signed 961121
File: 11950-2, -4, -5, -7(TA)
Doc: 1645
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Subject:
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Subdivision of Lot and Subsequent Sale
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This letter is in response to your electronic mail messages to John Bain and Bao Tran dated February 26, 1996 and March 8, 1996, respectively, on the above subject. I apologize for the delay in our response.
Unfortunately, XXXXX, the individual making the request to you, did not provide all the facts during two discussions in the spring to determine the facts for the case. Further relevant facts were confirmed in a telephone conversation on October 10, 1996. Research is continuing on the secondary issues so we are only able to give an interpretation on the primary issue and one secondary issue at this time. A letter dealing with the secondary issues will follow when the research is completed.
Facts of Existing Circumstance
The facts provided for the existing circumstances are the following:
(1) an individual owns XXXXX of the shares of a corporation;
(2) the individual is not registered for the GST;
(3) the corporation is registered for the GST;
(4) currently, the corporation owns XXXXX of a used residential complex;
(5) the corporation claims that the used residential complex is capital property of the corporation;
(6) the corporation is currently renting the used residential complex to the individual that owns the corporation;
(7) the corporation has not charged GST on the rental of the house and has not claimed any input tax credits for any purchases relating to the house;
(8) the corporation is in the business of engineering consulting, developing real property, construction and related activities and has previously constructed one house and sold it (refer to items 10 through 15 below); and
(9) the individual has not previously carried out the transaction proposed below nor a similar transaction nor carried out a series of transactions involving building a house, moving in, buying another lot, building a house, moving into the new house, and so on.
Additional relevant facts obtained from the individual and sole shareholder on October 16, 1996 were as follows:
(10) the corporation originally purchased two adjacent properties in XXXXX on each of which there were XXXXX houses that are between XXXXX years old;
(11) the properties purchased by the corporation were each XXXXX and were located in XXXXX[;]
(12) the intent of the corporation was to demolish the houses, subdivide the properties so that there were three equally wide lots where there used to be two lots, build houses and sell the land with the new houses (with one of the houses sold to the individual who is the sole shareholder);
(13) approval was received to have the zoning changed from a minimum frontage of XXXXX and for the severance and construction as intended by the corporation;
(14) both of the older houses straddled the proposed boundaries of the subdivided lots so the houses would both have to be moved or demolished for the plan to be implemented;
(15) the corporation carried out the first part of the plan by demolishing one of the older houses, completing the severance, building a new house and selling the house to a third party (the sale was completed in XXXXX[;]
(16) XXXXX house still exists, sitting on a lot that is XXXXX and is the one being rented to the individual by the corporation;
(17) the proposed transactions (see items 21 through 27 below) would complete the initial plan of the corporation by demolishing the second older house, completing the remaining severance, building new houses and selling it or selling the vacant lot;
(18) the proposed transactions would also complete the initial plan of the individual by demolishing the second older house, completing the severance and building a new house that would become the individual's principal residence;
(19) the remaining older house has three bedrooms, a living room, a family room, a dining room, a kitchen and, in the basement, a recreational room;
(20) the corporation has a small office space (for which it claims a portion of the costs of operating the house) in the existing older house (that is rented by the individual) and intends to have a similar office in the new house, yet to be built, that will be owned by the individual; and
(21) at the end of the series of transactions there will be three new houses on three lots measuring XXXXX, one occupied as a principal residence by the individual.
Proposed Transaction
The individual proposes to cause to occur the following transactions with the corresponding conditions:
(22) the corporation will sell the individual a XXXXX interest in the used residential complex (a house) so that each of the corporation and the individual own a XXXXX interest in a tenants-in-common relationship (not a partnership, not joint tenancy and not a joint venture);
(23) the owners (the corporation and the individual) will demolish the house because the demolition must be completed before the municipality will permit the subdivision to occur;
(24) if permitted by the municipal authorities, the owners will subdivided the lot (which would now be vacant) into two separate lots;
(25) the two newly created lots will, for all practical purposes, be identical in size, shape, value, etc.;
(26) each of the individual and the corporation will give up their XXXXX interest in each of the two vacant lots in return for XXXXX fee simple (i.e., legal and equitable) ownership of one of the newly created lots in a transaction or series of transactions in which no money will be exchanged;
(27) the corporation will sell its vacant lot to a third party or develop the lot for sale; and
(28) the individual will construct a residential complex on his lot for his own use.
Interpretations Requested
You have requested an interpretation for the following two sets of questions.
1. Are the individual and the corporation each making a supply of real property when they give up their interest? If so, who is the recipient of these supplies and what are the tax consequences?
2. Are the individual and the corporation each making a supply of real property when they receive one of the subdivided lots? If so, who is the supplier of these lots and what are the tax consequences?
We consider the primary issue to be whether or not there is a supply or are supplies at the time of the swap of interests. There are several secondary issues involved in the tax consequences of the series of transactions proposed. A complete interpretation must consider primary and secondary issues and the research for the secondary issues is continuing, including a request for review from Income Tax Rulings and Interpretations.
Interpretations of Supplies Made
Yes, the individual and the corporation are each making a supply of real property when they give up their interests. The recipient of each of the supplies is the other party and for each supply the consideration given is the fair market value of one of the 50% interests in the real property received from the other party. Fair market value must be used because the two parties in this situation are not dealing at arms' length.
The individual is making a supply of real property when he gives up his XXXXX interest in the first of the newly created and subdivided lots. In exchange for that supply, the individual receives the corporation's XXXXX interest in the second newly created lot so that the individual has fee simple interest in the second of the two lots. The value of the consideration for the supply made by the individual is one half of the fair market value of the first lot, the XXXXX interest of which he makes the supply.
Similarly, the corporation is making a supply of real property when it gives up its XXXXX interest in the second of the two newly created and subdivided lots. In exchange for that supply, the corporation receives the individual's XXXXX interest in the first newly created lot so that the corporation has fee simple interest in the first of the two lots. The value of the consideration for the supply made by the corporation is XXXXX of the fair market value of the second lot.
Rationale for Supplies Made - The Swap of XXXXX Interests
Part of the proposed transactions is the swap between the individual and the corporation of their respective XXXXX interests in the two subdivided lots for XXXXX interest in the one of the two lots. No money is exchanged in the swap. This swap does not qualify for the deeming provision applicable to certain barter transactions under subsection 153(3) of the ETA because the individual is not a registrant.
Note that at the time immediately before the swap of interests, the property owned in a tenants-in-common relationship is not a residential complex because the residential complex no longer exists (it was demolished). The property owned immediately before the swap is only vacant land (real property).
There are, in fact, two supplies made in this swap. One is the sale by the individual to the corporation of his XXXXX interest in Lot B (one of the two smaller lots that used to be one lot). Instead of money as consideration for that XXXXX interest in Lot B, the individual will receive the corporation's XXXXX interest in Lot A (the other of the two smaller lots that used to be one lot). Under paragraph 153(1)(b) of the ETA the consideration given for the individual's XXXXX interest in Lot B will be equal to the fair market value of the corporation's XXXXX interest in Lot A. Even without that provision, the consideration would have to be based on the fair market value of the supplies because the two parties are not dealing at arms' length.
The first transaction (the supply by the individual to the corporation of the XXXXX interest in one of the lots that is the real property) is a taxable supply since it is not described in section 9 (or any other section) of Part I of Schedule V to the ETA. As discussed earlier, following Policy Statement P-059, the individual is carrying on a business which is an excluding condition from the exception to the exemption. The property sold is "capital property used primarily in a business of the individual" (paragraph 9(a)).
The second transaction is the sale by the corporation to the individual of its XXXXX interest in Lot A. This transaction represents a taxable supply of real property by the corporation since there is no description of such a supply in Part I (or any other Part) of Schedule V to the ETA.
Secondary Interpretation: Supplies (Not) Made: Subdivision
Although we generally view a change in title of a specific legally described parcel of real property as a supply, where the resulting lots are owned by the same person or persons as the original lot, the act of subdividing a lot is not viewed as making a supply.
Other Secondary Issues
Although the explanation for the interpretation of the primary issue is provided above, explanations of the transactions before and after the swaps give rise to secondary issues that must be considered to keep the whole set of transactions in perspective. In addition to the secondary issue for which an interpretation is provided above, other secondary issues we are considering include whether or not:
1. the nature of the transactions by the individual and corporation are characterized as a carrying on a business or as an adventure or concern in the nature of trade (taking into account the legislation and Policy Statement P-059) and, for whichever characterization applies, during what times periods the characterization applies
2. the property or properties of the corporation is or are, in fact, capital property (notwithstanding that the corporation considers the property or properties to be capital property) and for what time periods it is or they are capital property
3. the corporation is a builder and, if it is, at what times is the corporation a builder
4. the proposed supply of the XXXXX interest to the individual (item 21) is a taxable supply or exempt supply under section 2 of Part I of Schedule V (dependent on whether the corporation is a builder)
5. change in use rules may apply to the individual or the corporation during the set of transactions
6. the individual is eligible for a rebate under section 256 or 257 of the ETA
7. the self-supply rules in subsection 191(1) of the ETA will apply to the individual or the corporation
Again, we regret the delay in providing a complete response. If you have any comments or questions, please do not hesitate to contact Mr. John Bain at (613) 954-3772.
Tom Alley
Policy Officer
Financial Institutions and Real Property Division
GST Rulings and Interpretations
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John Bain, A/Manager, Real Property Unit |
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