15 October 2004 GST/HST Interpretation 52554 - Application for Designation of XXXXX as a Hospital Authority

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.

Excise and GST/HST Rulings Directorate Place de Ville, Tower A, 15th floor 320 Queen Street Ottawa ON K1A 0L5
XXXXX XXXXX XXXXX XXXXX	Case Number: 52554 File Number: 11680-6, 11680-7, 11950-1
XXXXX

Subject:

GST/HST APPLICATION RULING Application of GST to Sales of Time-Share Resort Accommodation Through the Sale of Resort Points

Dear XXXXX:

Thank you for your letter XXXXX and correspondence submitted prior to that date, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transactions described below.

All legislative references are to the Excise Tax Act (hereafter "the Act") unless otherwise noted.

Statement of Facts

Our understanding of the facts is as follows:

1. XXXXX is a resort property developer based in XXXXX. XXXXX, which is registered for the GST/HST, has created a form of time-share occupancy rights for timeshare resorts as described herein.

2. XXXXX business, carried on directly or through related persons, is comprised of three divisions:

(a) XXXXX;

(b) development and sale of resort accommodation by way of full and fractional ownership; and

(c) development and sale of resort time-share accommodation.

3. The development and sale of time-share resort accommodation (condominium units) is conducted in Canada by XXXXX, which is registered for the GST/HST and is a wholly owned subsidiary of XXXXX. XXXXX was wound up into XXXXX. XXXXX will continue to carry on, through a separate division, the time-share business formerly carried on by XXXXX. For purposes of this ruling, any references to XXXXX after XXXXX, will be references to the separate division of XXXXX that was formerly XXXXX.

4. In the United States, the development and sale of time-share resort accommodation is conducted by XXXXX and XXXXX (hereafter collectively, "the U.S. Entities", singularly, "a U.S. Entity"), indirectly owned in whole or in part by XXXXX. Each U.S. Entity will be registered for the GST/HST.

5. XXXXX has incorporated XXXXX (hereafter "the Club"), a XXXXX, non-profit, non-stock corporation. The Club is a non-resident of Canada that is registered for the GST/HST.

6. XXXXX builds condominium units situated in Canada and transfers beneficial ownership of such units to the Club in exchange for rights to occupy properties (for ease of description and to accommodate a method of allocation of these rights to occupy, the occupancy rights are designated and marketed as "resort points") beneficially owned by the Club. Such properties are situated throughout the world. In some cases XXXXX acquires property for contribution to the Club that was developed by third parties. XXXXX principal activity is restricted to acquisition or development of property for contribution to the Club and the sale of resort points received in exchange (i.e., XXXXX does not develop property for other members of XXXXX or for direct sale to the public).

7. The U.S. Entities operate in a similar manner to XXXXX. That is, a U.S. Entity transfers beneficial ownership of a resort property situated in the United States to the Club in exchange for resort points. Property contributed to the Club by a U.S. Entity may be developed by the U.S. Entity or developed by a third party (either related or unrelated) and acquired by the U.S. Entity for contribution to the Club. For example, XXXXX has purchased XXXXX condominium units in XXXXX from an unrelated third party for contribution to the Club.

8. Resort points issued by the Club are ultimately for the purpose of using the resort accommodations, subject to certain terms and conditions, beneficially owned by the Club. The Club will not sell resort points to members of the public ("Purchasers"). Thus, a Purchaser is entitled to reserve and occupy, on an annual basis, residential accommodation at any one of the properties beneficially owned by the Club from time to time.

9. XXXXX sells resort points acquired from the Club from XXXXX sales offices located in XXXXX and XXXXX, to Purchasers. XXXXX also sells resort points to the U.S. Entities. XXXXX increasingly sells, in Canada, resort points acquired from the U.S. Entities who acquired the points on the transfer of properties situated in the United States to the Club.

10. The U.S. Entities sell resort points acquired from the Club at locations in the United States, such as XXXXX, to Purchasers. The U.S. Entities also sell resort points to XXXXX. It is anticipated that from time to time, the U.S. Entities may sell in the United States resort points acquired from XXXXX. The U.S. Entities' sales offices are located in XXXXX and XXXXX.

11. Presently, the Club beneficially owns resort accommodations in XXXXX and XXXXX.

12. Additional properties are under construction at XXXXX and XXXXX. In the future, additional properties will be developed at XXXXX and an additional location in XXXXX. It is expected that the beneficial ownership of these properties will also be transferred to the Club.

Structure of Property Transfer to Club and Points Acquisition

13. The method for determining the number of resort points per resort property is as follows:

(a) when considering whether to construct a resort complex at a particular location for contribution to the Club, an estimate is made as to the maximum amount potential Purchasers (members) would be willing to pay for the use of a time-share property at the particular location;

(b) the estimated amount takes into account, inter alia, the seasons of intended use and the size of the individual units in the complex;

(c) a XXXXX is developed which represents the estimated market value of the units on a week-by-week basis as determined by the retail selling price of the resort points;

(d) the total number of resort points in the XXXXX is the total number of resort points required to occupy all units in the complex for the entire year taking into account required maintenance (typically, one week is set aside for maintenance per unit);

(e) the number of points XXXXX expects to receive from the Club in exchange for the resort property in question is the total number of resort points in the XXXXX;

(f) once construction of a resort property is complete, and prior to transfer to the Club of each XXXXX unit (i.e. condominium unit), the market value of each unit is reviewed and adjusted as necessary;

(g) when beneficial ownership of a unit is transferred to the Club, XXXXX receives the total number of points in the XXXXX from the Club in exchange for the unit; and

(h) once a unit is transferred to the Club in exchange for resort points, no additional points in respect of that unit can be created, issued or sold, such that the number of resort points issued is fixed at the time of the transfer of beneficial ownership of the unit to the Club.

14. The points creation process works on the same basis for resort properties developed by the U.S. Entities and transferred to the Club.

15. At any given time, the Club, XXXXX and the U.S. Entities are able to track the number of points that have been issued by the Club in respect of each resort property and the number of points remaining available for sale by XXXXX and the U.S. Entities.

Sale of Points to Purchasers

16. The procedures for sales of resort points are set out in the "Purchase and Sale Agreement", a sample copy of which was included with your submission.

17. Currently there are approximately XXXXX memberships in the Club, XXXXX of whom are non-residents of Canada. The portion of members of the Club that are non-residents of Canada is expected to increase significantly with the addition of more properties, and the opening of additional sales offices, in the United States.

18. Upon purchasing resort points, Purchasers automatically become members of the Club and collectively, the Purchasers own the Club. For married purchasers, both spouses become members of the Club.

19. Purchasers, by virtue of their membership in the Club, acquire, inter alia, the right to receive a proportionate share of assets of the Club on dissolution or wind up.

Exercise of Occupancy Rights of Purchasers

20. A Purchaser's occupation of a resort property is subject to a mechanism set out in the Club's by-laws.

21. Purchasers must initially purchase a minimum of XXXXX resort points. The current price per point is $XXXXX and the minimum initial investment is, therefore, $XXXXX.

22. A Purchaser may reserve use of any one of the Club's properties at any time in a particular calendar year subject to:

(a) the number of resort points purchased;

(b) the extent of any previous reservations by the particular Purchaser in the year; and

(c) prior reservations of specific property by other Purchasers.

23. Resort points are not "redeemed" in the technical sense. That is to say, the points are not converted or exchanged, nor do the points have an expiry date. The points are the mechanism to track the exercise of a Purchaser's rights, in accordance with the Club's by-laws.

Operation of Club

25. On the purchase of resort points, a Purchaser is issued a membership in the Club.

26. As a member of the Club, a Purchaser is entitled to vote at general meetings of the Club, participate in the beneficial ownership of assets of the Club and, in the event of a wind up or dissolution of the Club, receive a portion of assets of the Club.

27. As a member of the Club, a Purchaser is subject to its by-laws, which, as noted above, govern when and where a Purchaser can occupy resort accommodation.

Repurchase of Points

28. Once a year, XXXXX and the U.S. Entities will repurchase points from Purchasers who wish to sell their points. The repurchased points are added to the existing inventory and are sold by the purchasing entity.

Accounting for GST

29. XXXXX and the U.S. Entities propose to calculate the GST on the sale of points, and allocate between Canadian and non-Canadian points, as follows:

(i) On the transfer of Canadian properties by XXXXX to the Club, the Club will self-assess the GST/HST and will claim an offsetting input tax credit.

(ii) On the supply of resort points by the Club to XXXXX in consideration for the transfer of a property situated in Canada, the Club will collect and remit the GST/HST on the basis of an allocation formula that reflects the fact that the points relate to real property situated in and outside Canada. The formula will be based on the proportion of existing and new points available for sale that relate to properties situated in Canada to the total number of points available for sale in respect of all properties, both in and outside Canada.

(iii) On the transfer of properties by the U.S. Entities to the Club, no GST will apply as the properties are located outside Canada and the supply is deemed to be made outside Canada for purposes of the Act.

(iv) On the transfer of points by the Club to the U.S. Entities, the Club will collect and remit the GST based on the proportion of Canadian points to total points as set out in subparagraph (ii), above.

(v) XXXXX and the U.S. Entities, as GST/HST registered persons, will claim input tax credits to recover the GST payable to the Club.

(vi) When XXXXX and the U.S. Entities sell points, including the transfer of points between each other, they will calculate the GST remittable on the selling price of the points based on the proportion of Canadian points to total points at the time the points are sold. The allocation formula will be adjusted as necessary to take into account the fact that the inventory of Canadian and total points will change over time.

(vii) The allocation formula will also be applied to the sale of points by XXXXX and the U.S. Entities that have been repurchased from Purchasers.

(viii) When XXXXX, a U.S. Entity or the Club repossess or seize points, the resale of the points will not be subject to the allocation formula. Instead, the resale will be treated as fully taxable and the vendor (be it XXXXX, a U.S. Entity or the Club) will claim a fully offsetting input tax credit under subsection 183(7).

Rulings Requested

1. On the windup of XXXXX into XXXXX, its parent corporation, there will be no GST consequences on the transfer of the existing inventory of resort points held by XXXXX for sale pursuant to section 272.

2. GST will be self-assessed by the Club on the transfer of Canadian properties by XXXXX pursuant to subsection 228(4) and the Club will be able to claim a fully offsetting input tax credit as it is engaged in a commercial activity.

3. The transfer of properties situated in the United States to the Club by a U.S. Entity will not be subject to the GST since the real property is situated outside Canada.

4. On the exchanges of resort properties and points between XXXXX, the U.S. Entities and the Club, the provisions of paragraph 153(1)(b) will apply. The Club will self-assess GST on the transfer of properties situated in Canada based on the fair market value of the points issued by it and will collect tax from XXXXX and the U.S. Entities in respect of the points issued to these entities based on the fair market value of the resort properties transferred to the entity.

5. The amount of GST payable by XXXXX and a U.S. Entity to the Club on the points received for transfers of properties in Canada and the United States, respectively, can be determined on the basis of the proportion that new and existing unsold points created on the transfer of Canadian properties are to the total of existing and unsold points relating to all properties (World points). This will be the allocation formula and is expressed mathematically as follows:

Total Canadian points available for sale x Consideration for points
  Total World points available for sale

6. To the extent XXXXX and the U.S. Entities sell points to each other, they will calculate the GST applicable on the amount charged for such transfers based on the allocation formula described in Ruling Request 5.

7. On the sale of points by XXXXX and the U.S. Entities to Purchasers, the GST applicable can be determined on the basis of the allocation formula in Ruling Request 5.

8. XXXXX and the U.S. Entities will be entitled to claim input tax credits to recover the GST payable on their inputs.

You had also requested a ruling concerning certain issues surrounding the seizure or repossession of resort points by XXXXX, a U.S Entity or the Club. As discussed in a telephone conversation XXXXX between XXXXX of your office and Costa Dimitrakopoulos of our office, this matter will be addressed under separate cover.

Rulings Given

Please note that the rulings given in this section do not necessarily correspond numerically to the Rulings Requested as set out above.

Based on the facts set out above, we rule that:

1. On the wind up of XXXXX into its parent corporation, XXXXX, there will be no GST consequences on the transfer of the existing inventory of resort points held by XXXXX for sale because of the application of section 272 of the Act.

2. The GST is payable on the value of consideration for a supply of resort points made by XXXXX to a recipient Purchaser or a U.S. Entity to the extent that the resort points are in respect of the right to occupy real property in Canada. It will be necessary to determine the proportion of a supply that is deemed to be made in Canada at the time consideration for the supply becomes payable. It is that portion of the supply that will attract tax.

In most cases, it will be necessary to allocate the consideration payable by a recipient to the extent that the resort points represent a right to use real property situated in Canada. Such an allocation must be done on a fair and reasonable basis and used consistently.

One method that is fair and reasonable is to determine the total resort points remaining available for sale by XXXXX and the U.S. Entities (as issued by the Club) in respect of properties situated in Canada (Canadian points) and the total resort points that were issued by the Club remaining available for sale by XXXXX and the U.S. Entities in respect of all properties throughout the world (World points) at the time points are sold. Once this ratio is established, it would remain the same until resort points in respect of a new property become available for sale by XXXXX or the U.S. Entities. Further details of this allocation method are provided in the Explanation to Ruling 1 (below).

To the extent that the GST is payable on the supply of such points, tax is to be accounted for by XXXXX in the reporting period in which tax in respect of the supply is paid or becomes payable by the recipient of the supply. Pursuant to subsection 168(1), tax in respect of a taxable supply is payable by the recipient on the earlier of the day consideration for the supply is paid and the day consideration for the supply becomes due.

3. Where XXXXX makes a supply of the beneficial interest in real property situated in Canada to the Club, the GST is payable on the supply. The consideration for the supply by XXXXX to the Club is the fair market value of the resort points supplied by the Club to XXXXX. XXXXX is not required to collect the tax payable by the Club on this supply under the provisions of subsection 221(2). Rather, the Club is required to remit tax directly to the Receiver General for Canada. Where the Club uses the real property primarily in commercial activities, the Club must account for this tax in the reporting period in which the tax becomes payable. Subject to the general provisions of the Act, the Club is eligible to claim an input tax credit in respect of this tax payable.

Where resort points are supplied by the Club to XXXXX, the GST is payable by XXXXX to the Club to the extent that the points relate to the right to occupy real property in Canada. The value of consideration for this supply is the fair market value of the beneficial ownership of the property supplied by XXXXX to the Club. The Club must account for this tax in the reporting period in which the tax was paid or became payable by XXXXX.

4. No GST is payable when the beneficial ownership of properties situated outside Canada are transferred to the Club. However, when resort points in respect of those properties are supplied by the Club, GST is payable by the recipient of the supply (i.e. a U.S. Entity) based on the extent to which the points relate to the right to use real property in Canada. The value of consideration for this supply is the fair market value of the beneficial ownership of the property supplied by the U.S. Entity to the Club. The Club must account for this tax in the reporting period in which the tax was paid or became payable by the U.S. Entity.

5. Where a U.S. Entity sells resort points to XXXXX or Purchasers, the sale of those points by XXXXX is to be treated in the same manner as set out in Ruling 2.

6. The supply of resort points by XXXXX to a U.S. Entity is subject to tax in the same manner as set out in Ruling 2.

7. XXXXX and the U.S. Entities are engaged in commercial activities and are entitled to claim input tax credits relating to their respective GST payable, subject to the general provisions of the Act.

These rulings are subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by these rulings provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transactions for which you requested the rulings.

Explanation

Ruling 1

To the extent that XXXXX is wound-up and not less than 90% of the issued shares of each class of the capital stock of XXXXX was, immediately before that time, owned by XXXXX, the transfer of resort points to XXXXX as a consequence of the winding-up shall be deemed not to be a supply.

Ruling 2

The supply of resort points is a supply of intangible personal property related to real property situated in and outside Canada.

In the circumstances, the intangible personal property relates in part to real property situated in Canada and in part to real property situated outside Canada. It is the position of the Canada Revenue Agency that the GST/HST will apply only to the extent that the intangible personal property relates to real property in Canada at the time consideration for the intangible personal property becomes due.

The allocation method set out in the ruling would be as follows. Suppose XXXXX has acquired 400 points from the Club in respect of a property situated in Canada. At the time these points are available for sale, there are 1,200 points remaining available for sale in respect of property situated throughout the world (including properties in Canada). If XXXXX sells 80 points, tax would be based on one-third (i.e. 400/1200) of the consideration payable for the supply. Hence, the tax payable on the sale of these 80 points would be $XXXXX (assuming a price per point of $XXXXX):

80 points x $XXXXX x 400 Canadian points available for sale x 7%

1,200 World points available for sale

(the ratio, expressed as a fraction, is 1/3)

If XXXXX were to sell another 80 points when no additional points have become available for sale in respect of properties anywhere in the world, the same ratio would be used (i.e. 400/1,200). That is, the ratio would not change as no additional points have become available for sale.

If XXXXX then acquired 240 points from the Club in respect of another property situated in Canada, one would have to recalculate the ratio to determine the portion of the consideration that attracts tax. Thus, after the acquisition of the 240 points by XXXXX, assuming no other points have become available for sale in respect of properties situated anywhere in the world, the ratio (i.e. the portion of consideration that attracts tax) would be calculated as:

587 Canadian points available for sale ^[viii]1

1,280 World points available for sale ^[ix]2

(the ratio, expressed as a percent, is 45.85%). Note that in determining the new ratio, the numerator is reduced proportionally by the ratio established above.

This ratio would also be used for subsequent sales of resort points until such time as more Canadian or World points become available for sale at which time the ratio would have to be recalculated.

Ruling 3

Where XXXXX supplies beneficial ownership of a resort property in Canada to the Club, XXXXX is selling an interest in real property situated in Canada. That supply is deemed to be made in Canada under the provisions of paragraph 142(1)(d). The supply is not exempt and as the supply is a taxable supply made in Canada, the Club, as recipient of the supply, is liable to pay tax under the provisions of section 165. The consideration for the supply by XXXXX is the resort points the Club provides to XXXXX. Pursuant to paragraph 153(1)(b), the value of consideration for the supply by XXXXX to Club is the fair market value of the resort points.

As this supply by XXXXX is that of an interest in real property and the Club is registered for the GST/HST, XXXXX is not required to collect the tax payable on the supply pursuant to subsection 221(2). Rather, under the provisions of subsection 228(4), the Club is required to remit tax directly to the Receiver General for Canada.

Subject to the general provisions of the Act, the Club is eligible to claim an input tax credit in respect of this tax payable.

Where the Club supplies resort points in relation to properties situated in Canada to XXXXX, the Club is supplying intangible personal property that relates to real property situated in and outside Canada. As the Club is registered for the GST/HST, subsection 143(1), which deems certain supplies by a non-resident to be made outside Canada, does not apply. The supply is not exempt and is made in the course of a business or adventure or concern in the nature of trade. To the extent that the points represent the right to use real property situated in Canada, Club is required to collect tax on the supply.

Similar to Ruling 2, in most cases it will be necessary to allocate the consideration payable by a recipient (i.e. XXXXX) to the extent that the resort points represent a right to use real property situated in Canada. Such an allocation must be done on a fair and reasonable basis and used consistently. The method set out in Ruling 2, whereby the allocation is based on the number of resort points remaining available for sale by XXXXX and the U.S. Entities in respect of properties situated in and outside Canada, may also be used by the Club in determining an acceptable method of allocation.

Ruling 4

The transfer of beneficial ownership of real property situated outside Canada is a supply made outside Canada under paragraph 142(2)(d) and is not subject to tax. Nonetheless, the Club's supply of points in respect of a property situated outside Canada is a supply of intangible personal property that relates to real property situated in and outside Canada. For the reasons set out in Ruling 3, the Club is making a taxable supply and to the extent that the points represent the right to use real property situated in Canada, the Club is required to collect tax on the supply.

We would add that where a supply of property or a service is made between persons not dealing at arm's length for no consideration or for consideration less than the fair market value of the property or service at the time of the supply, subsection 155(1) deems the supply (where the recipient is not a registrant acquiring the property or service for consumption, use or supply exclusively in commercial activities) to be made for a value of consideration equal to the fair market value of the property or service.

The allocation method proposed in Ruling 2 may also be used for the supply of points issued by the Club in respect of property situated outside Canada.

Ruling 5

The sale of resort points by XXXXX, whether acquired from the Club or a U.S. Entity, is subject to tax on the same basis as set out in Ruling 2 and the explanation thereto. Similarly, the sale of resort points by a U.S. Entity, whether acquired from Club or XXXXX, is subject to tax on the same basis as set out in Ruling 2 and the explanation thereto.

Ruling 6

Ruling 2 applies to a supply of resort points by XXXXX to any of the U.S. Entities in the same manner as the supply of points by XXXXX to a Purchaser. We would add that the provisions of subsection 155(1) may be relevant to a supply from XXXXX to a U.S. Entity.

Ruling 7

XXXXX and the U.S. Entities are entitled to input tax credits for the GST payable to the Club, and to each other, on acquisition of points of properties situated in Canada, as well as for the GST payable on its other business operations, to the extent the property and services are for consumption, use or supply in the course of a commercial activity. Generally, any GST payable by XXXXX or a U.S. Entity will be fully recoverable as an ITC.

If you have any questions on Ruling 1, please contact Larry Springstead of the Corporate Reorganizations Unit at 613-952-9220. Should you have questions or require clarification on any other matter above, please do not hesitate to contact me at (613) 954-4393.

Yours truly,

Hugh Dorward
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2004/09/16 — RITS 39725 — Eligibility for Input Tax Credits