11635-10 11690-1(ar)
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Subject:
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Sale of remainder interest in real property
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Dear Mr. XXXXX
This is in response to your letter addressed to Stan Farber dated March 25, 1994 in which you request that your draft letter be reviewed. A copy of your letter was forwarded to our Division as the interpretations in question fall under our responsibility.
Fact:
In September 1993, you received a letter from XXXXX to which you responded in the same month. The letter was in regard to the sale of remainder interest in real property. Subsequent to your response, you received a letter from the law firm XXXXX questioning your interpretation. You have prepared a draft response to their letter which differs from your initial interpretation in the area of the recipient's eligibility to register for the GST and to claim ITC's in respect of the acquisition of the remainder interest. Initially, you felt that because the recipient does not usually enjoy beneficial ownership of the interest until such time as the life estate expires, they would not be entitled to claim ITC's as the interest is not consumed, used or supplied in the course of a commercial activity at the time of acquisition.
You now feel that this position may not be supportable. You state that there is no requirement in subsection 169(1) that the interest be consumed, used or supplied immediately after the acquisition of the property in order to be eligible for the ITC. In addition, you also state that a non-registered recipient may also be entitled to register voluntary and to claim an ITC for the tax payable on the interest in the real property.
Question:
You ask us to provide you with our comments on your draft response to the inquiry.
Response:
After reviewing your letter we have the following comments:
XXXXX you discuss a situation where the children are not registered (they do not have a commercial activity neither do they take action to start a commercial activity) and receive a remainder interest in a commercial real property. Specifically, the children will not have possession and use of the property until the death of their father and until that time will only have a beneficial interest in the land. Consequently, the children are not engaged in any activity in regards to this property (as it is not within their rights without the right of possession and use). Therefore, even if the land is used by the father in a commercial activity, the children do not have a commercial activity as defined in the Excise Tax Act (the Act) as they have only a remainder interest in the real property. The intention of perhaps using the land in commercial activity at sometime in the future, is not sufficient in itself to say that the person is engaged in a commercial activity at the particular moment. Ultimately, a person is considered as being engaged in a commercial activity based on his/her activity and not based on an ownership of something that could be used in the course of a commercial activity.
In addition, pursuant to paragraph 141.1(3)(b) a person that does anything (other than making a supply) in connection with the acquisition, establishment, disposition or termination of an activity of the person that is not commercial activity, that person is deemed to have done that thing otherwise than in the course of commercial activities. We do note the possibility of considering the acquisition of the property as the first step in establishing a commercial activity and therefore, deemed to be part of same pursuant to paragraph 141.1(3)(a). However, given the scope of the activity engaged in by the children and the lack of an ability/right to take action to establish a commercial activity related to the real property in question, it would seem that the linkage between the acquisition and a possible future commercial activity to be too remote.
Consequently the children will not be eligible to register and to claim ITCs in respect of their acquisition of the property in question. However, at the time that they will get the possession and use of the real property (and assuming that they will use the property in a commercial activity) they will be entitled to register and to claim an ITC in respect of the property pursuant to sections 240 and 171 of the Act.
Therefore, as a registrant, the father is responsible for collecting the tax on the beneficial interest that he transfers to his children (applicable on the fair market value of the right as a non-arm's length transaction captured under section 155) per section 221 of the ETA.
In some circumstances when the children are in commercial activity of farming (or in a commercial activity related to real property) and registered, they could be eligible to claim an ITC on the acquisition of the remainder interest as the intended use and the actual use of the property is a relevant fact for determining if an ITC can be claimed under 169(1). Such a proposition would be accepted where the facts permit one to reasonably deduce that the intended use of the land is in the course of commercial activities.
Should you have any question, please contact Anny Roy at (613) 954-2560, Serge Bernier at (613) 958-9580, Lalith Kottachchi at (613) 952-9588 or Gerry O'Reilley at (613) 952-9589.
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations
Policy and Legislation Branch
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Imposition Team
A. Venne |
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