28 February 2019 CBA Roundtable, Q.27

Developer, which owns the land until the closings described below, enters into a Sale Agreement with the Builder to sell developed home lots and developed land for residential condo units (‘Units”). The Builder then enters on to the land to construct the subject houses (the “Houses”) or Units as an invitee of the Developer. The Builder agrees with home buyers to sell Houses or Units to such buyers for a price less than $450,000. Once the Builder completes construction of a House or a Unit, and the Unit is registered as a condominium, the Developer first transfers its beneficial ownership interest in the House or Unit to the Builder under the Sale Agreement (the Initial Closing), followed one moment later by the transfer by the Builder to the Home Buyer of the beneficial ownership of the House or Unit under the applicable Home Buyer Agreement (the Subsequent Closing). However, at the Builder’s direction, the Developer conveys registered title directly to the Home Buyer on the Subsequent Closing.

Before this conveyance the Home Buyer will provide completed and signed GST/HST New Housing Rebate forms (Rebate Forms) to the Builder.

Respecting the Initial Closing, the Builder will self-assess 13% HST and claim an offsetting ITC on filing its monthly GST/HST return. On the Subsequent Closing, the Builder will charge the 13% HST included in the purchase price, and credit the rebate to the Home Buyer.

Can the Builder credit the Rebate, as described above, pursuant to ETA ss. 254(4), 254(5), 256.21(3) and 256.21(4) and s. 41(6) of the New Harmonized Value-Added Tax System Regulations, No. 2 (Regulations), notwithstanding the direct transfer of title to House/Unit to the Home Buyer from Developer?

CRA responded:

Generally, the condition in paragraph 254(4)(a) of the ETA and the corresponding condition in subparagraph 41(6)(c)(i) of the Regulations requires the builder to have made a taxable supply of a single unit residential complex or a residential condominium unit by way of sale to an individual and to have transferred ownership of the complex or unit to the individual under the agreement for the supply. … [T]he word “ownership” generally refers to the legal ownership (that is, “titled” ownership in the case of the underlying real property), rather than equitable ownership of the property. …

Based on the assumptions that: (a) the Builder has actual possession of the Developed Lots or the Developed Land pursuant to the Sale Agreement, and (b) the Sale Agreement provides that beneficial ownership of the House or Unit situated on the Developed Lot or Developed Land (as the case may be) is transferred to the Builder at Initial Closing, one could argue that the Developer holds legal ownership for the benefit of the Builder and is required to transfer legal ownership to the Builder on demand, or to any third party at the Builder’s request (for example, to the Home Buyer …).

So, with respect to this scenario, provided that legal ownership is transferred from the Developer, at the Builder’s direction at Subsequent Closing, to the Home Buyer who is the particular individual with whom the Builder has entered into the Home Buyer Agreement, the CRA will … regard the Builder as having transferred ownership of the House or Unit … to the Home Buyer … .

Therefore … provided that all of the other conditions … are met, the Builder may pay or credit the Rebate to the Home Buyer.

ETA s. 254(4)(a) and the Ontario equivalent required that in order for a taxable supply by a builder of a new house or condo unit to generate the new housing rebate, there must inter alia be a “sale” of the home to the purchaser. CRA considers that in this context, “the word ‘ownership’ generally refers to the legal ownership (that is, ‘titled’ ownership in the case of the underlying real property), rather than equitable ownership of the property.”

However, CRA commented favourably on a situation where legal title bypassed the builder. A developer, which was the full legal owner of land, agreed with a builder that the builder would both build new homes and condo units on the land and enter into agreements to sell those houses or units to the individual purchasers. At closing (and registration of the condo units), beneficial ownership of the built lots or units would be transferred from the developer to the builder and, moments later (on the “Subsequent Closing”), from the builder to the individual purchaser. However, at the direction of the builder, registered title was transferred directly from the developer to the individual purchaser.

After indicating that “one could argue that the Developer holds legal ownership for the benefit of the Builder and is required to transfer legal ownership … to any third party at the Builder’s request (for example, to the Home Buyer …),” CRA stated:

[P]rovided that legal ownership is transferred from the Developer, at the Builder’s direction at Subsequent Closing, to the Home Buyer who is the particular individual with whom the Builder has entered into the Home Buyer Agreement, the CRA will … regard the Builder as having transferred ownership of the House or Unit … to the Home Buyer … .