11755-2(sn)
XXXXX
District I&S Chief XXXXX
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Attention: XXXXX
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March 7, 1995
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Subject:
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Application of GST to a Lease of Real Property at XXXXX
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Further to the telephone conversation of February 1, 1995 between Sara Nixon, of my staff and XXXXX of your office, and your fax of July, 1994, attached, as requested, are the research notes prepared for purposes of that discussion.
Background
As a provision of a commercial lease, a tenant pays for equipment and/or leasehold improvements which become the property of the landlord, and receives an offset against the monthly rental payment. This arrangement is a term of the written lease.
Also, as a term of the lease, the tenant is required to purchase fire insurance in the name of the landlord. There is no provision in the lease to reduce the amount of rent payable by the tenant to reflect his purchase of fire insurance.
Our comments on the application of GST to these two transactions, was requested.
Discussion
With respect to the issue of lease payments being offset by purchases made by the tenant, because the ability to offset is a term of the lease, the landlord is making a taxable supply of real property every month to the lessee for consideration which takes the form of cash and/or non-monetary consideration in the form of equipment or leasehold improvements.
Where the tenant is paying cash as consideration for the supply, there is only one supply, that being the supply of real property from the landlord to the tenant. By definition, the payment of money by the tenant to the landlord is not a supply. Where the tenant is giving non-monetary consideration, there are two supplies occurring:
1) the landlord supplies real property to the tenant, and
2) the tenant supplies equipment and/or leasehold improvements to the landlord.
Tax would be applicable to each supply, assuming that the tenant was a GST registrant. The landlord must account for GST on the gross amount of the lease (i.e. the total of the monetary consideration as well as any non-monetary consideration that may have been paid) since the real property has been supplied every month during the term of the lease and the tenant has given monetary and/or non-monetary consideration, for the monthly taxable supply.
The tenant is eligible to claim input tax credit claims, to the extent provided for under section 169. The tenant must also account for tax on the supply it made within the transaction (i.e. the equipment or leasehold improvements supplied to the landlord), and the landlord would be entitled to an input tax credit pursuant to section 169.
The rules of paragraph 153(1)(b) will apply to determine that the value of the non-monetary consideration given, is the fair market value of that consideration. In the case of the supply made by the landlord, this would result in a total consideration being comprised of the fair market value of the equipment/leasehold improvements, combined with any money paid by the tenant (pursuant to paragraph 153(1)(a)). From the perspective of the tenant, the consideration for the supply made to the landlord will be a portion of the fair market value of the supply of real property attributable to this supply.
With respect to the purchase of fire insurance by the tenant, in the name of the landlord, there is no provision in the lease to reduce the amount of rent payable by the tenant to reflect this purchase. The tenant is required to purchase the insurance as a result of a term of an agreement for the supply of a commercial lease. The amount paid by the tenant to the insurance broker is subject to GST which must be accounted for by the landlord.
Should you or your staff require any further assistance in this matter, please contact one of the members of the Application Team in the Tax Provisions Unit. They are: Lalith Kottachchi (613) 952-9588, Ken Mathews (613) 952-9585, Suzanne Leclaire (613) 952-7931 and Sara Nixon (613) 952-8812.
H.L. Jones
Director
General Tax Policy
Policy and Legislation
Mitch Bloom
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Application Team XXXXX |
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