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: 155500
February 18, 2014
Subject: GST/HST INTERPRETATION
Purchase of real property using Islamic financing
Dear [Client]:
Thank you for your letter of [mm/dd/yyyy], and your facsimile of [mm/dd/yyyy], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the purchase of real property using Islamic financing.
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 (effective April 1, 2013) and 15% in Nova Scotia. The GST applies in the rest of Canada at the rate of 5%.
Effective April 1, 2013, the 12% HST in British Columbia has been replaced by the 5% GST and a provincial sales tax.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Although you requested a GST/HST ruling, the nature of your questions is such that the application of the tax is specific to the facts of each purchase or lease transaction and the related agreements entered into in each situation. Although a draft version of [the] […] (Agreement) that is expected to be used in the proposed transactions was submitted, we are not in a position to use the draft Agreement as the basis for a ruling. Since your request does not relate to a specific set of facts and we were not provided with all relevant documents, we are not able to provide a ruling on these matters, but are pleased to provide the following GST/HST interpretations.
We understand as follows:
1) […] ([…][FinanceCo]) is proposing to offer a new financing product for the Islamic community which is compliant with Sharia Law. The new financing product would be used to finance purchases of commercial properties that could include, for example, strip malls or combination residential/commercial buildings.
2) You provided us with a draft Agreement that you indicate would be used in the proposed financing transactions.
3) The draft Agreement contains the following provisions:
a) Recital […] indicates the Agreement is based on a financing concept that complies with the Islamic principle of “declining Musharaka”, a declining equity partnership. However, sections […] provide that, since the Agreement is a financial arrangement intended to be compliant with the Islamic faith, at no time will the Agreement be considered a partnership or landlord/tenant arrangement.
b) Recital […] defines Musharaka, for purposes of the Agreement, as a contract entered into by [FinanceCo] and the Purchaser for the purpose of purchasing a property (Property), inclusive of the right of possession and occupation for the Purchaser, with an agreed upon profit (Profit) for [FinanceCo] and an agreement for the Purchaser to buy [FinanceCo’s] ownership interest in the Property over time.
c) Recital […] and section […] require that the Purchaser has executed an agreement of purchase and sale (APS) for the purchase of the Property, which is to be used by the Purchaser for commercial use or to be leased out by the Purchaser as a multi-family dwelling. The APS will form Schedule […] to the Agreement.
d) Recital […] requires that the Purchaser has requested that [FinanceCo] purchase a percentage interest in the Property and concurrently agreed to repurchase [FinanceCo’s] ownership interest, subject to the Agreement, and “to this end this shall be considered a final and binding contract of purchase and sale as between [FinanceCo] and the Purchaser….”.
e) Under sections […], the Purchaser will contribute an amount toward the initial purchase of the Property under the APS, which represents a specified percentage of the purchase price. [FinanceCo] will, on or before the closing date, or within a reasonable time after the transfer of land and collateral security are registered, contribute a specified sum (Contribution) being the remaining percentage of the purchase price.
f) Under Recital […] and subsection […], exclusive possession and occupation of the Property will remain with the Purchaser (or a tenant of the Purchaser) and title will remain in the Purchaser’s name. However, during the term of [FinanceCo’s] ownership interest, [FinanceCo] will reserve its equitable interest in the Property. In consideration for exclusive possession and occupation of the Property, the Purchaser will pay a Profit to [FinanceCo].
g) Under subsection […], the Purchaser’s repurchase of [FinanceCo’s] equitable interest may be carried out through a series of renewable payment arrangements, each for a specified term. The amount to be paid in each term will include the portion of [FinanceCo’s] Contribution to be purchased in that term plus the Profit established for that term.
h) Subsection […] provides that, at the end of the […] term, the Purchaser may pay the entire remaining balance to repurchase [FinanceCo’s] Contribution, which would terminate the Agreement. Where the Purchaser does not have the funds to fully repay the remaining balance and is not in default under the Agreement or collateral security, the parties may enter into a further payment arrangement for another term. Subsection […] provides that the parties may enter into further payment arrangements for additional terms until the Purchaser has repurchased all of [FinanceCo’s] Contribution.
i) Under subsection […], if the Purchaser is in default under the Agreement or collateral security or the parties cannot agree upon terms of payment for the next payment arrangement, the Purchaser will be deemed to be in default of the Agreement and required to pay the full unpaid balance of [FinanceCo’s] Contribution, plus the accruing Profit, upon receipt of which, the Agreement will be terminated.
j) Under section […], during any payment arrangement, [FinanceCo] will retain its equitable interest in the Property. Upon full repayment of [FinanceCo’s] Contribution plus all Profit owing, [FinanceCo] will transfer its equitable interest in the Property back to the Purchaser, at which time the mortgage, collateral security, and any remaining obligations under the Agreement will be discharged.
k) Sections […] provide that, as security for the payment of all amounts owing to [FinanceCo] and the performance of the Purchaser’s obligations under the Agreement, the Purchaser agrees to provide [FinanceCo] with a commitment letter, a registerable collateral mortgage on the Property, and any other collateral security required by [FinanceCo]. Collateral security will include a general Assignment of Leases and Rents, a site specific General Security Agreement and, where the Purchaser is a corporation, the unconditional guarantee of the shareholders that all required payments will be paid.
l) Section […] provides that, to better secure all amounts owing to [FinanceCo] by the Purchaser and the performance of any obligations of the Purchaser under the Agreement, the Purchaser mortgages and charges his/her legal and equitable interest in the Property to [FinanceCo].
m) Under section […], the Purchaser must acknowledge that [FinanceCo] is legally required, under the Interest Act of Canada and the Consumer Protection Act, to provide a statement showing the rate used to determine the Profit in each payment arrangement as a rate of interest chargeable on the Contribution and to disclose the overall cost related to the Agreement expressed as an annual percentage rate. To the extent permitted by law, the following terms in the statement and disclosure will have the same meaning as the terms in the Agreement:
(1) “Principal amount borrowed” means [FinanceCo’s] Contribution.
(2) “Interest rate” means the rate used to determine the Profit.
(3) “Term” means Payment Arrangement.
(4) “Amortization” means the Promise to Buy.
(5) “Loan” means the Agreement.
n) Subsection […] provides that, for better certainty and clarity, when fulfilling legal requirements, the terms “profit” or “profit amount” shall be interchanged with, and shall have the same meaning as “interest” or “interest rate”.
o) Section […] provides that during the term of the Agreement, the Purchaser will be responsible for all obligations related to the occupation of the Property, such as payment of taxes, acquisition of insurance, repair and maintenance, utilities, and other costs normally incurred and paid by the owner of a property. Further, the Purchaser must not allow the Property to become or remain vacant or abandoned or do anything to decrease the value of the Property.
4) You indicated that until the Purchaser has bought [FinanceCo’s] total interest in the Property, the Purchaser will hold, in trust, [FinanceCo’s] interest in the Property. You further indicated that at no time would [FinanceCo’s] equitable interest be registered in the Land Titles Office. The Purchaser would hold title solely in the Purchaser’s name to the credit of his/her own percentage interest and as trustee for [FinanceCo] to the extent of [FinanceCo’s] contribution.
5) In your view, the transaction incorporated in the Agreement and collateral mortgage will be a parallel transaction to an outright purchase by the Purchaser whereby the Purchaser then obtains a mortgage to the extent that the Purchaser does not have the funds available to purchase the Property. You indicated that the number of payments would mirror an amortization period regularly established in a mortgage repayment schedule.
6) In addition, you indicated that, while this would not be a mortgage transaction in the true sense, and Sharia Law requires a concept of co-ownership on a declining basis, the true intent is for the control of the Property to be in the hands of the Purchaser and not [FinanceCo]. Although the security would provide for [FinanceCo] to take over control in default situations, on a day to day basis the control of the Property would remain with the Purchaser.
INTERPRETATIONS REQUESTED
You would like confirmation that:
1. The Canada Revenue Agency (CRA) considers the Purchaser to be the owner of the Property and the Purchaser would be obligated to pay the GST/HST on the purchase of the Property.
2. If any applicable GST/HST is not paid by the Purchaser on the closing of the purchase transaction, the CRA would not pursue [FinanceCo] for the GST/HST owing and that, for the purpose of dealings with the CRA, [FinanceCo] would be considered a lender and not a co-owner.
3. If any applicable GST/HST on lease payments received by the Purchaser from its tenants is not remitted by the Purchaser, the CRA would not pursue [FinanceCo] for the GST/HST owing.
INTERPRETATIONS GIVEN
Based on the information provided, it is our view that:
1. The Purchaser is required to pay the GST/HST on the purchase of the Property if, under an agreement for the taxable supply of the Property, the Purchaser is the recipient of the supply.
2. If [FinanceCo] is not a recipient of a supply made under an APS for the supply of the Property to the Purchaser, the CRA cannot assess [FinanceCo] for a failure of the Purchaser to pay the tax payable in respect of the supply made under the APS.
3. If the Purchaser collected an amount as or on account of tax with respect to a supply by way of lease, licence or similar arrangement of all or part of the Property and [FinanceCo] is not a supplier of that supply and is not liable, either solely or jointly, with the Purchaser to collect any amount of tax in respect of that supply, the CRA could not assess [FinanceCo] for the Purchaser’s failure to remit an amount that the Purchaser collected as or on account of tax in respect of that supply.
EXPLANATION
Interpretations 1 and 2
Pursuant to subsection 165(1), every recipient of a taxable supply made in Canada is required to pay the GST in respect of the supply calculated at the rate of 5% on the value of consideration for the supply.
“Recipient” is defined in subsection 123(1). Where consideration for a supply is payable under an agreement for the supply, the recipient of the supply is the person (or persons) who is (are) liable under the agreement to pay that consideration.
Generally, the agreement for the supply of the property would be fully set out in the APS and documents related thereto (e.g., change orders). If that is the case, and if the Purchaser is liable under that agreement to pay the consideration for the supply, then the Purchaser is required to pay the GST/HST payable on the supply. Further, if the APS is the only agreement for the supply of the Property and [FinanceCo] is not liable to pay consideration for the supply under that agreement, then [FinanceCo] is not liable to pay the GST/HST should the Purchaser fail to pay tax on the purchase of the Property.
However, if the Purchaser were to default under the APS and the supplier were to instead make a supply by way of sale of the Property to [FinanceCo] who is a recipient of a supply under an agreement for the supply of the Property from the supplier to [FinanceCo], then [FinanceCo] would be liable to pay the GST/HST on that supply. While the supplier generally has the liability to collect and remit the GST/HST payable on a supply made by the supplier, in certain circumstances, subsection 221(2) relieves the supplier of having to collect the tax payable on a supply by way of sale of real property. One of those circumstances is where the recipient of the supply is registered for the GST/HST and the supply is not that of a residential complex made to an individual. In such a case, subsection 228(4) requires the recipient of the supply to pay the tax payable on the acquisition of the real property to the Receiver General.
Interpretation 3
Pursuant to subsection 123(1), a supplier in respect of a supply means the person(s) making the supply. Generally, every person who makes a taxable supply is required, under subsection 221(1), to collect the tax payable under subsection 165(1) from the recipient of the supply. Subsection 225(1) requires a person who collects amounts as or on account of tax to include the amounts collected in their net tax calculation.
Further, subsection 222(1) provides that every person who collects (whether required to or not) an amount as or on account of tax is deemed to hold the amount in trust for the Crown until the amount is remitted to the Receiver General or withdrawn as an input tax credit or net tax deduction under subsection 222(2).
Therefore, where a person is not a supplier in respect of a supply of real property by way of lease, licence or similar arrangement and is not liable, jointly or otherwise, to collect tax under subsection 221(1) in respect of the supply of real property, the CRA cannot assess the person for amounts collected by another person (whether remitted or not) as or on account of tax in respect of that supply.
Whether a person is a supplier of a particular supply of real property and is liable (jointly or otherwise) to collect tax on the supply may depend, for example, on whether the person holds the property in joint tenancy or tenancy in common or whether the supply is made by a partnership of which the person is a member/partner. You may wish to refer to GST/HST Memoranda 3.1, Liability for Tax, which discusses scenarios under which joint and several liability to collect tax on a taxable supply may result.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-957-8222. 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,
Lisa Papineau
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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