File #11950-1
Ref. I/V, 25/VI/V
Document #1412
Dear XXXXX:
This is in response to the memo of XXXXX, from XXXXX to the Manager of the Real Property Unit, concerning the GST status of real property supplied by a municipality. Her memo indicates that you are now the officer responsible for the case. The facts, as outlined in XXXXX memo and as discussed by you with Mr. Don Dawson, are as follows.
Facts
1. The XXXXX (the District) incorporated as a municipality effective August 1, 1995. The District is supplying bare land by way of lease to individuals or corporations, with an option to purchase, as well as providing simple leases of land and making sales of land.
3. Your questions concern leases of bare, un-serviced lots by the District to individuals for residential use. The lease agreements in respect of such lots permit a lessee to terminate the lease part way through the lease period, without having to make any more lease payments or pay any penalty. However, if the individual wishes to acquire ownership of the lot, he or she is able to do so merely by requesting the title after having located a residential complex or mobile home on the property during the lease period.
4. The lease agreements state that, provided the individual has remained current with his or her lease payments and municipal property taxes, he or she can acquire title to the property at any point during the lease period, conditional on their continuing to make lease payments and pay municipal property taxes on time for the remainder of the original lease period.
The individual also has the option of acquiring title to the property at the end of the lease period without any further payments, provided he or she has made all his or her lease payments on time and is not in arrears with respect to municipal property taxes.
Question #1
Paragraph 7(a) of Part I of Schedule V to the ETA contains the phrase "person in occupation or possession of a residential unit that is or is to be affixed to the land for the purpose of its use and enjoyment as a place of residence". How is this to be interpreted for the purposes of the exemption? At the time of entering into these lease agreements with the option to purchase for residential purposes, the tenant will not necessarily be "in occupation or possession" and it is possible that they will never fulfil this requirement of affixing a residential unit to the land, in which case the option to purchase is never exercised.
Response
A supply of a bare lot to an individual by way of lease is not exempted by paragraph 7(a) of Part I of Schedule V unless, at the time the lease is granted, the lessee is also the owner, lessee or person in occupation of a residential unit that is to be affixed to the land for the purpose of its use and enjoyment as a place of residence for individuals. However, provided the District has not made an election pursuant to section 211 of the ETA in respect of the property, an initial supply of a bare lot by way of lease to an individual by the municipality for at least one month is exempted by paragraph 25(f) of Part VI of Schedule V to the ETA. If the municipality has made an election pursuant to section 211, the supply of real property by way of lease would not be exempted by paragraph 25(f), so would be taxable.
Question #2
If paragraph 7(a) of Part I cannot be applied to the original supply by way of lease at the time the lease agreement is entered into, is there a change from the lease being exempt under paragraph 25(f), Part VI, Schedule V, to the lease being exempt under paragraph 7(a), Part I, Schedule V, when a residential complex is affixed to the land?
Response
The incidence of tax in respect of the original supply by way of lease occurs at the time the lease agreement is made. It is only in respect of section 136 of the ETA and section 6.1 of Part I of Schedule V to the ETA that the tax status of a supply can change at lease intervals, because of the wording of subsection 136(2.1). In the case at issue, the tax status of the original supply would not change merely because the lessee affixed a residential complex to the land without acquiring title to the property or receiving any change to the lease. However, if the original lease agreement is abrogated and replaced by a different lease agreement or by a supply by way of sale, the tax status of the new supply could be different from the tax status of the original supply.
Question #3
If paragraph 7(a) of Part I of Schedule V to the ETA does apply at some point in time, will the provisions of subsection 190(3) of the ETA apply to the municipality? If so, when would subsection 190(3) apply?
Response
If paragraph 7(a) exempts the lease of a bare lot by a municipality, the provisions of subsection 190(3) would apply to the municipality at the time of the lease, unless the property was previously leased in circumstances where the supply was exempted by paragraph 7(a).
The municipality would therefore be required to self-assess on a deemed sale of the bare lot. If the supply by way of lease were exempted only by paragraph 25(f) of Part VI of Schedule V, subsection 190(3) would not apply.
Question #4
Where the provisions of paragraph 7(a) of Part I do apply at some point in time, is the subsequent sale of the residential land through the option to purchase exempt under section 5.2 of Part I?
Response
Where the provisions of paragraph 7(a) of Part I do apply to a lease of bare land to an individual by the municipality, the subsequent transfer of title to the land from the municipality to the individual would be an exempt supply of the land by way of sale pursuant to section 5.2 of Part I. However, as noted above, the Department will have already received GST on the fair market value of the lot at the time the exempt lease was made, pursuant to subsection 190(3) of the ETA.
If the initial supply of real property to the individual by way of lease is exempted only by paragraph 25(f) of Part VI, there is no provision that would allow us to collect GST on the fair market value of the property. If the individual is subsequently given title to the land for no consideration, no GST would be payable at the time the title to the property is transferred.
Therefore, the question of whether the individual would pay GST on the property may depend on whether he or she was in occupation or possession of a residential unit that is or is to be affixed to the land for use as a place of residence for individuals at the time the property is supplied by way of lease.
We will approach the Department of Finance to request that they consider a legislative amendment to rectify the matter, possibly by amending subsection 190(3) so that the self-supply requirement also refers to supplies exempted by virtue of paragraph 25(f).
If you require any further information concerning this matter, please contact Mr. Don Dawson at (613) 952-9211.
J.A. Venne
Director
Special Sectors
GST Rulings and Interpretations
File #11950-1
Ref. 2 & 9/I/V
Document #1430
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