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:
November 12, 2010
To:
[Client]
From:
Lisa Papineau
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
RITS/No:
108120
Subject:
GST/HST
[...] Community and GST/HST new housing rebate availability
This memorandum is in response to our telephone conversation on July 7, 2008, your facsimile transmissions of August 5 and 6, 2008, and September 8, 2008, your voice mail message of October 21, 2008, and the facsimile transmission of October 30, 2008, that we received from [...], a representative of [...] Community (herein referred to as (["the Community"]). We apologize for the delay in our response.
Our conversation and the subsequent facsimiles relate to the availability of a GST/HST new housing rebate (NHR) to an individual (herein referred to as the "Homeowner") who subleases land (herein referred to as the "Home Site") located in [...] (herein referred to as "the Corporation"). The Homeowner also enters into a construction contract with [...] (herein referred to as "the Contractor") for the construction of a house on that Home Site. We will assume that the Homeowner is not an Indian.
The following documents were provided to us for our consideration:
a) [...] used to evidence:
• the registration [...] (herein referred to as the "Registry") of the lease of a particular Home Site to the Corporation for a term of 99 years; and
• the registration of a sublease of that Home Site by the Corporation to a particular individual.
b) Consent to Sublease, used to evidence the Crown's consent for the Corporation to sublease the particular Home Site, situated in [...], (herein referred to as the ["Land"] [...].
c) Purchase Contract, containing an offer by another individual to "purchase" from the Corporation, a sublease of a Home Site located in [the Community], which is situated on the [Land].
d) Sublease and Homeowner Agreement (herein referred to as the "Homeowner Agreement") between the Corporation (as sub-lessor), the particular individual (as sub-lessee), and the Corporation (as an additional sub-lessee) in respect of the individual's acquisition of the Home Site by way of sublease from the Corporation [...].
e) Construction Contract between the Contractor and the particular individual for the construction of a house by the Contractor on the Home Site.
We understand that the documents provided to us are examples of standard documents that are routinely used in a transaction between the Corporation and an individual for the supply of housing in [the Community], one of a number of communities located in [...] which is situated on the [Land].
1. The Purchase Contract identifies the Corporation as the "vendor" of a sublease of the Home Site. The Purchase Contract also identifies the Homeowner as the "purchaser" of the sublease.
2. We make specific note of the following content of the Purchase Contract:
Offer to purchase sublease of Home Site (subsection [...])
Under subsection [...], the Homeowner offers to purchase from the Corporation a sublease of particular land legally identified as a specific lot on the [Land], in accordance with the terms and conditions contained in the Homeowner Agreement. Subsection [...] refers to the particular lot as the "Home Site" and stipulates that the acquisition must be for the purpose of a single family home.
The Home Site is defined in Schedule [...] the Homeowner Agreement as the land that has the same legal description as the land identified under subsection [...] of the Purchase Contract. The Home Site is not defined to include any improvements to the land (e.g., a house).
Purchase price (subsection [...])
The Homeowner will pay to the Corporation for the purchase of the sublease of the Home Site for the Term a certain amount of money (the "Purchase Price"), which amount the Homeowner will pay on the Completion Date.
Pursuant to paragraph [...] of the Homeowner Agreement, the Purchase Price means the amount set out in Schedule [...] to that agreement, which states that the purchase price is for the Home Site. There is no indication that any part of the purchase price is for the house or the construction of the house.
Subsection [...] indicates that the completion date for the purchase of the sublease of the Home Site is the date of registration of the Homeowner Agreement in the Registry.
Permitted encumbrances (subsection [...])
The Homeowner Agreement will be subject to the lease between Her Majesty in right of Canada as Landlord and the Corporation as Tenant (herein referred to as the "Lease") (iFootnote 1)
Performance Deposit (subsection [...])
The Homeowner will pay to the Corporation a specified amount on the Completion Date to secure the Homeowner's obligations under the Homeowner Agreement respecting the development of the Home Site.
"Development," as defined in paragraph [...] of the Homeowner Agreement, means, in part, to carry out any construction, engineering or other operations whatsoever on, in, over or under land but does not include the maintenance or repair of any existing works, structures or buildings.
Benefit of the Corporation (subsection [...])
The Corporation's obligations under the Purchase Contract are subject to the Homeowner entering into a Construction Contract with the Contractor to build a house on the Home Site. In the event that the Homeowner does not comply with this condition precedent, the Corporation will not transfer the Home Site to the Homeowner.
Subsection [...] also stipulates that the house to be built on the Home Site must be in accordance with plans chosen by the Homeowner from the selection of stock plans provided by the Corporation.
Homeowner Covenants (subsection [...])
The Homeowner covenants and agrees to complete the construction of a residential dwelling on the Home Site within [...] years from the Completion Date.
Penalty for Nonperformance (subsection [...])
If the Homeowner fails to complete the Development of the Home Site within [...] years from the Possession Date, the Homeowner will be liable to pay to the Corporation $[...].
Risk of Home Site (subsection [...])
The Home Site will be at the sole risk of the Corporation until [...] on the Completion Date, and thereafter the Home Site will be at the sole risk of the Homeowner.
3. We make specific note of the following content of the Homeowner Agreement:
a) Recital [...] stipulates that the Corporation owns the improvements on the "community property." Paragraph [...] defines "improvements" to mean all buildings, structures, works, utilities, services, landscaping and other improvements whatsoever, by whomsoever made, which are at any time affixed to, or erected or constructed in, on, under or above any lands in the community or that are affixed to any other improvement.
Paragraph [...] defines "community property" to include those areas in the community that are for the benefit of the community as a whole designated as common areas and the improvements located thereon, including roads, curbs, walkways, sidewalks, street lighting, parks, community facilities, amenities, and recreational facilities.
Recital [...] does not stipulate that the Corporation owns any house that may be constructed on the Home Site.
b) Subsection [...] indicates that the Corporation subleases the Home Site to the Homeowner for the Term, subject to the terms and conditions contained in the Homeowner Agreement. Subsection [...] defines the "Term" as the period from and including the date of registration of the Homeowner Agreement in the Registry up to and including the day that is one day before the expiration of the Lease.
c) Subsection [...] stipulates that the Purchase Price is payable by the Homeowner to the Corporation, without set-off or deduction, upon registration of the Homeowner Agreement at the Registry.
d) Subsection [...] requires that the Homeowner pay all taxes and charges applicable to the premises or Homeowner and that the Homeowner will fully indemnify and save harmless the Corporation for all such taxes and any interest or penalty thereon.
Paragraph [...] defines "premises" to mean the Home Site and the improvements on the Home Site.
e) Subsection [...] allows the Homeowner to develop and use the Home Site for the permitted uses and requires that the Homeowner will not use, or allow the use of, the Home Site or any part of it for any other purpose. [...].
f) Subsection [...] provides that, by paying the Purchase Price, the Homeowner will peaceably and quietly possess, hold, and enjoy the Home Site during the term without any disturbance by the Corporation.
g) Subsection [...] allows the Homeowner to assign the Homeowner Agreement subject to the prior written consent of the Corporation [...].
h) Subsection [...] allows the Homeowner to grant a mortgage of its interest in the premises.
i) Subsection [...] provides that the Homeowner may construct, install or place any material improvement on, under or above the Home Site, or may permit another person to do so, subject to the Homeowner Agreement, the Lease, and any law. However, under [...], the Homeowner is to present any request for any development approval through the Corporation.
Paragraph [...] defines "development approval" to mean, in part, any inspection, review, approval, authorization, acceptance, permit, license, certificate, requirement or order relating to any interest in, or any use, development or occupation of, the premises or any part of it.
j) Subsection [...] stipulates that no granting of, or failure to grant, a development approval will be construed as an assumption of responsibility in any way by the Corporation for any construction or other work completed in accordance with the development approval.
k) Under subsections [...], the Homeowner must take out and maintain liability insurance against claims arising out of the ownership, use and occupancy of the premises and builder's risk insurance for any damage to any improvements and building materials on the Home Site during the construction by an "all risks" form including resulting damage from error in design and faulty workmanship. The Homeowner must also provide the Corporation with evidence that the Homeowner is in compliance with any applicable government requirements for worker's compensation insurance, and has made any corresponding payments required.
l) Subsection [...] stipulates that when the term expires or is otherwise terminated the Homeowner will surrender "the Home Site."
4. The Construction Contract identifies the Contractor as the builder and refers to the recipient as the "Homeowner," consistent with the Homeowner Agreement. We make specific note of the following content of the Construction Contract:
a) Recital [...] stipulates that the Homeowner must have entered into the Purchase Contract with the Corporation to purchase a prepaid sublease of the Home Site.
b) Recital [...] indicates that the Contractor has agreed to construct the house on the Home Site on the terms and conditions set out in the Construction Contract, which defines the "Home Site" in paragraph [...] as the same particular land that is subject to the sublease under the Purchase Contract and the Homeowner Agreement.
c) Subsection [...] states that prior to the execution of the Construction Contract, the Homeowner will have executed the Purchase Contract.
d) Under subsection [...] the Contractor agrees to supply all labour and materials to construct the house on the Home Site.
e) Subsection [...] identifies the amount the Homeowner will pay to the Contractor for the construction of the house.
f) Subsection [...] stipulates that if the Homeowner fails to make a payment to the Contractor as required, the Contractor may cease work until the outstanding payment is paid or may terminate the Construction Contract and retain all payments already made and sue the Homeowner for the amount by which the value of the work exceeds the amount paid.
5. According to the information on the Corporation's Web site, the selection of floor plans for the housing that may be built on the Home Sites in [the Community] include detached single storey and two storey buildings with attached double car garages. The buildings are not mobile homes and the Home Sites are not located in a residential trailer park as defined in subsection 123(1) of the Excise Tax Act (ETA).
6. As there is no indication that [the Community] development is governed by the [...], we have assumed that this legislation does not apply.
7. Although you have indicated that the representative for [the Community] has stated that the Corporation is a "bare land trustee" for the Contractor and that both the Corporation and the Contractor are owned by the same parent company, we have not been provided with any evidence that the Corporation is a bare trust. Based on the activities and responsibilities of the Corporation it would appear that the Corporation is not a bare trust. In addition, there is no evidence that either the Corporation or the Contractor is acting as an agent. As such, our response is predicated on the understanding that the Corporation is not a bare trust in respect of this development, and that neither the Corporation nor the Contractor is an agent, there being no evidence to support that such is the case.
ISSUE
You would like to know if a Homeowner is entitled to claim an NHR for an ownerbuilt home under section 256 of the Excise Tax Act (ETA) if the Homeowner:
• enters into a Purchase Contract and a Homeowner Agreement with the Corporation for the "purchase" of a sublease of a Home Site located in [the Community]; and
• enters into a construction contract with the Contractor for the construction of a new house by the Contractor on that Home Site.
RESPONSE
Where a Homeowner enters into the particular combination of all of the standard agreements submitted to us to acquire a Home Site in [the Community] by way of sublease from the Corporation and to engage the Contractor to construct a single unit residential complex (SURC) on that Home Site for use by the Homeowner, or a relation of that individual, as their primary place of residence, and the Homeowner paid the GST/HST charged under the construction contract in respect of the construction of the SURC, the conditions of subparagraphs 256(2)(a) and (c) of the ETA are met.
Therefore, such a Homeowner is entitled to claim an NHR for an ownerbuilt home under section 256 of the ETA for the GST/HST paid to the Contractor under the construction contract for the construction of the SURC, provided that the text of all of the particular agreements entered into by the Homeowner is substantially the same as that contained in the standard agreements submitted to us and that all of the other conditions for claiming a rebate under section 256 of the ETA are met.
We would like to point out that an NHR is not available to a Homeowner in respect of the acquisition of the Home Site by way of sublease from the Corporation insofar as that supply is exempt from the GST/HST.
To the extent that a Homeowner pays tax to a person other than the Contractor and the tax is payable in respect of an improvement to the land that forms part of the SURC, such tax may also be included in an NHR claim.
ANALYSIS
Our analysis and conclusion are based on facts derived from the standard documents you provided to us for consideration and that are routinely used for [the Community] transactions. Should this particular combination of documents not be used in substantially the same manner to affect the same supplies by the Corporation and the Contractor or where the text of those documents is not substantially the same as that contained in the documents submitted to us, our analysis and conclusion may not be valid.
Further, our analysis and conclusion only considers whether the conditions of paragraphs 256(2)(a) and (c) of the ETA are met as these conditions are at the root of your enquiry. The availability of an NHR is dependent upon all of the conditions for claiming a rebate under section 256 of the ETA being satisfied.
Are the conditions of paragraph 256(2)(a) of the ETA met?
The conditions of paragraph 256(2)(a) of the ETA are met if an individual "engages another person to construct...for the particular individual, a residential complex that is a single unit residential complex...for use as the primary place of residence of the particular individual or a relation of the particular individual."
Therefore, we must determine whether a Homeowner who enters into the Construction Contract with the Contractor to construct a house on the Home Site is considered to have "engaged" the Contractor to construct a SURC.
In general, we consider an individual to have engaged a person to construct a SURC for purposes of paragraph 256(2)(a) of the ETA if the SURC has not yet been constructed and the agreement between the builder and the individual is for the supply of the services and property necessary for the construction of the SURC.
In the case at hand, it is clear that the Contractor's supply under the Construction Contract is that of construction services (i.e., labour) and the materials necessary to perform the construction of a house that is a SURC and is not a supply by way of sale of a partially or substantially completed house. As such, a Homeowner would be considered to have engaged the Contractor to construct a SURC if the Homeowner enters into the Construction Contract with the Contractor to construct a house on the Home Site that the Homeowner had acquired by way of sublease from the Corporation. Where the Homeowner engages the Contractor to construct that house for the Homeowner, or their relation, to use as their primary place of residence, the conditions of paragraph 256(2)(a) of the ETA will be met.
Are the conditions of paragraph 256(2)(c) of the ETA met?
The conditions of paragraph 256(2)(c) of the ETA are met if the particular individual has paid tax in respect of:
a) a supply by way of sale of an interest in the land (i.e., the Home Site) that forms part of the SURC that the individual constructed or engaged another person to construct; or
b) a supply to the individual of any improvement to the land that forms part of the SURC.
a) Does the individual (i.e., Homeowner) pay GST/HST on the purchase of an interest in the Home Site?
Although the Purchase Contract indicates that the Corporation is "selling" a sublease of the Home Site to the Homeowner, the nature of the transaction is a supply of the Home Site by way of sublease. It is important to draw this distinction because, for GST/HST purposes, a sale of a sub-leasehold interest in land is a sale of an interest in real property, which is a sale of real property (iiFootnote 2) . An assignment of a lease, which would normally constitute the sale of a leasehold, would normally involve the holder of a leasehold interest assigning or transferring all of their rights and obligations under the lease agreement to the purchaser of the leasehold.
In the case at hand, the Corporation holds a leasehold interest in the Home Site rather than a sub-leasehold interest, as the Corporation has leased the land directly from the Crown. As the Corporation does not hold a sub-leasehold interest in the Home Site, it cannot be selling a sub-leasehold interest. Further, the Corporation is not transferring its rights and obligations under its lease agreement with the Crown to the Homeowner; rather it is entering into a sublease agreement with that Homeowner. As such, the Corporation is supplying land (i.e., the Home Site) by way of sublease, as opposed to supplying a sub-leasehold interest in land. The "Purchase Price" charged under the Purchase Contract constitutes an upfront, lump-sum lease payment, rather than consideration for the sale of a sub-leasehold interest in the Home Site.
Therefore, a Homeowner does not purchase an interest in the Home Site since no sale of such an interest has occurred.
b) Does the individual (i.e., the Homeowner) pay GST/HST in respect of a supply to the individual of any improvement to the land that forms part of the SURC?
An "improvement" in respect of capital property is defined for GST/HST purposes to be any property or service acquired for the purpose of improving the capital property to the extent that the consideration for the property or service would be included in determining the adjusted cost base of the capital property for income tax purposes. Where the capital property in question is land that forms part of a residential complex, the improvement must be a property or service the consideration for which is included in the adjusted cost base of such land. Such an improvement would comprise property and services acquired for the purpose of improving the land that forms part of the residential complex (e.g., property and services for constructing the house itself or any appurtenances to the house). Therefore, the property and services acquired from the Contractor by the Homeowner under the Construction Contract to construct the house will generally constitute an improvement to the Home Site.
Schedule [...] of the Construction Contract, referred to as the [...] shows a total construction contract price, which includes the base price of the house and all additions as well as an amount identified as GST. If the Homeowner paid the GST charged under the Construction Contract in respect of the improvement to the Home Site (i.e., the constructed house), the conditions of paragraph 256(2)(c) of the ETA are met.
Additional consideration
Fair market value of the residential complex
Paragraph 256(2)(b) of the ETA sets out one of the other conditions for claiming a rebate under section 256. That paragraph requires that the fair market value of the SURC, at the time construction is substantially completed, be less than $450,000. A "residential complex," includes a building or that part of a building that is, or contains, a residential unit, appurtenances to the unit and the land that is immediately contiguous to the building and that is reasonably necessary for the use and enjoyment of the building as a place of residence for individuals.
As such, the fair market value used to determine the availability of an NHR under section 256 of the ETA to a Homeowner must be the fair market value of the house, appurtenances to it and the land included in the Home Site that is reasonably necessary for the use and enjoyment of the house as a place of residence. This applies even if the Homeowner is only claiming an NHR in respect of the GST paid on the construction of the house.
If you require further clarification with respect to any of the issues addressed in this letter, please call me at 613-954-4393.
Lisa Papineau
i 1 [...]
ii 2 By definition in subsection 123(1) of the ETA, "real property" includes, in respect of property in Canada (other than in Quebec), every estate or interest in real property.
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