March 26, 1997
XXXXX
This concerns an E-mail message dated January 19, 1996, from XXXXX to XXXXX, concerning the application of GST to residential complexes constructed by co-owners. We regret the delay in responding.
Facts
We have outlined below our understanding of the facts of the case, as outlined in XXXXX E-mail message. XXXXX has indicated that the question was hypothetical and that further details are unavailable.
1. Five XXXXX individuals who are not registrants entered into a "co-ownership agreement" with respect to real property in which they each bought an undivided one-fifth interest. The real property was acquired exempt of tax, because it consisted of a used residential complex and the land that formed part of the residential complex.
2. The individuals hired a construction manager to demolish the existing house and construct a multiple unit residential complex on the land.
3. The construction manager claimed input tax credits for all GST. He passed on all expenses to the co-owners.
4. Following the completion of the complex, the co-owners stratified the property into five strata units, so that each co-owner acquired an undivided one-fifth interest in each of the five units in the complex.
5. At the time of XXXXX E-mail message, the co-owners wished to enter into a transfer agreement between themselves, so that each co-owner trades his one-fifth interest in all five units for a full interest in one unit.
Questions
Does the transfer of each co-owner's one-fifth interest in each of five units constitute a supply? If so, could section 9 of Part I of Schedule V to the Excise Tax Act (ETA) exempt such a supply?
Response
We cannot provide a specific answer to a hypothetical question where it is not known for certainty whether a joint venture or a partnership exist. However, we will provide some comments that address the issues that you have raised.
We are assuming that the "co-ownership agreement" is not a joint venture election or a partnership, and that the term simply implies that five individuals have purchased land in joint tenancy or tenancy in common, and have agreed to act together to demolish the existing residential complex and construct a multiple unit residential complex on the land.
When the five co-owners in joint tenancy exchange their undivided interest in the property for sole ownership of one-fifth of the property, this would be an exchange of supplies. The supplies would not be exempted by section 9 of Part I of Schedule V to the Excise Tax Act (ETA), but would be exempted by section 2 of Part I.
Rationale
When the individuals exchange their undivided interest in the property as a whole for sole ownership of one fifth of the property, this would be regarded as a barter of one supply for another, since a group of individuals are exchanging an undivided interest in the property as a whole for a supply of a sole interest in one fifth of the property for each individual.
Section 9 of Part I of Schedule V to the ETA would not apply to the supplies, because section 9 cannot exempt supplies of residential complexes. Also, since the original real property that the group purchased was subdivided into five parts, the supply of real property by the group to the individuals would be excluded from section 9 if the timing of the supply was such that it would be affected by the proposed amendment to section 9 that was announced on April 23, 1996.
However, the supply by the group to the individuals and the supplies by the individuals to the group would all be exempted by section 2 of Part I of Schedule V to the ETA. None of the five individuals would fit the definition of "builder" in subsection 123(1) of the ETA, since they appear to be constructing the condominium complex otherwise than in the course of a business or an adventure or concern in the nature of trade. (For further details on this subject, please refer to Policy Paper #59, Business vs. Adventure or Concern in the Nature of Trade Relating to Sales of Real Property.) Also, since none of the individuals are registrants, none of them will have claimed any input tax credits in respect of the acquisition of the multiple unit residential complex or in respect of each individual's acquisition of his or her respective condominium unit. Therefore, the supplies would meet the requirements of section 2.
If you require further information concerning this matter, please contact me at 952-9211.
Don Dawson
Policy Officer
Real Property Unit
Financial Institutions and
Real Property Division
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