6 March 1996 GST/HST Interpretation 1996-03-06 - Correct Procedure to Account for the GST Payable on a Purchase of a Commercial Building Lot and Improvements Thereto

                                                                        c.n. 2783(JB)

Dear XXXXX,

This is in response to your letter of March 6, 1996, addressed to XXXXX Tax Services, and further to your telephone conversation with Mr. John Bain, Real Property Unit, in which you raise concerns as to the correct procedure to account for the GST payable on a purchase of a commercial building lot and improvements thereto.

As I understand it, your company XXXXX, a GST registrant, acquired a commercial building lot located at XXXXX. It then engaged a general contractor to construct a building on said property for use in business activities. At issue is how the amounts of GST resultant from those acquisitions should be accounted for; that is, are the suppliers required to collect the GST or is XXXXX required to self-assess the applicable amount?

Subsection 221(2) of the Excise Tax Act (the "Act") states that where a GST registered purchaser receives a taxable supply of real property by way of sale, and is not an individual acquiring a residential complex, the supplier is not required to collect the tax payable by the purchaser in respect of the supply. Rather, subsection 228(4) of the Act requires the GST registered purchaser to remit the amount of tax payable directly to the Receiver General via the "Goods and Services Tax Return for Acquisition of Real Property", the GST 60.

With respect to the situation you raise, XXXXX would be required to file a GST 60 with respect to the acquisition of the commercial building lot, which is real property, with its normal GST return for the period in which the lot was acquired. Furthermore, provided the building lot was for use exclusively in commercial activities, XXXXX would be in a position to claim an input tax credit equal to the total amount of GST payable. This credit is claimed on the normal GST return with which the GST 60 is submitted.

However, based on the facts from your telephone conversation with Mr. Bain, the same cannot be said with respect to the improvements (i.e., the building) to that lot. XXXXX engaged a contractor to construct a building on the lot and received construction services. It did not acquire real property by way of sale from the contractor. As such, XXXXX is required to pay the GST to the supplier of the construction services. Although required to pay the GST to the supplier rather than self-assess, XXXXX would be eligible for input tax credits in the normal manner with respect to the amount of tax paid to the supplier. The earliest such credits can be claimed is on the GST return for the period in which the tax was paid or became payable. [Should you wish further information on filing frequencies and what options are available, please contact XXXXX Tax Services.]

For GST purposes, "real property" is defined under subsection 123(1) of the Act in common law jurisdictions to include, "... messuages, lands and tenements of every nature and description and every estate or interest in real property, whether legal or equitable, ...". A contractor is normally considered to be supplying construction services to the person and not supplying real property by way of sale. A contractor, who agrees to provide construction services does not normally have an estate or interest, either legal or equitable (e.g., a leasehold), in the underlying real property. Although what is supplied by the contractor may ultimately become part of the real property (e.g., a fixture), at the time of supply the supply is one of construction services and not a supply by way of sale of real property. As the contractor is not making a supply by way of sale of real property, the contractor if a GST registrant, is required to collect and remit GST in the normal manner. Where such services are acquired for use in commercial activities of a GST registered purchaser, that purchaser would normally be entitled to input tax credits.

I would like to take this opportunity to provide some general comments with respect to the issue you raise. There may be instances where an arrangement could be interpreted as either a contract for supply of construction services or as a supply by way of sale of real property. To make such a determination, a thorough review of the contract is often necessary as the contract will determine which party, either the vendor or purchaser, is required to remit GST applicable to the supply to the Receiver General. Several factors to consider when determining whether the supply is one of construction services or a supply by way of sale of real property are as follows:

•   Terms of the Agreement
Does the agreement clarify whether the supply is one of construction services or a supply by way of sale of real property?

•   Ownership of the Construction in Progress
Does the supplier or the purchaser own the rights to the construction in progress?

     If the purchaser does not own the land on which the building is being constructed, are there air rights or separate legal title in respect of the construction-in-progress?

•   Fulfillment of the Performance Under the Contract
Is the fulfillment of the construction contract evidenced by a transfer of legal title or by a final payment (e.g., a holdback) following certification of the building?

Should you wish to request a specific GST ruling with respect to the particular contract XXXXX has entered into regarding the construction of the building, please forward such a request to:

XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX

In this regard, please find enclosed GST Memoranda 1.4 entitled Goods and Services Tax Rulings.

This interpretation is based upon our current understanding of the Act and regulations thereunder in their present form and does not take into account the effects of any proposed or future amendments thereto or future changes in interpretation. Further, while we trust our comments are of assistance to you, we would advise that they do not constitute a GST ruling and are therefore not binding upon the Department in respect of any particular fact situation.

Should you have any further questions concerning any of the issues discussed herein, please contact Mr. John Bain at (613) 954-3772.

J.A. Venne
Director
Special Sectors
GST Rulings and Interpretations
Policy and Legislation Branch

Attachment (1)