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
FROM:
Marcel Boivin
Manager, Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate - HQ
DATE:
July 14, 2009
CASE:
112077
SUBJECT:
_GST/HST Interpretation
Sale of shares and associated land-use rights
Further to your telephone conversation with Daryl Hooley on XXXXX, and your XXXXX of XXXXX and XXXXX, we provide the following comments concerning various transactions that involve the provision of rights to use and occupy land, XXXXX and common facilities of a XXXXX that form part of the XXXXX (the "Resort").
Our views are based on the following documentation that you submitted to us:
i) XXXXX. dated XXXXX, and amended XXXXX (the "Disclosure Statement") XXXXX;
ii) Exhibit XXXXX to the Disclosure Statement - XXXXX;
iii) Exhibit XXXXX to the Disclosure Statement - XXXXX;
iv) Exhibit XXXXX to the Disclosure Statement - XXXXX;
v) Exhibit XXXXX to the Disclosure Statement - XXXXX;
vi) Exhibit XXXXX to the Disclosure Statement - XXXXX;
vii) Exhibit XXXXX to the Disclosure Statement - XXXXX;
viii) XXXXX;
ix) Certificate of Incorporation for XXXXX;
x) Certificate of Amalgamation to amalgamate XXXXX as one company under the name of XXXXX; and
xi) Certificate of Name Change to change the name of XXXXX to XXXXX.
Statement of Facts
Our understanding of the facts is as follows:
1. The various documents submitted relate to the development of real property located at XXXXX (the "Subject Property") for residential and recreational purposes. The Subject Property is at all relevant times a single parcel having the legal description, XXXXX.
2. XXXXX (referred to as "XXXXX") was incorporated on XXXXX.
3. XXXXX shares and XXXXX shares in XXXXX were issued under XXXXX Agreements dated sometime in XXXXX. The Agreements refer to the purchasers of these shares as XXXXX. The XXXXX shares were sold at a price of $XXXXX per share and the XXXXX shares at $XXXXX per share. Investors eligible to acquire these shares were limited to certain persons including: directors, senior officers, XXXXX (the Directors); members of the Directors' or their spouses' immediate families; XXXXX.
4. The XXXXX shares are subject to special rights and restrictions, including: no voting rights; restrictions on transfer; and the right to exchange the XXXXX shares for Lots and XXXXX on the Subject Property.
5. As soon as XXXXX is in a position to provide an Investor with occupation rights with respect to parts of the Subject Property, the XXXXX shares will be redeemed. For example, Investor A purchased XXXXX shares, representing an investment of $XXXXX. These shares were later redeemed for share certificates in the XXXXX. (the "Co-op Assoc.") numbered XXXXX, which had the attached rights to occupy Lot XXXXX, respectively.
6. On XXXXX, XXXXX purchased all of the outstanding shares of XXXXX (referred to as the "Developer").
7. The Subject Property was owned in fee simple by the Developer.
8. The Co-op Assoc. was incorporated as a XXXXX cooperative association on XXXXX.
9. On XXXXX, the Developer transferred fee simple ownership of the Subject Property to the Co-op Assoc. The stated consideration paid by the Co-op Assoc. to the Developer for the purchase of the Subject Property was $XXXXX and other good and valuable consideration. In addition to the stated consideration of $XXXXX, XXXXX membership shares in the Co-op Assoc. were exchanged and, as a result, the Developer became a member of the Co-op Assoc. The land transfer application indicated that the market value of the property was $XXXXX.
10. The Subject Property was divided into XXXXX cooperative interest parcels (referred to as "Lots"), as shown on the XXXXX, one Lot for each membership share in the Co-op Assoc.
11. On XXXXX, the Developer entered into the Co-op Assoc. XXXXX with the Co-op Assoc. Under this XXXXX, the Co-op Assoc. granted to the Developer a non-exclusive right and licence to use and occupy XXXXX Lots designated on the XXXXX as Lots XXXXX and to use common areas and facilities, which are marked as XXXXX, for a term of XXXXX years. For purposes of this memorandum, the rights of use and occupancy granted under the XXXXX are collectively referred as the "land-use rights".
12. The stated consideration paid by the Developer for the land-use rights for the XXXXX year period is $XXXXX. However, as stated above, the Developer transferred title to the Subject Property to the Co-op Assoc.
13. The land-use rights granted under the XXXXX do not create any rights of tenancy or any possessory rights of exclusive use or occupation by implication or otherwise. At the end of the XXXXX year period, the land-use rights will automatically be renewed for a further term of XXXXX years unless during the final year of the period and before its expiration XXXXX% or more of the Members of the Co-op Assoc. vote not to extend the term.
14. The Disclosure Statement together with the Co-op Assoc.'s rules established in accordance with the XXXXX (the "Rules") set out the general structure for the operation and management of the Resort.
15. Rules of the Co-op Assoc. restrict the use of the Lots to the installation or construction and occupation of a single detached recreational residence on a permanent foundation and other uses that are necessarily incidental or ancillary to this use of the Lot unless the Co-op Assoc. consents in writing to a different use. Mobile homes, modular homes and trailers, other than holiday trailers, are only permitted on Lots XXXXX, with a minimum foundation footprint of XXXXX square feet.
16. The construction of a recreational residence within the Lot must proceed to XXXXX and completion of the exterior within XXXXX months following the beginning of construction, and completion of landscaping and driveways within XXXXX months following substantial completion of the residence.
17. The Developer is marketing the XXXXX Lots together with memberships in the Co-op Assoc. which provides a Member with a renewable XXXXX year right to use and occupy a certain Lot, allows the Member to construct a recreational home on their Lot and to access and use the XXXXX area, XXXXX and common property of the Co-op Assoc. consisting of a pool and access road. In addition, a Member obtains a licence for the use and occupancy of a certain XXXXX within the Resort.
18. A Member is required to pay all utility costs connected with the Member's use and occupation of the Lot that are not otherwise included in the XXXXX Fees, as defined and set out under the current rules of the Co-op Assoc.
19. A Member is also required to pay to the appropriate authorities all taxes, rates, levies, duties XXXXX, which includes any XXXXX to the extent that such charges are not included in the XXXXX Fees.
20. A Member is required to acquire, at its own expense, all risks occupier's insurance on the furniture, XXXXX located in or on the Member's Lot or for which the Member is responsible or legally liable and must maintain and repair their Lot in accordance with the Rules.
21. Where any construction, XXXXX (the "construction") are made to the Lot by the Member, the Member is required, on the written request of the Co-op Assoc. to restore the Lot to its condition at the beginning of the period not later than XXXXX days prior to the termination of the XXXXX year period. Alternatively, if the Co-op Assoc. prefers that the construction remain, the Co-op Assoc. may require the Member, without compensation, to restore the Lot to such an extent as the Co-op Assoc. XXXXX
22. The Co-op Assoc. has the right to make XXXXX to the common areas and facilities.
23. The Co-op Assoc. has the right to use, install, maintain or repair XXXXX, XXXXX, XXXXX other installations on, XXXXX a Member's Lot or in connection with the supply of any services (including gas, electricity, XXXXX) to the Lot or other parts of the Subject Property and has the right to enter upon the Lot XXXXX.
24. A Member will not cause injury or damage to the Subject Property or do anything that XXXXX constitutes a nuisance or an interference with any other Member or occupant of the Subject Property.
25. A Member has the right to assign (XXXXX) or XXXXX the whole of its interest in the Lot in accordance with the Rules and only on the consent of the Co-op Assoc.
26. A Member does not have the right to enter into a sub-XXXXX type of arrangement of the whole or any part of the Lot.
27. A Member will not XXXXX permit any lien under the XXXXX or any XXXXX to be filed or registered against the Subject Property XXXXX. If any such lien is filed or registered against the Subject Property, the Member will cause a discharge to be filed within XXXXX days after it has come to the attention of the Member.
28. Should a Member default under the arrangement, the Co-op Assoc. may declare that the Member's land-use rights are suspended until the default is remedied and should a Member's default not be remedied within XXXXX days, the Co-op Assoc has the right to terminate the land-use rights.
29. The Co-op Assoc has the right to sell, XXXXX. the Subject Property provided no such transaction in any way affects the rights of a Member and in the event of a sale or assignment of the Subject Property, the Member shall release the Co-op Assoc. of all obligations under the land-use rights arrangement arising after the date of such sale or assignment.
30. A Member is required to XXXXX surrender the Lot to the Co-op Assoc. upon the expiry of the XXXXX year period or any earlier termination. If a Member remains in possession of a Lot after the expiration of the period and without execution of a new arrangement and without the consent of the Co-op Assoc., then the Co-op Assoc. has the right to take exclusive possession of the Lot and remove the Member.
31. Nothing in the arrangement between a Member and the Co-op Assoc. is to be construed as making the Member an agent of, or a partner or a joint venturer with the Co-op Assoc.
32. On XXXXX, the Developer amalgamated with XXXXX to form XXXXX. On the same day, following this amalgamation, XXXXX changed its name to XXXXX. In the remainder of this memorandum, the amalgamated entity under the name XXXXX will also be referred to as the "Developer".
Issues
1. What is the characterization and tax status of the supply(ies) made under the contract of purchase and sale (the "Agreement") entered into by an individual and the Developer for: a membership share in the Co-op Assoc; the land-use rights to a designated Lot and the right to use XXXXX?
2. Whether the Developer makes supplies of real property when it redeems (or retracts) the XXXXX shares, if yes, are those supplies of real property taxable or exempt and what is the consideration payable for those supplies?
Application of the GST/HST
1. Under the Agreement, the Developer is assigning their rights under a lease, licence or similar arrangement in respect of a specific Lot and this assignment is a taxable supply of real property.
2. In exchange for the XXXXX shares, the Developer is assigning their rights under a lease, licence or similar arrangement in respect of a specific Lot and this assignment is a taxable supply of real property. The consideration for the assignment of the land-use rights is the fair market value of the XXXXX shares redeemed by the Developer, which is essentially the fair market value of the Lot.
Explanation
When the Developer transferred ownership of the Subject Property to the Co-op Assoc., the Developer acquired memberships in the Co-op Assoc. and the land-use rights (i.e., the non-exclusive right to use and occupy specific Lots, XXXXX as well as the shared right to use certain common areas and facilities of the Resort). The memberships and the land-use rights provided by the Co-op Assoc. to the Developer are interdependent and each is an integral part of what the Co-op Assoc. is providing to the Developer. The Developer does not have the option to acquire a membership separately from the land-use rights. In applying policy statement P-077R2, Single and Multiple Supplies, the Co-op Assoc. is making a single supply to the Developer. The issuance of a membership is considered to be an element of this supply. However, the provision of the land-use rights is the predominant element of the supply. As such, the Co-op Assoc. is considered to be making a single supply of the land-use rights to the Developer.
For GST purposes, the Co-op Assoc.'s supply of the land-use rights is a supply of the right to use real property by way of lease, licence or similar arrangement. Such a supply of the land-use rights by way of lease, licence or similar arrangement is a supply of real property in accordance with subsection 136(1) of the Excise Tax Act (the "ETA").
Under the Agreement, the Developer provides an individual (a new Member) with a membership in the Co-op Assoc. and assigns to the individual the land-use rights (i.e., the non-exclusive right to use and occupy a specific Lot, XXXXX as well as the shared right to use certain common areas and facilities of the Resort). For the same reasons indicated above, the Developer is making a single supply of an assignment of the land-use rights, which is an assignment of a lease, licence or similar arrangement. The assignment of the lease, licence or similar arrangement is a supply of an interest in real property, which is a supply of real property.
Similarly, where the Developer redeems the XXXXX shares of a shareholder, the Developer is assigning, to the shareholder, their rights under a lease, licence or similar arrangement in respect of a specific Lot which the Developer acquired from the Co-op Assoc. when it sold the Subject Property to the Co-op Assoc.
Supply of real property is taxable
The supply of real property made by the Developer under the Agreement to an individual or to a shareholder when the Developer redeems the shares is a taxable supply unless an exemption under Schedule V to the ETA applies. Since the Developer is not a "public service body" or a "charity" and the Lots are not sites in a "residential trailer park" (as those terms are defined for GST purposes), the only possible exemptions for the supplies of real property made by the Developer are paragraphs 7(a) and 7(c) of Part I of Schedule V to the ETA.
Given that the Developer is not in possession of a "residential unit" as defined in subsection 123(1) of the ETA at the time the land-use rights are acquired, the Developer has no intention to affix a residential unit to the land and has not acquired the land-use rights for the purpose of constructing a residential complex in the course of a commercial activity, the exemption under paragraph 7(a) of Part I of Schedule V to the ETA does not apply. As a result, the assignment of the lease, licence or similar arrangement by the Developer to either an individual or a shareholder is not exempt under paragraph 7(c) of Part I of Schedule V to the ETA. Therefore, the supplies of real property made by the Developer are subject to GST calculated on the value of the consideration payable for the supply.
In the case of the assignment of the land-use rights to a shareholder, subsection 153(1) of the ETA provides that the consideration payable by the shareholder includes the fair market value of the XXXXX shares, which is essentially the fair market value of the land-use rights in respect of the specific Lot provided to the shareholder.
For a taxable supply of real property made by way of lease, licence or similar arrangement, the GST becomes payable on the earlier of the day the consideration for the supply is paid and the day that it becomes due under subsection 168(1) of the ETA. Where the lease, licence or similar arrangement is under an agreement in writing, subsection 152(2) of the ETA provides that the consideration, or any part of it, is deemed to become due on the day the recipient is required to pay the consideration or part of it to the supplier under the agreement.
Annual payments
Subsequent to the assignment of the lease, licence or similar arrangement to an individual or a former shareholder, GST may not be payable in respect of the annual payments made to the Co-op Assoc. For GST purposes, a "lease interval" is a period of time in a lease arrangement that is attributable to each lease payment. Since an individual or former shareholder is required to make annual payments for the right to use and occupy the XXXXX and to cover the Co-op Assoc.'s costs for maintaining and managing the infrastructure and common facilities each one year period is a "lease interval". Under subsection 136.1(1) of the ETA, the Co-Op Assoc. is deemed to make, and the individual or former shareholder is deemed to receive, a separate supply of real property by way of lease, licence or similar arrangement for each annual lease interval.
While the supplies of real property made under the lease, licence or similar arrangement to the Developer are taxable, the supplies may become exempt in a subsequent annual lease interval if it is clearly established at the beginning of that lease interval that the individual or former shareholder intends to affix a residential unit to its Lot. For example, if a former shareholder has the intention to begin to construct a house on their designated Lot when the land-use rights are acquired, the supply of the real property by way of lease, licence or similar arrangement would become exempt under paragraph 7(a) of Part I of Schedule V to the ETA at the beginning of the first annual lease interval following the assignment of the lease, licence or similar arrangement. As a result, the Co-op Assoc. would no longer be required to collect GST in respect of any further payments made under the lease, licence or similar arrangement.
Change-in-use
While the Co-op Assoc. began to use the Subject Property exclusively in commercial activities upon its acquisition, if one or more supplies of real property made by way of lease, licence or similar arrangement become exempt supplies in subsequent annual lease intervals, the Subject Property may undergo a change-in-use. The extent of the Subject Property's use in commercial activities for change-in-use purposes is based on the use of the entire property. The event that could trigger a change-in-use for GST purposes would be the beginning of a particular annual lease interval where the conditions under paragraph 7(a) of Part I of Schedule V to the ETA are first met for a supply of real property made to an individual or former shareholder. This would result in a decrease in the extent to which the Subject Property is used by the Co-op Assoc. in commercial activities and, depending on the extent of this decrease; the Co-op Assoc. may undergo a change-in-use under either subsection 206(5) or 206(4) of the ETA. However, a change-in-use would not be triggered for GST purposes unless the decrease in the extent of the Subject Property's use in commercial activities is 10% or more on a cumulative basis, as described in section 197 of the ETA.
The extent to which the Subject Property's use in commercial activities decreases will depend upon how many supplies of real property by way of lease, licence or similar arrangement become exempt. Where the change-in-use rules apply in a particular reporting period of the Co-op Assoc., there will be a recapture under subsection 206(5) of the ETA of a portion of the ITCs claimed by the Co-op Assoc. or under subsection 206(4) of the ETA of all of the ITCs claimed by the Co-op Assoc. with respect to the improvements made to the Subject Property, depending on the extent of the change-in-use in that reporting period. Subsection 141.01(5) of the ETA requires that the method used to determine the extent of use in commercial activities has to be fair and reasonable and used consistently throughout the year under. Calculating the extent of use based solely on land area is not fair and reasonable in cases where the value of the residential use areas is significantly higher than the other areas.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 954-3772.
UNCLASSIFIED
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