29 June 2004 GST/HST Interpretation 52146 - Request for Designation as a "hospital authority" by the XXXXX

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.

Dear XXXXX:

This is further to your request for a review of the subject ruling issued by our XXXXX Tax Services Office XXXXX concerning a sale of capital real property to XXXXX (the "Purchaser").

In a letter XXXXX, your authorized representative XXXXX described the property in question as farmland bearing the following legal description: XXXXX. We refer to this property as the "Land" in the present letter.

The following facts are based on the information provided in XXXXX letter, which was submitted with copies of your income tax returns filed for the taxation years XXXXX. You confirmed in our conversation XXXXX that the facts as stated in the letter are complete and accurate. You provided supplementary information in your facsimile transmission XXXXX.

All references are to the Excise Tax Act ("ETA")

Statement of Facts

1. The Land was originally acquired in XXXXX as part of a XXXXX parcel of property (the "Property") containing the Land. In addition to the Land, the Property also contained an area of roughly XXXXX acres (the "Remainder") XXXXX.

2. You became sole owners in joint tenancy of the Property XXXXX by deed registered as Instrument XXXXX. You had previously co-owned the Property with your son and daughter-in-law since its acquisition XXXXX.

3. In your facsimile, you state that the Land was used as a family farm until XXXXX, at which time your son relocated to XXXXX, leaving the farm in your care. We understand that you are retirees and do not earn income from employment.

4. During the taxation years XXXXX, the Land was leased to a nearby farmer for a sum of $XXXXX. You filed a statement of real estate rentals with your income tax returns for that period that included that figure.

5. During the taxation years XXXXX, you also leased one of the residential units located on the Remainder. The income generated from the lease of the residential unit for those taxation years was XXXXX respectively. You filed a statement of real estate rentals with your income tax returns that included these figures.

6. The combined income generated by the above leases were reported on your income tax returns as follows:

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

7. In your XXXXX facsimile, you provided lists of expenses relating to the Land. The figures are based on the expenses originally reported on your XXXXX income tax returns and are prorated to reflect only the expenses attributable to the Land. In addition, you included expenses relating to the Land that were not originally reported on the returns. The income and expenses attributable to the Land are summarized as follows.

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

XXXXX

8. XXXXX you negotiated a sale of the Land with the Purchasers. The agreement for the purchase and sale of the Land was conditional upon obtaining approval for a severance of the Land from the Remainder. The purchase and sale of the Land was completed and transferred to the Purchasers XXXXX subsequent to severance approval.

9. Neither of you has ever been a GST/HST registrant; however, the Purchaser was registered for GST/HST purposes at the time of the sale.

10. You were not in the business of buying or selling real property at the time of sale, nor was the Property severed into more than two parts since you acquired it.

Ruling Requested

The sale of the Land to the Purchaser was exempt from the GST.

Ruling Given

The sale of the Land to the Purchaser was subject to the GST at 7%.

This ruling is 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 this ruling 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 ETA or to our interpretative policy; and that you have fully described all necessary facts and transactions for which you requested a ruling.

Explanation

Sales of real property made in Canada are generally taxable pursuant to subsection 165(1) unless a specific provision applies to exempt them. Under subsection 9(2) of Part I of Schedule V, a supply of real property (such as the Land) made by way of sale by an individual is exempt from the GST/HST unless one of the listed exclusions to the exemption applies.

In the present case, the exclusion described in subparagraph 9(2)(a)(i) of Part I of Schedule V is relevant. Under this subparagraph, a sale of real property made by an individual is excluded from exemption if, immediately before the time ownership or possession of the property is transferred, the property is capital property used primarily in a business carried on by an individual with a reasonable expectation of profit.

For purposes of subparagraph 9(2)(a)(i), a "business" is defined in subsection 123(1) to include an undertaking of any kind whatever, whether the undertaking is engaged in for profit. It is further defined as any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement. In accordance with this definition, we would consider the Land leases as a "business" for GST/HST purposes. Moreover, since that business continued over a period of XXXXX years, we would consider the business to have been carried on for purposes of subparagraph 9(2)(a)(i). The tax status of the sale of the Land in this case therefore depends on whether there existed a reasonable expectation of profit with respect to the Land leases.

As mentioned in our original ruling XXXXX, policy statement P-176R, Application of Profit Test to Carrying on a Business, provides the criteria for determining whether a business is being carried on with a reasonable expectation of profit. The fact the gross income generated from the Land leases was greater than the expenses attributed thereto for each of the taxation years in question would suggest that the business had a reasonable expectation of profit. Accordingly, exclusionary subparagraph 9(2)(a)(i) is applicable and, since there are no other relevant exemptions in the circumstances, the sale of the Land was taxable. Moreover, on the basis that the business was carried on with a reasonable expectation of profit, we would consider the Land leases to be a "commercial activity" for GST/HST purposes for the reasons stated in our original ruling.

We acknowledge the calculation of certain expenses described in your facsimile as "man hours spent". You have calculated this amount for the XXXXX-year period as $XXXXX or $XXXXX, a figure derived from the estimated value of the approximate personal time spent tending to the Land. We understand that your accountant has advised that this amount is not deductible as an expense for the relevant taxation years. However, if we were to take that expense into consideration, the Land leases would nevertheless show a profit for each of the subject years.

We further acknowledge that you may have spent a significant sum of money on legal fees in pursuing the present matter. However, as such an expense is not determinative of whether a reasonable expectation of profit existed with respect to the Land leases, it cannot be considered for that purpose.

Lastly, we note the possibility that the business (i.e., the Land leases) may have ceased prior to the closing date of the sale. If that were the case, and as long as the Land had not been appropriated for your personal use and enjoyment, we would consider a commercial activity to have continued to exist up to the closing date by virtue of subsection 141.1(3). Specifically, subsection 141.1(3) provides that to the extent that a person does anything (other than make a supply) in connection with the disposition or termination of a commercial activity of the person, the person shall be deemed to have done that thing in the course of commercial activities of the person. Therefore, even if you had ceased to lease the Land prior to its sale, the holding of the Land pending its sale would be viewed as an action to terminate a commercial activity, which itself would be deemed to be a commercial activity pursuant to subsection 141.1(3).

On the other hand, if you had ceased leasing the Land prior to its sale but appropriated it for your personal use and enjoyment, subsection 190(2) would have required you to self-assess and remit GST based on the fair market value of the Land. Under this provision, GST would have been deemed to be collected at the time of the appropriation.

While we regret that our response could not be more favourable, it is the responsibility of the Canada Revenue Agency to administer the ETA as written. Accordingly, we must concur with the Ruling issued by the XXXXX Tax Services office.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-8816.

Yours truly,

Paul Hawtin
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

XXXXX XXXXX

2004/07/09 — RITS 52404 — [Liablility to Pay Consideration for Goods and Services Supplied by a Provider]