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.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 122272
May 12, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Purchase of housing using Islamic financing
Thank you for your letter of March 4, 2010, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the sale of housing purchased with certain financing that is compliant with Sharia law.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories. As the transactions described in your letter are carried out in [...] [Province X], we will discuss only the GST implications.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Although you requested a GST/HST ruling on this issue, the nature of your questions are such that they are specific to the facts of each sale and the purchase and sale agreement that would be entered into in each such situation. While a sample agreement of purchase and sale was submitted, we are not in a position to use that agreement as the basis of a ruling that would apply in all situations involving the sale of housing. As such, we are not able to provide a ruling on this matter, but are pleased to provide the following GST/HST interpretation.
We understand as follows:
1. An individual (the Purchaser) purchases newly constructed or substantially renovated housing from a builder and pays the GST on the purchase. (iFootnote 1) The agreement of purchase and sale for the housing (the Property) is between the Purchaser and the builder and sets out the rights and obligations of both parties. The Purchaser occupies the Property as a place of residence.
2. The Purchaser obtains financing for the purchase of the Property from the [...] ([FinanceCo]). The [FinanceCo] offers a type of financing that complies with the Islamic principal of declining (or diminishing) Musharaka.
3. The Purchaser contributes a certain percentage of the purchase price of the Property and the [FinanceCo] contributes the remaining percentage of the purchase price. The Purchaser alone obtains legal title to the Property. The [FinanceCo] obtains an equitable interest in the Property, in the form of partial beneficial ownership, as set out in the [...] (the Agreement), detailed below. Upon entering into the Agreement, the [FinanceCo] effectively agrees to sell its equitable interest in the Property to the Purchaser over a certain period of time. During this period of time, the [FinanceCo] maintains an equitable ownership interest in the Property albeit on a declining basis.
4. The Agreement contains the following provisions:
(a) Section [...] sets out the percentage of the purchase price of the Property that is paid by the Purchaser while section [...] sets out the remaining percentage of the purchase price that is paid by the [FinanceCo]. The amount paid by the [FinanceCo] is its contribution towards the purchase of its ownership interest in the Property.
(b) Paragraph [...] requires the Purchaser to purchase the [FinanceCo's] ownership interest in the Property over a certain period of time and for a certain sum of money. Paragraph [...] provides that during the course of purchasing the [FinanceCo's] ownership interest in the Property, the Purchaser is entitled to exclusive possession or occupation of the Property. In consideration of the Purchaser's right to possession of the Property and of the [FinanceCo's] contribution to the purchase of the Property, the [FinanceCo] is entitled to a payment of a certain amount (the Profit) from the Purchaser. Under paragraph [...], the Purchaser's requirement under paragraph [...] can be carried out through a series of renewable payment arrangements each for a specified term. (iiFootnote 2) In each such term, the amount to be paid by the Purchaser to the [FinanceCo] will include the portion of the [FinanceCo's] contribution to the purchase price to be repaid in that term plus the Profit established for that term. The amount may be paid weekly, bi-weekly, semi-monthly or monthly, as set out in the payment arrangement for that term. Section [...] provides that the Purchaser may make additional payments to those set out in the payment arrangement.
(c) Under section [...], during the term of any such payment arrangement, the [FinanceCo] retains its equitable interest in the Property. Upon the Purchaser completing payment of the [FinanceCo's] contribution to the purchase of the Property plus the Profit for all such terms and renewals, the [FinanceCo] will transfer its ownership in the Property to the Purchaser.
(d) Section [...] reiterates that while the Agreement is in place, the Purchaser has the right to exclusive possession and occupation of the Property and is responsible for obligations arising from occupation thereof, e.g., paying property taxes, maintaining property insurance, avoiding periods of extended vacancy of the Property, performing repairs and maintenance, paying utilities, and paying condominium fees if applicable.
INTERPRETATIONS REQUESTED
You would like confirmation that:
1. The Purchaser is obligated to pay any GST payable under the purchase and sale agreement for the Property.
2. If any of the GST payable under the purchase and sale agreement is not paid by the Purchaser, the Canada Revenue Agency (CRA) would not pursue the [FinanceCo] for such GST owing.
3. The Purchaser would be eligible for a GST/HST new housing rebate with respect to the purchase of the Property.
INTERPRETATIONS GIVEN
Based on the information provided, it is our view that:
1. The Purchaser is required to pay the GST on the purchase of the Property if, under an agreement for the supply of the Property, they are the recipient of the supply.
2. If the [FinanceCo] is not a recipient of a supply made an agreement for the supply of the Property to the Purchaser, the CRA cannot assess the [FinanceCo] for a failure of the Purchaser to pay the tax payable in respect of the supply made under the agreement.
3. The Purchaser will be eligible for a GST/HST new housing rebate if they meet the conditions for claiming the rebate as set out in section 254.
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 agreement of purchase and sale 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 payable on the supply. Further, if the agreement of purchase and sale is the only agreement for the supply of the Property and the [FinanceCo] is not liable to pay consideration for the supply under the agreement of purchase and sale, then the [FinanceCo] is not liable to pay the GST should the Purchaser fail to pay tax on the purchase of the Property.
However, if the Purchaser were to default under the purchase and sale agreement and the builder were to instead make a supply by way of sale of the Property to the [FinanceCo] who is a recipient of a supply under an agreement for the supply of the Property from the builder to the [FinanceCo], then the [FinanceCo] would be liable to pay the GST on that supply. While the supplier generally has the liability to collect and remit the GST 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
An individual qualifies, under section 254, for a rebate of part of the GST/HST paid on a single unit residential complex or a residential condominium unit (qualifying unit) if all of the following conditions are met:
(a) the individual purchases the qualifying unit from a builder;
(b) at the time the individual becomes liable under an agreement of purchase and sale, the individual is acquiring the qualifying unit as the primary place of residence of the individual, or a relation of the individual; (iiiFootnote 3)
(c) the total consideration paid to the builder for the qualifying unit is less than $450,000, before tax;
(d) the tax was paid by the individual;
(e) ownership of the qualifying unit is transferred to the individual after construction or substantial renovation of the unit is substantially completed;
(f) after the construction or substantial renovation is substantially completed and before possession of the qualifying unit is given to the individual
• in the case of a single unit residential complex, the complex was not occupied by any individual as a place of residence or lodging, and
• in the case of a residential condominium unit, the unit was not occupied by an individual as a place of residence or lodging unless, throughout the time the complex or unit was so occupied, it was occupied as a place of residence by an individual, or a relation of an individual, who was at the time of that occupancy a purchaser of the unit under an agreement of purchase and sale of the unit,
(g) the individual or a relation is the first person to occupy the qualifying unit as a place of residence after construction or substantial renovation of the unit is substantially completed; and
(h) the rebate application is filed in the required form and within the required time.
The fact that the individual has entered into the Agreement with the [FinanceCo] will not, on its own, affect the Purchaser's eligibility for the GST/HST new housing rebate.
A complete discussion of the GST/HST new housing rebate can be found in GST/HST Memoranda Series Chapter 19.3.1, Rebate for Builder-Built Unit (Land Purchased). Reference may also be made to guide RC4028, GST/HST New Housing Rebate. The GST/HST new housing rebate may be claimed on form GST190, GST/HST New Housing Rebate Application for Houses Purchased from a Builder.
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 613-954-8852. 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,
Hugh Dorward
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
i 1 While you did not state the type of housing acquired by the purchaser, we will assume for the purposes of this response that the housing is either a "single unit residential complex", as that term is defined in subsection 254(1), or a "residential condominium unit", as that term is defined in subsection 123(1).
ii 2 We requested a copy of any agreements that detail the payment arrangements described in paragraph [...] We understand that [...] such documents have not been prepared at this time.
iii 3 For purposes of section 254, a relation of a particular individual means another individual who is related to the particular individual or who is a former spouse or common-law partner of the particular individual.
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UNCLASSIFIED
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