XXXXX
This is in response to a memorandum of January 3, 1995, in which XXXXX requested that we review the sale of a single unit residential complex constructed pursuant to a "cost plus" construction contract and comment on the corresponding GST new housing rebate treatment. We apologize for the delay in responding.
Statement of Facts
1. A builder enters into an agreement with an individual purchaser to construct a single unit residential complex (the "complex") using a "cost plus" construction agreement rather than a contract which gives a specific, more final cost.
2. Under a "cost plus" agreement, the builder will supply to the individual purchaser both the land and building.
3. The consideration value for the land is pre-determined prior to the builder and the individual purchaser entering into the "cost plus" agreement.
4. The consideration value for the building is determined by taking the total construction costs, excluding taxes, and multiplying it by an agreed upon percentage to come up with a "management fee". The construction costs, excluding taxes, plus the management fee determines the consideration value for the building. (Often there exists a minimum management fee amount.)
5. The builder does, however, also provide the individual purchaser with a completed purchase and sale agreement with an estimated final price of the complex to be used for financing purposes. The purchase agreement shows a GST calculation based on this estimated price. The purchase agreement also makes provision for the builder to credit the individual purchaser for the GST new housing rebate pursuant to subsection 254(4) of the Excise Tax Act (the "Act").
6. The individual purchaser receives possession and legal ownership of the complex at or near completion (it is assumed after substantial completion). At possession date, the purchase agreement is amended to reflect the full amount of costs known to that date. The GST amount payable is calculated on that figure. As well, the appropriate GST new housing rebate calculation is done.
7. After possession of the complex has been given to the individual purchaser, the builder prepares and issues to the purchaser, at the end of each subsequent month after possession was transferred, an invoice in respect of the final remaining costs billed by subcontractors. This occurs until all outstanding amounts in respect of the construction of the complex are paid.
Interpretation Requested
Where a builder and an individual purchaser enter into a "cost plus" agreement for the construction of a single unit residential complex, is the GST new housing rebate under section 254 of the Act available in respect of all GST paid by the purchaser including amounts paid after possession of the complex was given to the purchaser? If so, can the builder agree to pay or credit the GST new housing rebate to the purchaser pursuant to subsection 254(4)?
Interpretation Given
Section 254 of the Act provides for a partial rebate of the GST paid by an individual purchaser who is acquiring a single unit residential complex from a builder where all of the requirements for the rebate are satisfied.
Subsection 254(2) of the Act outlines seven paragraphs that must be satisfied. With respect to a sale of a single unit residential complex constructed pursuant to a "cost plus" agreement, two paragraphs under that subsection deserve particular attention[.]
Paragraph 254(2)(c) of the Act defines "total consideration" to be the total of all amounts, "... each of which is the consideration payable for the supply to the particular individual of the complex or unit or for any other taxable supply to the particular individual of an interest in the complex or unit, ...". The "total consideration" is necessary for determining the appropriate method to calculate the amount of the GST new housing rebate under paragraphs 254(2)(h) and 254(2)(i) of the Act.
When the complex is at or nearing completion, the agreement of purchase and sale is amended to reflect the most up to date amount of all known costs in respect of the construction of the complex. At that time, possession and legal ownership (i.e. legal title) of the complex are transferred to the individual purchaser. For GST purposes, this means that a supply by way of sale of the complex has occurred. Subsection 123(1) of the Act defines "sale" to be either (i) a transfer of ownership or (ii) a transfer of possession under an agreement to transfer ownership. (Policy Statement P-111 entitled The Meaning of Sale with Respect to Real Property is helpful in this regard.)
The amount of consideration payable arising from this supply by way of sale of the complex would be considered the "total consideration" as defined in paragraph 254(2)(c) of the Act. Accordingly, this amount would be used in determining the appropriate method to calculate the rebate under either paragraph 254(2)(h) or 254(2)(i) of the Act. Any amounts of consideration that became payable in respect of the construction of the house after the supply by way of sale occurred would not be considered to form part of the "total consideration" of the complex and, hence, could not be taken into account when calculating the amount of the GST rebate.
Paragraph 254(2)(d) of the Act requires that all of the tax under Division II payable in respect of the supply of the complex or in interest therein be paid by the individual purchaser. Such an amount is referred to as the "total tax paid by the particular individual" and is used as well under paragraphs 254(2)(h) and 254(2)(i) of the Act in calculating the amount of the GST new housing rebate. As the "total tax paid by the particular individual" is in respect of the supply of the complex which occurred by way of sale of the complex, tax that is paid after the supply by way of sale occurs can not be considered part of the "total tax paid by the particular individual".
Therefore, based on the preceding paragraphs, where a builder and a purchaser enter into a "cost plus" agreement in respect of the construction of a single unit residential complex, the GST new housing rebate under section 254 of the Act will be available but only in respect of a portion of the "total tax paid by the particular individual" resultant from the "total consideration" payable for the supply of the complex by way of sale provided all other conditions for the rebate are satisfied. Any amounts of tax that are paid or become payable after the supply by way of sale of the complex occurs will be excluded from the GST new housing rebate calculation under section 254. As only one GST new housing rebate claim is available in respect of any given matter pursuant to subsection 262(2) of the Act, no additional rebate claim in respect of the amounts of tax paid or payable after that supply by way of sale occurred will be available.
Subsection 254(4) of the Act permits the builder, at the time of sale, to pay the rebate to the purchaser or credit the amount of the rebate against the tax owing by the purchaser. This ensures that purchasers who are entitled to a rebate receive the benefits immediately and with minimal administrative burden. (Note that in order for subsection 254(4) to apply all of the conditions under subsection 254(2) must be satisfied as well.) Where all of the paragraphs of subsection 254(4) of the Act are satisfied, the builder may pay or credit the amount of the GST new housing rebate to or in favour of the individual purchaser where a cost plus agreement was used. The documentation in respect of such a claim where the complex was constructed under a "cost plus" agreement required would be similar to that of where an individual purchases a complex under a more standard agreement. Specifically, the amended purchase and sale agreement used at the time of transfer of possession of the complex would prove most relevant.
Finally, we would note that it appears that a "cost plus" agreement would generally be entered into prior to the commencement of construction. As such, the individual purchaser may also be eligible to make application for the GST new housing rebate under section 256 of the Act where all of the paragraphs of that subsection are satisfied. A GST new housing rebate under subsection 256(2) of the Act will be available where, "... a particular individual constructs or substantially renovates, or engages another person to construct or substantially renovate for the particular individual, a single unit residential complex, ...". Where a "cost plus" agreement is entered into prior to the commencement of construction of the complex, it can be said that the individual engaged the builder to construct the complex. Where all other eligibility requirements for this rebate are satisfied, all of GST paid in respect of the acquisition of the land or any improvements thereto (including tax paid after the possession and transfer of legal ownership occurs) will be included in calculating the rebate amount. There is, however, no mechanism under this rebate which would enable the builder to pay or credit the GST new housing rebate amount to the individual purchaser.
Should you have questions or require clarification of any of the points outlined above, please do not hesitate to contact John Bain at (613) 954-8852.
J.A. Venne
Director
Special Sectors
GST Rulings and Interpretations
11870-4-2, 11870-5
c.n. 983 (JB)
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