subparagraph (d)(iv) provides that a person is a builder of the complex where the person acquires an interest in the complex for the primary purpose of supplying it by way of lease, licence or similar arrangement, with the exception that the person is not a builder of the complex if the person’s intention is to supply it by way of lease, licence or similar arrangement to an individual who will use it other than in the course of a business or an adventure or concern in the nature of trade (that is, where the recipient is an individual who will use it for their personal use).
Certain persons are excluded from the definition of builder by paragraphs (f) through (h). Paragraph (f) provides, in part, that an individual described in paragraph (d) is not a builder of the complex where the individual acquires the complex (or interest therein) otherwise than in the course of a business or an adventure or concern in the nature of trade. The definition of “business” in subsection 123(1) includes any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement.
The Assignor acquired an interest in the Unit at a time when the condominium complex was not yet registered as a condominium. Further, the Assignor entered into both the APS and the Option on the same day and subsequently exercised the Option to lease the Unit under the Rental Program. Under the terms of the Rental Program, the Assignor would lease the Unit to a corporation (the Tenant). These actions suggest the Assignor’s primary purpose for acquiring the interest in the Unit was to lease the Unit for the purpose of receiving rental income, that is, in the course of a business.
Based on these facts, we find the Assignor is a builder as described by the conditions in subparagraphs (d)(i) and (iv) of that definition; the exclusion in paragraph (f) does not apply. (Footnote 2)
Therefore, we must consider the GST/HST implications in finding a person to be a builder of a residential complex.
Self-supply
Under subsection 191(1), the builder of a residential complex may be subject to a self-supply when the builder leases a newly constructed residential complex to an individual to occupy as a place of residence. Where all conditions of subsection 191(1) are met, the builder is deemed to have made and received a taxable supply by way of sale of the complex and to have paid as a recipient and collected as a supplier, the tax in respect of the sale. The tax that is deemed to have been collected is calculated on the fair market value of the complex at the later of the time when construction of the complex is substantially completed and the time when possession or use of the complex is so given for its occupancy by an individual as a place of residence.
As the Rental Program was terminated prior to [Date X], the conditions under subsection 191(1) are not met. Accordingly, the Assignor is not subject to a self-supply.
Assignment
As noted above, the assignment of a person’s rights and obligations under a purchase and sale agreement for a residential complex is considered to be a sale of the person’s interest in the complex to the assignee.
The sale of a residential complex or an interest in a residential complex is generally a taxable supply unless an exemption in Part I of Schedule V applies to the sale. Subject to certain conditions, section 2 of Part I of Schedule V exempts the sale of a residential complex or an interest in a residential complex when made by a person who is not a builder of the complex. As we have found the Assignor to be a builder of the Unit, the exemption in section 2 of Part I of Schedule V does not apply to the Assignor’s sale of the interest in the Unit to the Assignee.
There are circumstances where a builder’s supply of a residential complex (or an interest therein) may be exempt. Specifically, section 4 of Part I of Schedule V may exempt the sale of an RCU, or an interest in an RCU, where the builder of the RCU was deemed under subsection 191(1) to have received a taxable supply of the RCU by way of sale, and where that supply was the last supply of the complex made by way of sale to the builder.
As noted above, the Assignor is not subject to a self-supply imposed under subsection 191(1). Therefore, the exemption in section 4 of Part I of Schedule V does not apply to the Assignor’s sale of its interest in the Unit to the Assignee.
As there are no other exemptions that apply, the Assignment is a taxable supply.
2. The amount of the HST is calculated on the value of consideration for the Assignment.
Where the sale of a person’s interest in a residential complex is a taxable sale, tax is calculated on the value of consideration for the sale of the interest. By definition, consideration includes any amount that is payable for a supply by operation of law. The consideration charged for the sale of a person’s interest in a residential complex generally includes amounts (for example, deposits) the person has already paid to the developer and wants to recover when assigning their interest in the complex, as well as any amount over and above the amounts the person has paid to the developer.
The Assignment is a taxable sale. Accordingly, consideration for the Assignment is the total of the amounts paid by the Assignee to the Assignor, which includes any amounts identified as the deposits the Assignor has paid to the Vendor.
The amount of the HST is calculated on the total consideration for the Assignment. In the case where the Assignment states that the HST is included in the assignment amount, the total consideration is the total of the amounts paid by the Assignee to the Assignor, less the HST included in that amount. For example, where HST at the rate of 13% is included in the amount paid, the total consideration is calculated by multiplying the total amount paid by the fraction 100/113.
3. The Assignor is not required to collect the HST on the value of consideration for the Assignment.
A person who makes a taxable supply is generally required to collect the tax payable by the recipient in respect of the supply. Subsection 221(2) provides some exceptions to this rule where the supply is a taxable sale of real property. Specifically, paragraph 221(2)(a) provides that a non-resident supplier is not required to collect the tax from the recipient of a taxable sale of real property.
As a non-resident supplier, the Assignor is not required to collect the HST on the consideration for the Assignment.
Where paragraph 221(2)(a) relieves the supplier of real property from collecting the tax that is payable, subsection 228(4) requires the recipient of the supply of the real property to report and remit (self-assess) the tax that is payable on the purchase of the real property.
Therefore, where the recipient is a registrant who is required to self-assess the tax on the taxable purchase of real property and who is using or supplying the property primarily in the course of commercial activities, they will report the tax on their GST/HST return for the reporting period in which the tax became payable. In any other case, the recipient will use form GST60, GST/HST Return for the Purchase of Real Property or Carbon Emission Allowances, to report and remit the tax. The GST60 return must be filed on or before the last day of the calendar month following the month in which the tax became payable.
INTERPRETATIONS REQUESTED
You would like to know if a non-registrant person is eligible to register for the HST so as to claim an input tax credit (ITC) for the HST paid on any fees and expenses related to the taxable sale of real property, for example, realty commission, legal and accounting fees and an assignment fee.
Further, you have asked that we address the calculation of HST where the terms of an agreement provide that HST is included in an amount.
INTERPRETATIONS GIVEN
Registration and ITCs
Subsection 169(1) provides that a person who is a registrant may be able to claim an ITC to recover the GST/HST that is paid or payable on purchases and expenses that are related to the person’s commercial activities. A person is a “registrant” if the person is registered, or is required to be registered, for the GST/HST; “commercial activity” of a person is defined to include the making of a supply of real property, other than an exempt supply.
Subsection 240(1) sets out the conditions under which a person is required to be registered, with certain exceptions. Specifically, paragraph 240(1)(b) provides that a person is not required to be registered where the person’s only commercial activity is the making of supplies of real property by way of sale otherwise than in the course of a business.
Voluntary registration is permitted in some circumstances. For example, paragraph 240(3)(a) permits a person who is engaged in a commercial activity in Canada to voluntarily register for the GST/HST. The effective date for voluntary registration is generally the date the CRA receives the application for registration. An earlier effective date may be accepted where the date requested is within thirty days of the application for registration, or where the person collected the GST/HST prior to the date on which the application is received.
A person who is neither registered nor required to be registered cannot claim an ITC.
For more information on GST/HST registration, please refer to GST/HST Memorandum 2.1, Required registration and GST/HST Memorandum 2.3, Voluntary registration.
Tax collected in error
As explained above, subsection 221(2)(a) provides that a non-resident supplier who makes a taxable sale of real property is not required to collect the GST/HST payable by the recipient. This provision is mandatory and does not permit the parties to an agreement to alter the application of the legislation by including terms that are contrary to the legislation. A person who is required to self-assess the tax under subsection 228(4) is not relieved of that obligation if the person pays tax to the supplier instead.
GST/HST that is charged or collected in circumstances where it should not be charged or collected is considered to be charged or collected in error. For example, even where the terms of a contract provide that the GST/HST is included in the amount of a purchase, the amount is collected in error if the supplier is not required to collect the GST/HST that is payable.
Any amounts that a person collects as or on account of GST/HST, including GST/HST collected in error, are deemed to be held in trust for the Crown and must be included in the person’s net tax calculation for the reporting period in which the tax became collectible or was collected. A non-registrant person’s reporting period is a calendar month; any positive amount of net tax must be remitted to the Receiver General within one month after the end of the reporting period.
In this regard, a non-registered person will use form GST62, Goods and Services Tax/Harmonized Sales Tax Return (Non-personalized) to report and remit the tax.
A person who has charged or collected from another person an amount of tax in error (for example, a non-resident supplier) may, pursuant to subsection 232(1), refund or credit the amount of tax to the other person within two years after the day the amount was collected. Alternatively, a person who has paid an amount of tax in error (for example, the recipient of the supply) may apply to the CRA for a rebate under section 261 within two years after the day the amount was paid. Please refer to GST/HST Memorandum 12.2, Refund, Adjustment, or Credit of the GST/HST under Section 232 of the Excise Tax Act for further discussion.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretations given in this letter, including any additional information, is not a ruling and does not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretations or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 780-504-3442. 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,
Johanne Cairo
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
FOOTNOTES
1 […]
2 No other exclusion applies to an individual who is a builder described by paragraph (d).
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