28 January 1997 GST/HST Interpretation 11783-2 - REVISED GST APPLICATION RULING [Application of GST to Supply of Property Sold by Way of Power of Sale]

Dear XXXXX:

This is in reply to your letter dated November 26, 1996 to XXXXX which was forwarded to us for response. In your letter, you advised us that one of the facts in an application ruling that we issued to you on November 18, 1996, concerning the above-mentioned sale, was incorrect. Specifically, you stated that the sale conducted by XXXXX was under power of sale and not a judicial sale as indicated in fact #3 of the ruling letter.

As a result of this additional information, we are revoking our previous ruling and providing the following ruling. We also wish to inform you that the previous ruling issued on XXXXX, 19XX, is considered by Revenue Canada to be not valid and Revenue Canada is, or was, not bound by it at any time.

Our understanding of the facts and transactions is as follows:

Statement of Facts and Transactions

1. XXXXX held a first mortgage on a home located at XXXXX ("the property"). The mortgage was granted by way of a construction loan. The legal description of the property is XXXXX[.]

2. Before the home was completed the mortgagor (i.e., the home builder) went into default under the mortgage.

3. XXXXX exercised its remedies under the mortgage by way of power of sale under the mortgage and not by way of a judicial sale of the property pursuant to XXXXX[.]

4. Eventually the property was sold to a purchaser, XXXXX[.]

5. The purchaser accepted the property on "as is" condition which meant that she undertook to complete the home in order to make it habitable and bring it into compliance with the zoning by-laws for occupation purposes. The costs of the completion of the work was at the purchaser's sole expense. The purchaser delivered to XXXXX an undertaking on closing to complete the home at her expense.

6. The sale of the property is $XXXXX inclusive of any GST payable.

7. Pursuant to XXXXX it was required that the XXXXX pay into Court all the proceeds arising from the sale.

Ruling Given

Based on the facts set out above, we rule that the sale of the property by way of a power of sale by XXXXX to XXXXX is subject to the GST at the rate of 7%.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection or appeal, that there are no relevant changes in the future to the Excise Tax Act, and that you have fully described all necessary facts and transactions for which you requested a ruling.

Analysis

Subsection 183(10) of the Excise Tax Act (the "Act") provides that, where, for the purposes of satisfying in whole or in part a debt or obligation owing by a person (i.e., the debtor), a creditor exercises a right under a debt security (e.g., a power of sale under a mortgage agreement) to cause the supply of property, the creditor will be deemed to have seized the property immediately before the sale. Further, the sale will deemed to have been made by the creditor and not by the debtor.

The effect of the deeming provision in subsection 183(10) of the Act is twofold. First, subsection 183(1) of the Act will apply to the creditor because it was deemed to have seized the property. Second, subsection 183(2) of the Act will apply to the creditor because subsection 183(1) of the Act applies and because it was deemed to have made a supply of the property. Further, since subsection 183(2) of the Act deems the supply to have been made in the course of commercial activity, and since the property is situated in Canada, the sale of the property is subject to GST at the rate of 7% pursuant to subsection 165(1) of the Act.

It should also be noted that it is our view that XXXXX, as the mortgagee, would be considered a "builder" in this instance within the meaning of that term pursuant to subsection 123(1) of the Act as it had acquired an interest in the complex while it was under construction. Therefore, when XXXXX XXXXX sold the building under a power of sale to XXXXX, the sale was a taxable supply of property.

If you require any further information, please do not hesitate to contact me at (613) 954-4393.

Karl P. Marten
Rulings Officer
Financial Institutions Section
Financial Institutions and Real Property Division
GST Rulings and Interpretations Directorate
Policy and Legislation Branch

File #: 11750-3

11783-2/Ss. 266(1)

HQR0000479