File #11635-10
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Subject:
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Transfer of Title to Farmland in a Partnership
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This is reply to your memorandum dated January 22, 1993, regarding the application of subsection 145(1) of the Excise Tax Act (the "Act") under three scenarios posed by you. We regret the delay in dealing with this matter.
The questions all relate to farm partnerships and transfer of title of farm property. It is important to determine, before title is transferred, who is the beneficial owner of the property, i.e., a partner or the partnership. This is not only necessary to determine the application of the provisions of the Excise Tax Act but could have a bearing on whether the transfer will be subject to the provisions of the Income Tax Act.
We have discussed this matter both with the XXXXX and with our counterparts in Income Tax Rulings and Interpretations and all parties concur that title of property is not as important as beneficial ownership of that property. The XXXXX does not recognize a partnership as a person, however, it will register title in the name of a person or in the name of a person "in trust for a partnership" or in the name of a person "on behalf of a partnership". The Income Tax Act does not recognize a partnership as a taxable entity but looks to the beneficial owners of property for the application of the capital gains provisions of that Act.
For property to be considered partnership property while title to that property is registered in the name of an individual, there must be evidence indicating that the property is partnership property. That evidence could be a caveat of some sort to the title registration or the partnership agreement itself.
Our concern in your scenarios for which you request our input is whether, in any given scenario, the property in question is partnership property (i.e., the beneficial owner of the property is the partnership) or is non-partnership property (i.e., the beneficial owner of the property is an individual). For this reason our response to your questions will be dealt with under both cases.
In addition to the above, it must be stated that in all of the scenarios presented by you, we understand that neither the husband, wife or son are registered for GST purposes nor operate a farming business but, rather, the farming business is operated by a partnership which is registered. Because of this fact, the criteria for the application of Policy Paper P-109, dealing with transfers of farmland under certain circumstances, cannot be met and consequently, that particular policy is not available to grant relief from the provisions of subsection 155(1) of the Act.
Example 1
A husband and wife are actively engaged in a farming partnership which is registered for GST purposes. The husband has title to the farmland and wishes to transfer part of it to the wife for a nominal amount of $1. Your concern is whether section 155 of the Act applies to tax the transfer at fair market value, or can subsection 145(1) of the Act be utilized so no tax is payable on the transfer of title.
Response
In this scenario, we assume that the land is non-partnership property and that before the transfer of title, the beneficial owner of the property is the husband. We are also assuming that the husband, before the transfer of title, and that the husband and wife after the transfer, will be providing the farmland to the partnership by way of lease, license or similar arrangement since it is the partnership and not the husband or wife that are and will be in the farming business.
This being the case, the only way that the wife, as the recipient of the supply of real property, could avoid the application of subsection 155(1) of the Act, would be for her to voluntarily register pursuant to paragraph 240(3)(a) of the Act before the transfer of title to part of the farmland from the husband. It would appear that the wife could register since she would be engaged in a commercial activity pursuant to paragraph (c) of the definition of "commercial activity". That commercial activity would be the supply of the real property in question to the partnership on an ongoing basis for, presumably, nominal or nil consideration. Subsection 136(1) of the Act deems the supply of real property by way of lease, license or similar arrangement of the use, or right to use, real property to be a supply of real property.
If the property were partnership property, no transfer of title would be necessary since the wife, as a partner, would have an interest in the partnership and therefore, in the partnership property.
However, should the husband, as a partner of the partnership, wish to change title to the property into both his and his wife's name for personal or other reasons, and the property would still remain as partnership property, it is our view that the provisions of subsection 145(1) of the Act would apply to deem the activity of the husband of transferring title to the farmland to be an activity of the partnership and the activity of the wife of receiving title to the farmland to be an activity of the partnership. So long as the partnership remains the beneficial owner of the property, the effect of the application of subsection 145(1) of the Act is a self supply by the partnership and therefore, there would be no GST consequences.
Example 2
Same facts as in Example 1 except the land is being transferred from the husband to the partnership.
Response
This scenario assumes that the farmland is not partnership property before the transfer and that the husband wishes to transfer it to the partnership.
Since the recipient of the property (the partnership) is registered, the provisions of subsection 155(1) of the Act will not apply. Also, since the property will be transferred from the husband to the partnership at nominal or no consideration, there would appear to be no GST consequences. If GST were payable on the transfer by the partnership pursuant to subsection 228(4) of the Act, the partnership, being registered, would be required to self-assess the GST collectible by filing the GST 60, but would be eligible for input tax credits for that tax to the extent that the transferred property was used in the commercial activities of the partnership.
Example 3
Same facts as Example 1 except that the land is being transferred from the husband to the husband, wife and son. The son is not a member of the partnership.
Response
As discussed previously, it may be that the property, at the time of transfer to the husband, wife and son, is partnership property. If this is the case, the provisions of subsection 145(1) would appear to apply to the transfer of title to the farm property to the husband, wife and son. If the partnership retains beneficial ownership to the property, there would appear to be no GST consequences. However, if the son is actually severing off part of the property for his own use and that part of the property will no longer be partnership property, subsection 155(1) of the Act would apply to deem the transfer of property from the partnership to the son at fair market value. If the use of the property by the son is in the course of commercial activities, the son might qualify for registration and if so registered, subsection 155(1) would not apply.
If the property is not partnership property prior to the transfer of title, our comments in Example 1 regarding registration of the recipients would apply.
The transfer of title to the husband, wife and son will be a supply which may be subject to subsection 155(1) of the Act unless they use the land exclusively in commercial activities and register. If they register prior to the transfer, subsection 155(1) will not apply. If they register after the transfer, subsection 155(1) of the Act will apply but, because they are registered, they would be eligible to claim an ITC in respect of GST paid on the transfer of property used in commercial activities pursuant to subsection 171(1) of the Act. If the son will not use the property in commercial activities, but for his own personal use or enjoyment, the provisions of section 10 of Part I of Schedule V could apply to exempt the supply.
We hope our comments are helpful. If you have any questions, please contact Gerry O'Reilley at 952-9589.
H.L. Jones
Director
General Application Division
GST Rulings and Interpretations
Reg 693
c.c.: Real Property Unit, Sectors
| c.c.: |
Mitch Bloom (signoff) |
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