Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
TO:
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
CASE NUMBER:
103798
DATE:
June 5, 2008
SUBJECT:
_GST/HST Interpretation
XXXXX land sales
We refer to the memorandum to you from XXXXX dated XXXXX. You have forwarded the memorandum to us for our comments with respect to Issues 1 and 2 set out in that memorandum.
All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder, unless otherwise specified.
Our understanding of the situation is as follows.
1. An individual purchased a parcel of vacant land situated in the XXXXX resort area in XXXXX for XXXXX. The agreement of purchase and sale for the land includes the provision that the purchaser will, within XXXXX months of the date of the agreement of purchase and sale, enter into a construction agreement with the vendor to have the vendor construct a chalet on the land. The purchase and sale agreement for the land does not include any amount that would be payable for the construction of the chalet. The individual was to place the chalet in a rental pool to be managed by the vendor. To that end, the individual entered into agreements with the vendor called a "XXXXX" and a "XXXXX", copies of which were submitted for our review. It is our understanding that the residential unit was to be used to make supplies of short-term accommodations. The XXXXX provides that the individual can reserve the use of the chalet for up to XXXXX days per year. The individual must pay the vendor the current rental rate (XXXXX) for any days reserved in excess of XXXXX days.
2. The individual was registered for the GST/HST at the time of purchasing the land and claimed a full input tax credit (ITC) with respect to the tax payable on the purchase of the land.
3. As events transpired, the residential unit was not built and the individual sold the vacant land for $XXXXX.
4. In addition to the events described, XXXXX set out another similar situation (issue 2) where the vendor built a chalet on the land and the individual who purchased the land and chalet sold the property before it was placed into the rental pool and where the individual never used the chalet personally.
XXXXX is questioning whether the individual in each scenario described was entitled to claim an ITC on the purchase of the land and if so, whether the change in use rules would apply at some time before the sale of the land by the individual. Fundamentally, we must determine whether the sale of the land by the individual in each scenario is subject to HST or exempt.
Issue 1 - Sale of vacant land
In the course of a business
If the auditor has determined that the individual has sufficiently established that they intended to operate a business from the property, we can likely conclude that the sale of the vacant lot is made in the course of a business and therefore excluded from the exemption in section 9 of Part I of Schedule V XXXXX iFootnote 1. The fact that the individual entered into the XXXXX and XXXXX supports an intention to use the property in a business. Other evidence that the individual intended to operate a business from the property may include the existence of a detailed business plan, the individual's intended course of action and whether such was reasonable, the ability to secure proper and reasonable financing for the acquisition of the land and construction and operation of the residential unit, activities undertaken to arrange for the construction of the residential unit, the time spent on such activities and the individual's experience in business operations. It may also be beneficial to examine in greater detail the reasons the individual did not go ahead with the planned construction and operation of the residential unit.
Appendix C to Memoranda Series 19.5, Land and Associated Real Property, provides that once a business intention in selling real property has been established, the sale of the property will generally be excluded from the exemption offered by section 9 even if such an intention is frustrated. Example 6 discusses the scenario where an individual purchases real property on which a previously occupied residential complex is situated. The individual intends to tear down the complex, build a new one and sell the property. After demolishing the existing house, the individual is unable to build a new house and sells the vacant land. The example states that the sale is made in the course of a business iiFootnote 2.
While that example does not reflect exactly the scenario described by XXXXX, if it is established that the property in this case was to be used in a business of the individual, a finding that the sale of the property was made in the course of a business would be consistent with that example in Appendix C to Memoranda Series 19.5. There is no evidence to suggest that there has been extensive development activities undertaken by the individual with respect to the land in this case, which much of Appendix C suggests is necessary in order for a sale to be considered as being made in the course of a business. However, the last part of paragraph 9 of Appendix C suggests that once a business intention is established, the business use of the property remains relevant such that even an intervening frustrating event (e.g., the individual did not follow through with the intention to build a residential unit and make short term rentals), would generally not preclude the subsequent sale from being made in the course of a business iiiFootnote 3.
The individual may have been in a commercial activity, based on either paragraph (a) or (c) of the definition of that phrase as found in subsection 123(1), at the time of purchasing the land. The property appears to be capital property of the individual and under subsection 196(1), the actual use of the property after the acquisition is deemed to be the intended use (i.e., making taxable short term rentals). Under paragraph (c) of the description of element B in subsection 169(1), a full ITC would be allowed if the individual intended to use the property exclusively in making short-term rentals. If the individual intended to use the property primarily for personal use, an ITC cannot be claimed for the HST paid in respect of the acquisition of the land. If the individual intended to use the property 50% or more, but less than 90%, in making taxable short-term rentals, the ITC would be based on the extent of use in commercial activities. The method used to determine the extent of use in commercial activities must be fair and reasonable.
If, subsequent to purchasing the property, the property were appropriated for the personal use and enjoyment of the individual or a related individual, subsection 190(2) would require the individual to account for tax on the fair market value of the property at the time of the appropriation. The individual would also be considered to have made a deemed sale of the property under the change in use provisions of subsection 207(1). That deemed sale would not be exempt for the same reasons as set out above, i.e., the sale was made in the course of a business. The individual would have to account for tax on the deemed sale equal to the basic tax content of the property at the time of sale less any amount that the individual has to account for under subsection 190(2). We have been presented with no evidence to suggest that the individual began to use the property in such a manner though this is something the auditor may wish to investigate. If this is the case, the sale of the vacant lot following the appropriation would be exempt.
Not in the course of a business
If the individual has not established that they intended to operate a business from the property, nor established that they were in a commercial activity at the time of acquiring the land (e.g., the individual has not demonstrated an intention to make taxable supplies of short term rentals of a residential unit that was to be built on the property), there would be no ITC eligibility under subsection 169(1) with respect to the tax payable on the purchase of the land. Indeed, unless engaged in some other commercial activity, the individual would not have been entitled to register for the GST/HST. In this case, the sale of the vacant lot would be exempt.
Issue 2 - Sale of residential unit
On the understanding that the chalet is not a residential complex (the chalet would be excluded if it is described by that part of the definition of residential complex that follows paragraph (e)), we ivFootnote 4 would come to the same conclusion as in Issue 1, i.e., that if a business operation has been established, the sale of the real property is made in the course of a business and is excluded from the exemption in section 9 of Part I of Schedule V XXXXX. Even if the chalet were a residential complex, we would conclude that the individual is a builder of the complex and that the sale is not exempt under section 2, 3 or 4 of Part I of Schedule V XXXXX and is instead a taxable supply.
i 1. On the understanding that the chalet was intended to be used for making supplies of short-term accommodation, we would not consider the individual to be selling an interest in a residential complex.
ii2. It is noted that in the example the individual is engaged in the housing construction industry and has established a pattern of buying lots, constructing houses and selling them for the purpose of earning a profit.
iii 3. If the individual appropriated the property for their personal use, that may be enough to find that a subsequent sale is not made in the course of a business. There was no evidence presented to us in this case to suggest that the property was appropriated for personal use of the individual.
iv 4. Often the amount of tax owing under subsection 190(2) would be greater than the amount calculated under element A in subsection 207(1) such that there would be no additional tax owing under the change in use rules.
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UNCLASSIFIED
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