1 April 2005 GST/HST Interpretation 55068 - Tax Status of Lease Agreements Entered Into Before March 10, 2004

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 GST/HST interpretation regarding the tax status of lease agreements entered into by a municipality before March 10, 2004.

Background

A supply of real property made by a "public sector body" ^[xxxi]1 is generally exempt pursuant to section 25 of Part VI of Schedule V to the Excise Tax Act (the ETA). An amendment was made to that section and received Royal Assent on May 14, 2004. Subsequent to the 2004 amendment, a supply of real property made by a municipality and a supply of real property that is "designated municipal property" ^[xxxii]2 made by a "designated municipality" ^[xxxiii]3 are now excluded from the exemption provided for under section 25 of Part VI of Schedule V to the ETA. The amendment applies to supplies for which consideration becomes due after March 9, 2004 or is paid after that day without having become due.

However, the 2004 amendment does not apply to supplies made under an agreement in writing entered into before March 10, 2004. Therefore, lease payments made to a municipality in respect of a lease agreement entered into before March 10, 2004, may still be exempt under section 25 of Part VI of Schedule V to the ETA.

Interpretation Requested

1. If the lease that was entered into before March 10 (pre-March 10 lease agreement) is amended after (March 9, 2004), is it considered a new lease and taxable?

2. Is the pre-March 10 lease considered a new lease and taxable if the lease is modified under a provision, and the provision is open for negotiation or is not specific? For example, is the lease considered taxable if the lease is modified and within the provisions of the original lease the lessee has the option to renew at market rent? What if the market rent is negotiable?

3. What would be the interpretation for pre-March 10 leases that are paid month by month with a "market rate"?

Interpretation Given

Generally, lease payments to a municipality made under a lease agreement entered into before March 10, 2004, and that were exempt under section 25 of Part VI of Schedule V to the ETA would remain exempt unless the terms of the agreement are significantly modified after March 9, 2004, to the extent that the agreement is considered to have been terminated and a new agreement is considered to have been entered into.

Without further information on the original agreements and on the amendments made to the agreements, we are not able to provide specific guidance with respect to whether the amendments would result in new agreements. However, we can provide the following information:

If a modification to a pre-March 10 lease agreement is insignificant, it would not result in a new agreement and the lease payments would remain exempt. Examples of modifications that would not result in the termination of a pre-March 10 lease agreement include:

•   Changing the mode of payment (e.g. payment by cheque vs. direct deposit to the supplier's bank account).

•   Changing the designated place of payment (e.g. direct deposit to a different bank or a different branch).

•   Adding an early termination clause to the agreement provided that the other terms of the agreement are not changed.

If a written lease agreement is significantly modified after March 9, 2004, a new agreement is considered to have been entered into on the date of the modification and the lease payments after that date would be excluded from the exemption under section 25 of Part VI of Schedule V to the ETA and would be subject to GST/HST if no other exemption applies. Examples of significant modifications include:

•   Substituting the real property, object of the lease, for another property or significantly increasing or reducing the space rented whether or not this results in changing the amounts of the lease payments.

•   Renewing the lease agreement at the end of its term where it was not contemplated in the original agreement (i.e. no renewal clause) even if it is under the same terms and conditions.

It is our opinion that where a written lease agreement entered into before March 10, 2004, contains a clause allowing to renew at a different rent not specified in the original agreement (i.e. market rent/negotiable rent), the lease payments after the modification of the rent would not be exempt under section 25 of Part VI of Schedule V to the ETA

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9587.

Yours truly,

Béatrice Mulinda
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

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