File: 11634-2(go)
January 18, 1995
XXXXX
This is in response to your E-Mail of September 15, 1994 concerning the lease surrender agreement between the XXXXX and XXXXX and XXXXX . You had some questions concerning our previous memorandum of July 13, 1994 to you on this issue.
First, we are unaware of how the XXXXX representatives would have obtained a copy of our memorandum to you. We have had no communications of any kind on this issue with anyone outside our office, other than yourself and XXXXX .
The XXXXX representative made note of the fact that our memorandum made reference to the policy being developed on the meaning of supply that might impact on our treatment of lease surrenders by lessees. Although the policy has not been yet approved, it takes a broad meaning of the word "supply" and a lease surrender would come within the policy as it is currently being drafted.
At the time of our memorandum to you, we were not aware that the Court of Justice of the European Communities had released its decision in the Lubbock Fine case, which had been referred to it by the British VAT Tribunal. Our reading of the Court's decision is that it reinforces the position that a lease surrender constitutes a supply. The ruling of the Court was that:
"1. The term 'letting of immovable property' used in art. 13(B)(b) of the sixth council directive of 17 May 1977 ... to define an exempt transaction covers the case where a tenant surrenders his lease and returns the immovable property to his immediate landlord."
Thus, the court held that the transaction was exempt, not that a supply did not occur. XXXXX
Our next comments relate to your questions concerning subsection 136(1) and the definition of "real property" in subsection 123(1). Our reference to subsection 136(1) was simply to show that for GST purposes a leasehold interest in land is real property, unlike the position at common law, by virtue of both the definition of real property and subsection 136(1). However, we agree that it is the definition of real property that is most applicable to the characterization of a lease surrender, and not subsection 136(1).
You requested clarification of the last paragraph on page 2 of our memorandum. Please be advised that the words "although not by way of sale" should not have been included in that paragraph. As the memorandum went on to explain, our position is that a lease surrender is a sale, based on Policy Statement P-111.
You also had some further questions as to the allocation of the total amount paid to XXXXX between consideration for the lease surrender and return of pre-paid rent and whether we had any general guidelines for distinguishing between the two. We are not in a position to provide you with such general guidelines. Our view, which we confirm, that a portion of the surrender price was in fact a return of pre-paid rent and not consideration for the lease surrender, was based on the wording of article 2.2(a) of the Lease Surrender Agreement between the XXXXX and XXXXX and articles 2.3(b) and 3.1(c) of the Purchase Agreement between the XXXXX and XXXXX . Pursuant to article 2.3(b) of the Purchase Agreement, XXXXX of the purchase price for the sale of the land from XXXXX to the XXXXX was to be held in trust by the XXXXX solicitors to be distributed to or at the direction of XXXXX . Pursuant to article 3.1(c) of the Purchase Agreement, it was a condition precedent to the sale of the land that XXXXX surrender its lease to the XXXXX and that the lease surrender agreement provide for the payment of XXXXX to XXXXX at the direction of XXXXX "as the return of pre-paid rent on the Lease". Pursuant to article 2.2(a) of the Lease Surrender Agreement, XXXXX of the "surrender price" was to be delivered to XXXXX solicitors by the XXXXX solicitors "as payment by XXXXX to XXXXX with respect to the Lease".
You question whether the fact that XXXXX did not pay the rent to the XXXXX but rather to XXXXX is relevant. However, this is not quite our understanding of the facts. The letter of December 14, 1992 from XXXXX indicates that the original lease was between XXXXX and XXXXX . XXXXX pre-paid the rent to XXXXX . Subsequently, XXXXX assigned its interest in the lease to XXXXX and then XXXXX sold the land to the XXXXX . The payment by XXXXX to XXXXX retains its character as pre-paid rent notwithstanding the change in parties as a result of the assignment of the lease and the sale of the land. Of course, this is based on the assumption that in fact rent was prepaid and the amount returned was a reasonable prorating of the prepaid amount.
If you have any further questions, please contact Gunar Ozols at (613) 952-9589.
H. L. Jones
Director
General Tax Policy
Policy and Legislation
GTP: XXXXX
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