17 June 1994 GST/HST Interpretation 11685-1[2] - Supply of Land by Way of Lease

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Thank you for your E-Mail message dated June 22, 1993, requesting that we r eview your interpretation of the application of the GST in a particular fact situation involving the sale of a residential complex constructed on leased land. We apologize for the delay in responding to your enquiry.

Statement of Facts

Based on the information contained in your E-Mail we understand that:

1. O owns vacant land which is leased to L.

2. L, after holding the vacant land for a period of time, subleased it to D who acquired possession of the land in order to construct a single unit residential complex on it in the course of its commercial activities.

3. The single unit residential complex built by D was sold to X (an individual). X also obtained an assignment of D's sublease.

Further, we will assume that O and L are registered and that there is only one parcel of land and that the whole parcel is being supplied.

Interpretations Requested

You have asked for verification that in this situation a rebate cannot be claimed under section 256.1 of the Excise Tax Act. Alternatively, you have asked whether it is possible to interpret that where D acquires land by way of lease for the purpose of making a supply which will be exempt pursuant to Schedule V, Part I, paragraph 7(c) to the Act, and assigns the lease so that L is making a supply which is exempt pursuant to Schedule V, Part I, subparagraph 7(a)(i), that the conditions in section 256.1 have been met and that O is entitled to the rebate.

Interpretations Given

1. Section 256.1

To qualify for a rebate under section 256.1 a supply of land which is exempt pursuant to Schedule V, Part I, section 6.1 must be made to a lessee who is acquiring the land for the purpose of making a supply of the property, including the land, that is exempt pursuant to paragraph 6(a) or 7(b), or subparagraph 7(a)(i), of Part I of Schedule V and who will be deemed to have made a supply under subsections 190(3), (4), or (5) or under section 191.

Based on the information provided, the supply made by O to L will not satisfy these requirements. When the lease between O and L was entered into the supply was taxable, since none of the provisions in Schedule V applied. Pursuant to subsection 136(2.1) O began to make an exempt supply of the land to L when L subleased the land to D. O was, therefore, required to self-assess tax, pursuant to subsection 206(4), at that time.

L would also be required to self-assess tax under this provision when L makes the supply to D, provided L originally acquired the land for use as capital property. L will not, therefore, satisfy the requirements in section 256.1, even though L will be making a supply that is exempt pursuant to Schedule V, Part I, subparagraph 7(a)(i) once D assigns the sublease to X.

Where O and L are required to self-assess under subsection 206(4), section 198.1 will limit the amount self-assessed since the amounts payable arise from the enactment of an amendment to the Schedule V to the Excise Tax Act. Pursuant to section 198.1 the amount of tax that O and L are deemed to have collected or paid under subsection 206(4) is deemed not to exceed the total of tax that was payable on the last acquisition of the property. Therefore, if the vacant land was last acquired before 1991 the amount of tax that is deemed to be collected is nil.

D will also not satisfy the requirements in section 256.1 since D is not making a supply that is exempt pursuant to paragraph 6(a) or 7(b) or subparagraph 7(a)(i) of Part I of Schedule V. The conditions in section 256.1 would, however, be satisfied if D subleased the land to X since D is required to self-assess under paragraph 191(1)(b).

Therefore, O, L and D may all be required to self-assess tax in this scenario. O and L would, however, be eligible to claim an input tax credit, pursuant to subsection 193(1), on the amount of tax they are deemed to have paid to the extent that they were not previously using the property in commercial activities.

While the sale of the house to X is exempt under Schedule V, Part I, section 5.1, X would be eligible to claim a new housing rebate for the building only, pursuant to section 254.1, provided the application for rebate was filed within four years after possession of the complex was transferred to X and X:

(a) entered into an agreement with D,

(b) acquired the residential complex as his/her, or a relative's, primary place of residence,

(c) the fair market value of the complex (land and building) was less than $ XXXXX,

(d) possession was given to X after the construction of the complex was substantially completed,

(e) after the construction was substantially completed and before possession of the complex was given to X under the agreement the complex was not occupied by any individual as a place of residence or lodging, and

(f) either X (or a relative of X) was the first individual to occupy the complex as a place of residence after it was substantially completed or X made an exempt supply by way of sale or assignment of X's whole interest in the complex and transferred possession before the complex was occupied by any individual as a place of residence or lodging.

2. Assignment of Sublease

Section 256.1 and Schedule V, Part I, paragraph 7(c) cannot be interpreted to allow a rebate where D assigns his/her/its leasehold interest to X and L subleases the land to X, since the provisions in section 256.1 are very specific and a lease and an assignment of a lease are two different legal concepts. Furthermore, interpreting the provisions to allow the rebate in this situation would impact on the administration of other sections that refer to assignments.

In order to allow a rebate under section 256.1 where a leasehold interest is assigned the provision should have either

(a) used wording similar to subparagraph 254.1(2)(a)(i), clause 191(1)(b)(ii)([B]) or paragraph 211(1)(c); or

(b) specifically referred to 7(c) of Part I of Schedule V in paragraph 256.1(1)(a).

Thank-you for bringing this anomaly to our attention. We will bring it to the attention of the Department of Finance and report back to you.

In the meantime, the law should be administered as it is written and the rebate accordingly denied. If administering the law as written results in a severe financial hardship, it may be possible for a remission order to be granted. To obtain information on the procedures and requirements for remission orders, you may contact Ivan Bastasic, Director, Legislation and Regulation Division, Policy and Legislation, at (613) 954-3552.

We hope that our comments will be of assistance to you. If you have any questions in respect of the above please contact Stanley Farber at (613) 954-3772 or Wendy Houston at (613) 952-8812.

Sincerely,

Stanley Farber
Manager, Real Property
Tax Policy - Special Sectors
Policy and Legislation

            Ivan Bastasic
Director
            Legislation and Regulation Division
Policy and Legislation