1 April 2005 GST/HST Interpretation 58154 - Fair Market Value and Self-supply on New Residential Rental Property

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:

Thank you for your letter XXXXX concerning the meaning of fair market value for purposes of section 191 of the Excise Tax Act. For purposes of this letter, reference will be made to the Harmonized Sales Tax (HST) only. All legislative references are to the Excise Tax Act unless otherwise stated.

Interpretation Requested

You have asked us to review the situation you have described concerning the fair market value of residential complexes and the application of the HST and to provide policy direction on this issue.

Interpretation Given

In response to the information provided, we wish to clarify the CRA position on this matter.

Where certain conditions are met, section 191 deems a builder of a residential complex to have made and received a taxable supply by way of sale of a residential complex or unit and to have paid as a recipient and collected as a supplier tax in respect of that supply calculated on the fair market value of the complex or unit.

Fair market value is defined in subsection 123(1) as "... the fair market value of the property or service without reference to any tax excluded by section 154 from the consideration for the supply". Section 154 permits various taxes, duties, levies or fees to be excluded from the consideration for a supply of property or service where those amounts are imposed by law and payable by the recipient of that supply.

Thus there is a legislative basis to exclude from the fair market value or consideration of a supply of real property, any HST imposed under Part IX in respect of that particular supply.

It is important to distinguish between HST imposed under Part IX in respect of a taxable supply and an amount in respect of the HST that may be imbedded in the consideration for a supply as a result of the HST having been imposed at an earlier time. Section 154 refers to the HST imposed under Part IX in respect of a taxable supply, not to any amount imbedded on account of HST that may be attributable to a prior supply. Therefore, when arriving at fair market value, section 154 does not provide a legislative basis to discount the consideration of an exempt supply in an attempt to remove an amount imbedded in the consideration of that supply.

For example, where the consideration of a taxable supply of a residential complex is used as a comparable in a valuation methodology, the HST imposed on that supply, even where the supply was "HST included", is excluded from the consideration. However, if a comparable used in the valuation method is an exempt sale of a residential complex, section 154 does not permit the consideration of that exempt sale to be discounted to remove an amount imbedded on account of HST as a result of a prior taxable supply.

The Excise Tax Act does not prescribe a specific method for determining fair market value. The CRA recognizes that there are three general methods used to arrive at the fair market value of a residential complex, the cost, income and direct comparison method, and that no particular method or approach to market valuation should be excluded categorically. The appropriateness of any valuation methodology used in a particular case is a matter of valuation principles and practices to be determined in accordance with the professional judgement of the qualified appraiser.

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 613 954-8852.

Yours truly,

Daryl Hooley
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2005/03/08 — RITS 58291 — Supply of Laundry Facilities by Condominium Corporation