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, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 151911r
Dear [Client]:
Subject: GST/HST RULING
[…][Application of the GST/HST to the Sale of Real Property]
Thank you for your letter of October 17, 2013, and accompanying documents […], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the sale of real property by […](your client).
The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 14% in Prince Edward Island and 15% in Nova Scotia. 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 […][documents provided], we understand the facts as follows:
* Your client is an individual residing in [participating province A] and is not registered for GST/HST purposes. On [mm/dd/yyyy], she purchased vacant land (the Property) to hold as investment property jointly with an unrelated individual; they each owned a one-half interest in the Property. The Property is legally described as […][the property], with total acreage of [#] acres.
* The Property was the only real property owned by your client, other than her primary residence. The Property remained vacant land and was not subdivided nor severed during the time it was owned by your client.
* From the time of the initial purchase in [yyyy] to [yyyy], the Property was not rented or farmed by your client or the co-owner.
* Starting in [yyyy], your client and the co-owner leased the Property to the neighbouring farmer. Your client received consideration from the neighbouring farmer for the lease of the Property, which you stated was to protect against a potential claim of adverse possession. The property taxes on the Property were approximately $[…] per year. Before the sale by your client, the Property was rented as follows:
o From [yyyy] to [yyyy], your client and the co-owner leased the Property to the neighbouring farmer for consideration of $[…] per year. There was no written lease agreement in place.
o From [yyyy] to [yyyy], the rental arrangement continued with the same farmer and for the same annual consideration of $[….]. The parties entered into a written lease agreement.
o From [yyyy] to [mm/yyyy], the rental arrangement continued with the same farmer but for an annual consideration of $[…]. There was no written lease agreement in place.
* On [mm/dd/yyyy], your client sold her interest in the Property to the other co-owner and the spouse of the co-owner.
* For income tax purposes, your client reported half of the annual consideration received from the farmer as rental income from property and the only expense she claimed was her portion of the property taxes. You state that other expenses incurred (such as legal fees for professional services in connection with the lease, travel expenses between her residence and the Property to check up on the Property, etc.) were not reported for income tax purposes because your client was of the view that she was not operating a business and, if these expenses had been reported, they would have had little impact on her personal tax return as she had no meaningful sources of income. Based on information you have provided, your client’s net profits (losses) during the years the Property was rented to the neighbouring farmer taking into account all the expenses would have been as follows:
o From [yyyy] to [yyyy], total net profit for the […] years was $[…].
o From [yyyy] to [yyyy], total net loss for the […] years was $[…].
o From [yyyy] to [yyyy], total net profit for the […] years was $[…].
* In [yyyy], your client incurred an outlay of $[…] for survey and appraisal services. A fee of $[…] for professional services rendered in connection with this HST matter was incurred by your client in [yyyy].
* The Property was capital property of your client and the co-owner.
RULING REQUESTED
[Was] the sale by your client of her interest in the Property exempt under subsection 9(2) of Part I of Schedule V to the ETA[?]
RULING GIVEN
The sale by your client of her interest in the Property was subject to the HST at 13%. The sale is excluded from exemption by subparagraph 9(2)(a)(i) of Part I of Schedule V, because immediately before the sale the Property was capital property used primarily in a business carried on by your client with a reasonable expectation of profit.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
EXPLANATION
We have reviewed your additional documents […] and taken into account your submission that the Property was capital property used by your client without a reasonable expectation of profit.
[…], the fact that the gross income generated from the lease of the Property was greater than the expenses attributed thereto for most of the years the Property was rented suggests that the business had a reasonable expectation of profit. As such, the exception in subparagraph 9(2)(a)(i) applies and, since there are no other relevant exemptions in the circumstances, the sale of the Property was taxable.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-957-8226. 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,
Béatrice Mulinda
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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