GST/HST Rulings and Interpretations Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
XXXXX K1A 0L5
XXXXX
XXXXX July 9, 1997
XXXXX File: 11870-35
Case: HQR0000382
Dear XXXXX
This is further to the memorandum from XXXXX , to Mr. Don Dawson dated October 17, 1996 and a further E-mail from XXXXX to Mr. Dawson dated April 2, 1997. The memorandum requested our views concerning a query from XXXXX dated June 12, 1996, to XXXXX concerning the application of the GST to the subject real property transactions.
We have reviewed XXXXX memorandum and the additional documents and information provided by XXXXX . An explanation of our views is given below.
All legislative references are to the Excise Tax Act (the "Act") or the regulations thereunder unless otherwise specified.
Statement of Facts
Our understanding of the facts is as follows:
1. XXXXX
According to XXXXX query letter of June 12, 1996, the first Agreement is an option agreement by which XXXXX
2. In the first Agreement, XXXXX is given an option to purchase the Land from XXXXX for the sum of XXXXX together with interest thereon calculated from the date of this agreement at the rate of XXXXX per annum calculated semi-annually and not in advance and payable as follows:
i. XXXXX per month commencing on the 15th day of July 1991 and continuing for XXXXX consecutive payments on the 15th day of each successive month.
ii. XXXXX is to provide XXXXX with XXXXX post dated cheques for the above mentioned amounts.
iii. Provided that the first Agreement is not in default XXXXX shall be entitled following the aforesaid one year period to purchase the Land at the price as set out herein by way of an agreement for sale containing the following conditions:
Price of XXXXX less principal amount paid under the first Agreement.
Term of x years.
Payments of XXXXX month on the 15th day of each successive month.
iv. All payments made pursuant hereto shall be applied firstly to payment of interest at the rate as set out herein and secondly to principal.
v. Partial or full prepayment may be made at any time without notice or bonus. The first Agreement may be subject to GST.
3. The consideration for the option was $1.
4. XXXXX agreed that this option or the successive agreement for sale are non-transferable or assignable without the written consent of XXXXX was to be responsible for all property taxes in connection with the Land from the date of the first Agreement.
6. The first Agreement stipulated that if XXXXX should default in a payment of any monthly payment required by the agreement or the payment of property taxes as they fall due and should such default not be remedied by XXXXX within 30 days from the date which written notice is sent to XXXXX by regular mail at the address as shown in the agreement for XXXXX then XXXXX interest in the Land shall be extinguished and any payments made pursuant to the first Agreement shall be forfeited to XXXXX built himself a dwelling on the Land and lived there for some time.
8. XXXXX fell behind with his payments to XXXXX and sold the Land and the residential complex built upon it (the "Property") to XXXXX on December 1994 (the "second Agreement") who merely assumed XXXXX debt to XXXXX as the consideration for the second Agreement.
9. Under the second Agreement, signed by both XXXXX and XXXXX the consideration for the Property is set at XXXXX payable on the following terms and subject to the following conditions:
By mortgage in favor of XXXXX for XXXXX with interest at XXXXX per annum calculated XXXXX shall have the right of prepaying the whole or any portion of the principal sum remaining unpaid together with interest at the rate aforesaid to the date of such prepayment at any time without notice, bonus or penalty.
Balance of purchase price of XXXXX to be placed in trust account of XXXXX on or before December 14, 1994.
XXXXX "assumes indebtedness of XXXXX as at December 1, 1994", i.e., the sale is made by XXXXX .
10. A letter dated December 1, 1994 from XXXXX XXXXX involved in the second Agreement, indicates that XXXXX discussed the interim agreement with his client XXXXX wishes to confirm the following position:
"Although XXXXX is registered as owner, the deal should be treated as a sale between XXXXX with the mortgage being held by XXXXX This means that the vendor in the interim agreement should be XXXXX Because of the way the title is held, XXXXX will convey title to XXXXX and receive the mortgage back from him, but in all other respects XXXXX considers this a deal between XXXXX . This is the only basis on which XXXXX is prepared to go along with this arrangement."
11. A "Vendor's Statement of Adjustments" for the Property prepared by XXXXX indicating XXXXX as the vendor and XXXXX as the purchaser dated December 16, 1994, and signed by XXXXX provides the following information:
i. Credits regarding Sale Price of XXXXX and GST of $ XXXXX (attachment indicating GST on XXXXX being the value of the Property XXXXX
ii. Debit regarding Mortgage back to XXXXX for XXXXX
iii. Credit of XXXXX share of 1994 property taxes for XXXXX
XXXXX
iv. Debit of XXXXX regarding Net sale proceeds to XXXXX "in trust" on registration to pay out and discharge XXXXX in favor of XXXXX
12. XXXXX wrote a letter to Revenue Canada XXXXX dated December 21, 1994 in which she wished to confirm that during a telephone conversation on December 8, 1994, XXXXX advised that it appeared, that, under the circumstances, GST would only be payable on the acreage over and above the one acre and the one acre and dwelling would be exempt.
XXXXX also indicated that she understood that XXXXX contacted XXXXX after hearing from XXXXX and discussed the matter further with XXXXX indicated that XXXXX telephoned XXXXX and advised her of his conversation with XXXXX and that XXXXX felt unable to provide a firm answer as to how the GST should be calculated.
XXXXX requested that she receive a firm directive in writing in order to clarify this question.
13. XXXXX wrote to Revenue Canada XXXXX on June 12, 1996, indicating that she had not received a reply to her letter of December 21, 1994 requesting a decision on this matter.
XXXXX indicated that the problem was created by the fact that XXXXX sold the Land to XXXXX by an unregistered Option Agreement (i.e., the first Agreement) XXXXX . XXXXX then built himself a dwelling on the Land and lived there but later fell behind with his payment to XXXXX and in December 1994 sold to XXXXX who assumed the amount of XXXXX debt as the purchase price.
XXXXX also indicated that XXXXX feels that XXXXX should have paid GST of 7% x XXXXX whereas from XXXXX point of view, he has bought a property with a used dwelling and therefore only the excess over one acre around the house is subject to GST of XXXXX
ISSUES
1. What is the GST status of the first Agreement?
2. What is the GST status of the second Agreement?
VIEWS GIVEN
1. On the understanding that the first Agreement creates a sale of the land from XXXXX to XXXXX as stated in XXXXX query letter, the sale under this first Agreement is subject to GST at the rate of 7% on the consideration of XXXXX The GST must be paid by XXXXX to XXXXX to be remitted by the latter to the Department.
2. The second Agreement is for a supply of a residential complex by way of sale which qualifies for exemption from GST pursuant to section 2 of Part I of Schedule V to the Act. No GST is payable on this supply.
Analysis
1. With respect to the first Agreement, under subsection 168(5) of the Act, tax is payable at the time possession of the land was transferred to XXXXX The tax amount is 7% x XXXXX
2. The second Agreement is for a supply by way of sale of a residential complex by a person who is not a builder of the complex, a supply which is exempt from GST under section 2 of Part I of Schedule V. XXXXX is not a "builder" for purposes of the Act since he is excluded from the definition of "builder" under paragraph 123(1)(f) of the Act as an individual who carries on the construction of a complex "otherwise than in the course of a business or an adventure or concern in the nature of trade". A residential complex includes both "the building and the land immediately contiguous to the building that is reasonably necessary for the use and enjoyment of the building as a place of residence for individuals". Administratively, we have interpreted the reference to land to be the same amount of land allowed for income tax purposes under the "principal residence" rules, i.e., up to 0.50 hectare. In the case at hand, 0.5018 hectare is acceptable.
The transfer of the land title by XXXXX to XXXXX is considered, in these circumstances, to be a supply made for nil or nominal consideration.
Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9587.
Yours truly,
Bao Tran
Real Property Unit
Financial Institutions & Real Property Division
GST/HST Rulings and Interpretations Directorate
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