12 September 1994 GST/HST Interpretation 11870-4[2] - Application of GST to Sales of Real Property by Individuals Who Have Subdivided Their Property

XXXXX

This is in response to your E-mail of September 12, 1994, wherein you enquire about the application of GST to sales of real property by individuals who have subdivided their property. We apologize for the delay in responding.

Statement of Facts

The facts of the case are as follows:

1. XXXXX (husband and wife) purchased a house (House A) together with XXXXX acres of land in 1989 as joint tenants for use as their primary place of residence.

2. The XXXXX contend that the house and related land was intended for personal use. In support of this claim, the XXXXX advise that prior to their acquisition of the property the municipality had declared that the land contiguous to the house could not be subdivided. Further, it was noted that other lots in the area were subject to similar restrictions.

3. The owner of an adjacent lot was eventually permitted to subdivide their property after petitioning the municipality several times.

4. Recognizing the opportunity to subdivide their own property, the XXXXX filed a subdivision plan which was immediately approved by the municipality. In 1992, the property was subdivided into XXXXX lots, one of which currently includes House A.

5. Improvements to the lots were necessary in order for the subdivision to be approved. These services were the minimum required under the laws of the municipality. As well, the municipality ordered that a retaining wall be constructed.

6. At the time approval for the subdivision was granted, the XXXXX opened a separate bank account under the name of XXXXX. The sole purpose of the account was to keep all expenses and revenues related to the subdivision separate from other personal expenses.

7. XXXXX is not a formally registered partnership in XXXXX[.]

8. At the time of the subdivision of the property, neither of the XXXXX considered such activity a full time venture. XXXXX continued as a XXXXX and considered this to be his primary source of income.

9. In June of 1993, House A and the related subdivided land was sold. However, the XXXXX proceeded to rent House A (a condition of the purchase and sale agreement) from the purchasers until the construction of their new house (House B) on one of the other subdivided lots was complete. The proceeds from this sale were deposited into the XXXXX account and the principal residence exemption for income tax purposes was claimed.

10. Around the same time, one of the subdivided vacant lots was sold. The GST was not collected on the sale of the lot. The sale of the lot was treated as a capital gain for income tax purposes. (For purposes of our discussion, it is assumed that the income was reported properly.)

11. The construction of House B on one of the remaining subdivided lots was commenced in July of 1993 and completed in November of 1993. The XXXXX occupied the house that same month. The XXXXX contend that House B was intended to be their primary place of residence. Construction expenses were paid out of the XXXXX account. They filed for a GST new housing rebate under section 256 of the Excise Tax Act (the "Act") in March of 1992 which was paid in September of 1994.

12. In February of 1994, XXXXX terminated his employment as XXXXX to pursue residential construction on a full time basis. To this end, XXXXX XXXXX trading as XXXXX became registered for purposes of the GST on March 2, 1994 XXXXX[.]

13. The XXXXX listed House B for sale on May 2, 1994. Upon sale, the XXXXX intend to treat House B as their principal residence for income tax purposes.

14. The XXXXX are currently involved in the construction of a new house (House C) on the remaining subdivided lot which will be sold as a spec home.

15. No input tax credits (ITCs) have been claimed in respect of the GST paid on expenses incurred in the subdivision of the land or the construction of House A and House B. ITCs with respect to House C have been claimed.

Interpretations Requested

The foregoing raise the following issues.

1. Was House A and the XXXXX acres of land that was purchased in 1989 acquired for use primarily as a place of residence of the XXXXX or primarily for business use?

2. How should the supplies of real property made by the XXXXX be treated for GST purposes?

3. At what point might the XXXXX be considered to be making supplies in the course of a business (i.e. residential construction)?

Interpretations Provided

1. Subject to similar treatment for income tax purposes, it is our view that House A and XXXXX acres of land was purchased for use primarily as a place of residence of the XXXXX and not primarily for business use.

2. The application of the GST to the aforementioned supplies of real property by the XXXXX will be as follows:

•   the sale of House A and the land reasonably necessary for its use and enjoyment as a place of residence will be exempt under section 2 of Part I of Schedule V to the Act, with excess land exempt under section 9 of Part I of Schedule V,

•   the sale of the vacant lot will be exempt pursuant to section 9 of Part I of Schedule V, and

•   the sale of House B and the land that was placed on the market in May of this year will be exempt pursuant to section 2 of Part I of Schedule V, with any excess land exempt under section 9 of Part I of Schedule V.

3. The XXXXX would be considered to be making supplies in the course of a business, and thereby involved in commercial activity, in the Spring of 1994 when they made a full time commitment to pursue residential construction as evidenced by their actions and change in their intentions. As such, the XXXXX would be considered to be "builders" for purposes of GST as defined in subsection 123(1) of the Act as they are constructing a residential complex (House C) for resupply in the course of a business. The sale of House C, accordingly, will be subject to GST.

Analysis

The following provides the basis for the conclusions drawn above.

1. The XXXXX purchased House A and the XXXXX acres of land with the stated intention of using the property as their primary place of residence. They in fact carried out this intention for approximately XXXXX years. At the time of acquisition, the land in question (as well as other property in the area) could not be subdivided pursuant to municipal restrictions and the actions of the XXXXX do not indicate that the land was acquired for any other use (i.e. they did not make overtures to subdivide to the municipality until a neighbor was successful). Further, the disposition of House A, which was treated as a principal residence for income tax purposes, and the sale of the subdivided lot, which was treated as a capital gain for income tax purposes, indicate that the land was not intended primarily for business use. The facts attest that the XXXXX acquired the property for use primarily as their place of residence.

2. The sale of House A and the land reasonably necessary for its use and enjoyment as a place of residence would be exempt pursuant to section 2 of Part I of Schedule V to the Act. Excess land would be exempt under section 9 of Part I of Schedule V. The issue of concern is the correct tax treatment of the remaining subdivided lots.

Generally, the sale of property which was acquired without the intention of resale will not be considered to be made in the course of an adventure or concern in the nature of trade. Depending on the extent and nature of the activities undertaken with respect to the property prior to the sale, the sale may be considered either on account of capital or as being made in the course of a business. Policy Paper P-059 "Business v. Adventure or Concern in the Nature of Trade" indicates that sale of property originally acquired without intention of resale will generally be considered to be on account of capital where the activities prior to sale are minimal (e.g. filing a simple subdivision plan) or are required for purposes of facilitating the sale (e.g. providing the minimum amount of services required by law).

As the property was acquired for use primarily as a place of residence of the XXXXX and the services made to the subdivided lots were the minimum required under the laws of the municipality, the land would not be considered to be supplied in the course of a business or an adventure or concern in the nature of trade. The sale of the lot would appear to fall within the guidelines provided in Policy Paper P-059 (and the Real Property Manual) as being on account of capital and therefore an exempt supply pursuant to section 9 of Part I of Schedule V to the Act with no election available to make the sale taxable. (This conclusion must be, and is assumed for purposes of our discussion, in line with the corresponding income tax treatment.)

You raise the issue of the opening of the bank account as being indicative of the XXXXX carrying on a business. In determining whether such action changes the nature of the XXXXX activities from capital related to business related it is necessary to examine such an action in the context of all the relevant circumstances surrounding the ownership and sale of the property. As noted in Policy Paper P-059, income tax guidelines as outlined in Interpretation Bulletins IT-218R and IT-459 such as the nature of the property, the length of holding period of the property, the vendors' conduct and actions while holding the property and the vendors' background are helpful in making this determination. Additional factors suggesting a non-business transaction are the fact that neither of the XXXXX were involved in real estate, construction or development as a career at the time of the supply and there did not appear to be an intention to carry on this activity as a long term career. The circumstances surrounding the opening of a bank account, albeit with a trading name, suggest that these are personal rather than business related activities.

The XXXXX had occupied House A as their primary place of residence and after selling both it and the vacant lot in the summer of 1993 immediately commenced construction on House B which was to form their new primary place of residence. They leased House A from the purchasers until the construction was completed. As concluded previously, in our view, the sale of House A and applicable land, as well as the other subdivided vacant lot, would be capital transactions. Therefore, the sales of these properties were neither made in the course of a business nor an adventure or concern in the nature of trade. However, the potential sale of House B and the corresponding GST application to that supply warrants consideration in its own right.

To determine the GST application with respect to the sale of House B, it is necessary to establish whether the XXXXX can be viewed as "builders" for purposes of the GST as defined in subsection 123(1) of the Act. An individual who has an interest in real property and acquires or constructs a residential complex on said property, or engages someone to construct the complex, is not considered a builder within the meaning of "builder" set out in subsection 123(1) unless the acquisition or construction is in the course of a business or an adventure or concern in the nature of trade of the individual. Where an individual constructs a residential complex for his or her own personal use, without the primary or secondary intention of resupply, the person will not normally be viewed as constructing the home in the course of a business or an adventure or concern in the nature of trade. As a result, such individuals will not be considered "builders" within the meaning of the Act.

If, however, the individual has constructed the home in which he or she resides with the primary or secondary intention of resupply, the person may be said to have constructed the home in the course of an adventure or concern in the nature of trade or in the course of a business. The individual will then be considered a "builder" of a residential complex. The point at which an individual is considered to be engaged in a business, or an adventure or concern in the nature of trade, is a question of fact. (Again, policy number P-059 "Business v. Adventure or Concern in the Nature of Trade" will provide assistance in this regard.)

Based on the facts provided, it appears the intention of the XXXXX was to make newly constructed House B their primary place of residence. The XXXXX have indicated that they plan to treat the sale of this home as the disposition of a principal residence for income tax purposes. (As the house has not yet sold, it is not possible to verify the income tax treatment of the sale. Once again, the GST treatment must be in line with the corresponding income tax characterization.) Evidence to suggest that this intention may be correct includes the length of time taken to construct House B, the fact that House B has been occupied as the primary place of residence of the XXXXX for a significant period of time (it is currently occupied) and the period of time XXXXX before it was put up for sale. Consequently, subject to similar tax treatment for income tax purposes, it can be said that they constructed the house otherwise than in the course of a business or an adventure or concern in the nature of trade.

Accordingly, it would be our view that the XXXXX are not "builders" for purposes of the GST. Further, as individuals who have constructed a single unit residential complex for use as their primary place of residence, the XXXXX would be eligible for (and rightfully have claimed) the GST new housing rebate pursuant to subsection 256 of the Act. Finally, the sale of House B and the land reasonably necessary for the use and enjoyment of the house as a place of residence would be exempt pursuant to section 2 of Part I of Schedule V to the Act provided no input tax credits with respect to any improvements to House B were claimed. Any excess land would be exempt under section 9 of Part I of Schedule V.

3.  In the Spring of 1994 the XXXXX approach with respect to property development changed. The time, attention and resources spent by XXXXX with respect to the construction of House C (a spec house) on the final building lot for resale and the termination of his employment to pursue residential house construction full time clearly indicate that the intentions and approach to residential land development of the XXXXX changed. The XXXXX would be considered "builders" for purposes of the GST and the subsequent supply of House C will be considered to be made in the course of a business. The XXXXX themselves recognized this and voluntarily became GST registrants in March of 1994. The supply of House C will be subject to GST upon its sale or first rental (i.e. self-supply under subsection 191(1) of the Act) and, as GST registrants, the XXXXX would be eligible to claim ITCs with respect to any GST outlays related to their commercial activity.

If you require clarification of any of the above, please do not hesitate to contact John Bain at (613) 954-8852.

Stan Farber
Manager- Special Sectors
Real Property
GST Policy and Legislation

11950-1, 11950-6

c.n. 842(JB)