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.
Date : July 4, 2013
From: Melissa Mercer
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
To: [Addressee]
FILE: 144290
SUBJECT : GST/HST INTERPRETATION
[...] the availability of a [...] [GST/HST] new housing rebate
This memorandum is in response to our [...] [correspondence], regarding the transaction wherein [...] ("the Sub-lessee" or "the Purchaser") acquired an interest in leasehold land, and the buildings and improvements constructed on the land, from [...] ("the Lessee" or "the Developer").
All legislative references are to the Excise Tax Act (ETA), unless otherwise indicated.
The following documents were provided to us for our consideration:
a) Lease #[...] ("the Lease") between the Developer and the [...] ("the City" or "the Lessor") for the lease of land described as [...] [the land] for a term of [...], commencing on [mm/dd/yyyy].
b) [...] ("the Purchase Agreement") dated [mm/dd/yyyy], for the acquisition of a lot ("the Lot") that forms part of [the land], and all buildings and improvements to be constructed on the Lot. The Lot is municipally described as [...]. The Lot includes a single unit residential complex ("the Unit") in a property known as the [...] ("the Townhouse"), which contains [#] other single unit residential complexes. The Purchase Agreement is entered into between the Developer and the Sub-lessee (i.e., the Purchaser). The Purchase Agreement indicates that Schedule A [...], Schedule B [...] and Schedule C [...] are part of this agreement. We note that Schedule B was provided for our review, but we did not receive Schedule A or Schedule C.
c) The letter of [mm/dd/yyyy] to the City from [...], presumably solicitors for the Purchaser, notifying the City of the change in ownership of the Unit.
d) A copy of document [...] and the statement of adjustments for the supply of the Unit from the Developer to the Purchaser. The statement of adjustments indicates a purchase price of $[...], GST of $[...], as well as a GST rebate of $[...].
Statement of Facts
1. We make specific note of the following content of the Lease:
i) Section [...] states that the Lessee has elected to pay the total rent in the amount of $[...] for the lease of [the land].
ii) Section [...] provides for the payment of $[...] per [...] for the balance of the term of the Lease upon receipt of the rental payment in the amount of $[...].
iii) Section [...] indicates that it is the intention of the Lessor to transfer fee simple title to the Lessee [...]. However, there is no indication that the fee simple interest has ever transferred to the Lessee.
iv) Pursuant to Section [...], if the Lease is surrendered, with consent of the Lessor, the rent paid by the Lessee shall be refunded.
v) Section [...] requires the Lessee to use [the land] for residential purposes only.
vi) Section [...] provides that the Lessee shall construct one unit, contained within a [#]-unit row house, having a market value of not less than $[...]. Construction of the unit shall commence within [...] of the effective date of the Lease and shall be completed within [...] of the effective date of the Lease.
vii) Section [...] requires the Lessee to maintain the existing improvements already situated on [the land] and any additional improvements constructed on [the land], in a manner and condition satisfactory to the Lessor.
viii) Section [...] provides that upon termination of the Lease, the Lessee may sever and remove from the Land all structures, fixtures and improvements belonging to the Lessee. The Lessee cannot remove any land fill, soil, topsoil, [...], or any combination thereof. Additionally, Section [...] states that the Lessee must deliver up possession of [the land] to the Lessor upon termination of the Lease.
ix) Section [...] provides for the Lessor to grant a new lease to the Lessee for a further term of [...] at a rental rate of $[...] per [...], if the Lessee duly performs and observes all the covenants and agreements contained in the Lease.
x) Section [...] states that the Lessee shall not assign or dispose of the Lease or the Lessee's interest in [the land] without the consent of the Lessor in writing.
2. We make specific note of the following content of the Purchase Agreement:
i) Section [...] states a purchase price for the Unit of $[...] plus GST of $[...], net of the GST/HST new housing rebate, for a total of $[...]. [...], you confirmed that the purchase price indicated on the Purchase Agreement is for the supply of the Unit.
ii) Section [...] provides that the Purchase Agreement is conditional upon the Lessor's consent to the transfer of the Lease to the Purchaser.
iii) Section [...] stipulates that the Developer covenants that the Lease is a valid and subsisting and fully paid lease and the Developer is not in default. The Developer shall also maintain the Lease in good standing and shall observe and perform its covenants thereunder.
iv) Section [...] states that the Developer shall obtain all permits and build, construct, and erect the Townhouse on [the land] in accordance with the plans and specifications attached in Schedule A. As noted, Schedule A was not provided to us.
v) Section [...] states that the Developer agrees to provide the Purchaser with a copy of the Lease.
vi) Section [...] requires the Developer to maintain insurance on the Unit and all improvements and chattels included in the purchase price until the completion date. It is the responsibility of the Purchaser to maintain insurance on the Unit and all improvements and chattels included in the purchase price from the completion date.
ISSUE
The Developer has submitted a [...] GST/HST new housing rebate application on behalf of the Purchaser, who is claiming a rebate on the purchase of the Unit and lease of the related land. You would like to know if the transaction, supported by the documents mentioned above, qualifies as:
• a sale of the building portion of the Unit along with a long-term lease of the land portion of the Unit whereby the Developer must account for tax in respect of the self-supply of the Unit (if this is the case, you believe a [...] GST/HST new housing rebate application should be filed to claim a rebate under section 254.1 in respect of the consideration paid for the building portion of the Unit);
• a taxable sale of the Unit (i.e., building and land) (if this is the case, you believe a [...] GST/HST new housing rebate application should be filed to claim a rebate under section 254 in respect of the GST/HST paid on the Unit); or
• a long term lease of the Unit (if this is the case, you believe there is no GST/HST new housing rebate entitlement for the Purchaser and the Developer was required to make a self-supply of the Unit under subsection 191(1)).
Response
Based on our review of the documents provided, it is our view that:
1. The supply from the developer to the Purchaser is a taxable sale of the leasehold interest in the Unit. The Purchaser is required to pay GST/HST on the full consideration payable for the leasehold interest in the Unit. The Developer is not considered to have made a self-supply of the Unit under subsection 191(1).
2. The Purchaser will be eligible to claim a new housing rebate under section 256 in respect of the GST/HST paid on the Unit if all of the conditions for claiming the rebate under that section are met.
Analysis
Supply of the Unit
One of the basic principles of real estate law is that a fixture, such as a building, forms part of the land to which it is affixed, even if the person who affixed the building has retained the right to sever and remove it.
Based on the documentation provided, it is our view that the transaction between the Developer and the Purchaser is not a separate sale of the building portion of the Unit and a lease of the land portion of the Unit, or a sale of the building portion and an assignment of the lease of such land. There is no indication in the Lease that the City has given ownership of the building portion of the Unit to the Developer. The City requires the Developer to construct improvements (i.e., the Unit) on the Lot, to maintain those improvements and to use the Unit for residential purposes, but there is no indication that the Developer has ownership of the building portion of the Unit. The Developer has only an interest in the Unit constructed on the Lot and cannot therefore dispose of something more (i.e., the Developer cannot make a separate sale of the building portion of the Unit).
Instead of the sale of the building portion of the Unit and a lease, or assignment of a lease, in the land portion of the Unit, we would characterize the supply in this case as an assignment of a lease of land on which the building is located (i.e. an assignment of the leasehold in the Unit). As such, neither the condition in subparagraph 191(1)(b)(i) nor the condition in subparagraph 191(1)(b)(ii) is met and the Developer is not required to self-supply the Unit. As there is no self-supply under subsection 191(1), there is no rebate entitlement under section 254.1 (i.e., a [...] GST/HST new housing rebate is not permitted).
The Developer is assigning its leasehold interest in the Unit to the Purchaser for a single amount. This is a taxable supply as there are no provisions to exempt the supply.
New housing rebate under section 256 for owner-built homes
Section 256 provides for a rebate to an individual where that individual:
1. constructs, or engages another person to construct, a single unit residential complex (SURC) for use as the individual's primary place of residence or that of a relation;
2. has paid tax in respect of the supply by way of sale to the individual of the land that forms part of the complex or an interest therein or in respect of any improvement to the land that forms part of the SURC; and
3. meets all of the other conditions for claiming a rebate under section 256.
The Purchaser has paid the GST/HST to the Developer on the consideration paid for the assignment of the interest in a single unit residential complex (i.e., the Unit). Assuming the Purchaser meets all of the other conditions under section 256, they will be eligible for the new housing rebate for owner-built homes.
If you require further clarification with respect to any of the issues addressed in this letter, please call me at 613-952-9212.
Melissa Mercer
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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