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.
FROM Melissa Mercer
Real Property Unit
Financial Institutions and Real Property
Division
Excise and GST/HST Rulings Directorate
TO [Addressee]
Case Number: 152126
DATE December 4, 2013
SUBJECT : GST/HST INTERPRETATION
GST/HST implications with respect to capital real property where GST/HST registration is cancelled; GST/HST treatment of capital real property where use in commercial activity ceases
This memorandum is in response to your [correspondence] of March 12, 2013 wherein you enquired about the Goods and Services Tax (GST)/Harmonized Sale Tax (HST) consequences with respect to a registrant ceasing the use of capital real property, specifically farmland, in commercial activities. You would also like to know the GST/HST treatment of capital real property held by a registrant upon cancellation of registration.
All legislative references are to the Excise Tax Act (ETA), unless otherwise indicated.
[...][INTERPRETATION REQUESTED]
The [...] has encountered situations where GST/HST-registered farmers are no longer using their land for the purpose of farming. In some situations their accountants have advised them that if they request cancellation of their GST/HST registration, the farmland will be considered to have been sold immediately before their registration is cancelled and they will be deemed to have collected tax equal to the basic tax content of the farmland at that time. You would like to know if this is the correct GST/HST treatment. You would also like to know how the GST/HST would apply to farmers who still own farmland, but are no longer using it in commercial activity and have not requested cancellation of their GST/HST registration.
You indicated that you are only asking about the rules with respect to individuals cancelling their GST/HST registration. Therefore, this memorandum does not address the rules as they pertain to other persons, such as corporations or partnerships, upon cancellation of their GST/HST registration.
[...][INTERPRETATION PROVIDED]
There are GST/HST consequences with respect to ceasing the use of capital property and non-capital property in commercial activities, as well as GST/HST consequences with respect to capital property and non-capital property held at the time of cancellation of GST/HST registration. This [...][response] only addresses the GST/HST treatment of ceasing the use of capital real property in commercial activities and capital real property held at the time of cancellation of registration.
Ceasing use in commercial activity
Where an individual stops using farmland in commercial activities, depending on how the property is used by the individual after the cessation of use in commercial activities, two legislative provisions may be relevant: subsections 190(2) (Footnote 1) and 207(1).
Under subsection 190(2), where real property (including farmland) is held for supply, or used as capital property, in a business or commercial activity of a particular individual and the individual appropriates the farmland for their personal use and enjoyment or that of a related individual or former spouse or common-law partner of the particular individual, the particular individual is deemed to have sold and repurchased the farmland immediately before the appropriation. As discussed below, the deemed sale may be exempt under section 11 of Part I of Schedule V to the ETA. If the deemed sale is not exempt, the individual is considered to have collected tax on the deemed sale calculated on the fair market value of the farmland at the time of the appropriation.
Subsection 207(1) provides rules for GST/HST-registrant individuals who have been using capital real property in commercial activity and not primarily for their personal use and enjoyment or that of a related individual, and they subsequently cease to use that capital real property in commercial activity or they begin to use it primarily for their personal use and enjoyment or that of a related individual. Under this subsection, if the individual begins to use the property exclusively (90% or more) in non-commercial activities, or primarily (more than 50%) for the individual's or a related individual's personal use and enjoyment, the individual is deemed to have sold and repurchased the property. As discussed below, the deemed sale may be exempt under section 11 of Part I of Schedule V to the ETA. If the deemed sale is not exempt, at the time of the change in use, the individual is deemed to have collected and paid tax in respect of the sale equal to the amount determined by the formula:
A - B
where
A is the basic tax content of the property at the time of the deemed sale, and
B is the tax, if any, the individual is deemed to have collected under section 190.
The "basic tax content" of a property is generally calculated as:
(a) the amount of GST/HST that was payable on the last acquisition of the property and on any improvements made to the property since it was last acquired;
(b) from this sum, one must deduct any amounts (other than input tax credits) that the person was entitled to recover by way of rebate, refund, remission or otherwise;
(c) the result is then multiplied by a factor that takes into account the fair market value of the property at the time the basic tax content is being determined and the cost of acquiring the property or improvements.
As noted in the formula in subsection 207(1), to prevent tax from applying under both that subsection and subsection 190(2), any tax payable under subsection 190(2) is deducted from the amount otherwise considered to have been collected under subsection 207(1).
Ceasing to be a registrant
Paragraph 171(3)(b) provides that where a person ceases to be a GST/HST registrant, the person is deemed to have ceased using capital real property in commercial activities immediately before the time that their GST/HST registration is cancelled. Where an individual's GST/HST registration is cancelled, the change-in-use rules found under paragraph 207(1)(a), as discussed above, would have to be considered to determine whether the individual is considered to have collected any tax.
Exemption
As stated above, the deemed sale that occurs under subsection 190(2) and subsection 207(1) may be exempt. If the sale is exempt, an individual would not be considered to have collected tax on the fair market value of the farmland under subsection 190(2), nor would a GST/HST registrant individual be considered to have collected tax under subsection 207(1).
With respect to the situation you have described, wherein the capital property held is farmland, the exemption under section 11 of Part I of Schedule V to the ETA may apply to the deemed sale. Section 11 of Part I of Schedule V exempts an individual's supply of farmland deemed to be made under subsection 190(2) or 207(1) where:
* the farmland was used by the individual in a commercial activity that is the business of farming;
* the farmland was not used, immediately before the time of the deemed supply, in a commercial activity other than the business of farming; and
* immediately after the time of the deemed supply, the farmland is for the personal use and enjoyment of the individual or a related individual.
Please see paragraphs 29 through 34 of GST/HST Memorandum 19.5, Land and Associated Real Property, for further information on the meaning of farmland in the context of section 11 and on factors to consider in determining whether land is for the personal use and enjoyment of an individual.
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
Footnotes:
1. We will assume that subsections 190(1), 190(3), 190(4) and 190(5) do not apply in the situation you described as these subsections pertain to conversion of property to residential use and the first use of a residential trailer park or an addition to a residential trailer park.
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