May 22, 1997
Dear XXXXX
I am writing in response to a memorandum dated November 28, 1996, from XXXXX of the TIS unit in the XXXXX. XXXXX had asked for our comments on the following case. I understand that this case has now been transferred to your office for response. I apologize for the delay in responding to XXXXX query.
With his submission, XXXXX had included a number of documents he received from both parties to the transaction at issue as well as his own draft interpretation letter. A list of these documents is attached as an appendix to this letter. If the Vendor agrees with the first sentence in the forth point in the following statement of facts an application ruling rather than an interpretation should be provided. The disputed facts in this case have no bearing on the ruling if both parties agree that the property contained a basement suite.
Statement of Facts
implied from the incoming letter.
Our understanding of the facts and transactions is as follows:
1. On XXXXX (the Purchasers) made a conditional offer to purchase a newly constructed residential property from XXXXX (the Vendor). The property is located at XXXXX[.]
2. The conditions were resolved and the agreement of purchase and sale was concluded on XXXXX with freehold title transferring to the Purchasers on XXXXX and possession transferring on XXXXX under the agreement.
3. The Vendor was the "builder", within the definition of this term in subsection 123(1) of the Excise Tax Act (the Act), of this residential complex.
4. In XXXXX, the Vendor entered into a verbal lease agreement with a XXXXX whereby XXXXX obtained a basement suite in the property as his place of residence. The exact date that the Vendor gave possession of the property to XXXXX is a matter of dispute between the Vendor and the Purchasers. The Vendor maintains that the date was XXXXX while the Purchasers maintain that XXXXX had possession by XXXXX[.]
5. At the time that XXXXX took possession of the basement suite the construction of the property was substantially complete. XXXXX was the first individual to occupy the property as a place of residence.
6. An addendum to the purchase and sale contract contained the following clause:
Subject to the Buyers approving the Vendor's tenants by XXXXX[.] Above subject clause is for the sole benefit of the Buyers, and the Buyers may at their option, waive part or all of the subject clause, and proceed with the balance of the contract.
The Vendor and the Purchasers disagree on the reason for the existence of this clause:
The Vendor maintains that, on or about the time the Purchasers made the offer, he informed the Purchasers' agent that XXXXX had expressed an interest in immediately renting the property. He further maintains that the Purchasers' agent informed him that the Purchasers were interested in acquiring a revenue property and would therefore ultimately require a tenant.
The Purchasers maintain that they had added this clause to protect themselves in the event that they did not approve of the tenant that The Vendor had secured prior to and independent of the purchase and sale agreement.
7. The subject clause mentioned in the sixth point was removed by the Purchasers on XXXXX. The rental arrangement between the Vendor and XXXXX was terminated on XXXXX[.] This termination was documented in writing and the Vendor refunded XXXXX the unused portion of the monthly rent.
9. The Vendor's lawyer advised the Purchasers' representative, by way of a letter dated XXXXXXXXX that XXXXX was "... prepared to rent the basement suite from your clients if your clients are interested in entering into a new tenancy agreement ..."[.]
10. According to the amended Purchasers' Statement of Adjustments, the amount of XXXXX was to be held in an interest-bearing trust account pending a ruling. This amount was characterized as "GST" in the statement.
Interpretation Requested
XXXXX requested a ruling on behalf of the Vendor that subsection 191(1) of the Act did not apply to this property when possession was given to the lessee because the lease represented an arrangement, under or arising as a consequence of an agreement of purchase and sale of the complex. The logical extension of this argument is that the sale of the property to the Purchasers represented a taxable supply by way of sale of a residential complex and GST was properly payable by the Purchasers at the time of the sale rather than by their client, the Vendor, at the time of the lease.XXXXX, on behalf of the Purchasers, have put forth a two-fold argument:
a) A binding rental arrangement between the Vendor and XXXXX existed prior to and independent of their clients' purchase of the property.
b) The Vendor was the builder of the property and he had rented a residential unit in a multiple unit residential complex prior to his sale of the complex to the Purchasers. The Vendor was subject to the self-supply rules under subsection 191(3) of the Act.
The logical extension of this argument is that the sale of the property by the Vendor was exempt pursuant to section 5 of Part I of Schedule V to the Act.
Interpretation Provided
On the facts of the case, subsection 191(3) of the Act applied to deem the Vendor, XXXXX as the builder to have made and received a taxable supply by way of sale of the residential complex for consideration equal to its fair market value when he gave possession of the basement suite in the complex to XXXXX under a verbal lease agreement. The Vendor gave XXXXX possession of a residential unit in a residential complex containing more than one residential unit. Therefore a determination of whether or not the tenant got possession of a unit in the property by an arrangement, under or arising as a consequence of an agreement of purchase and sale of the complex, for the possession or occupancy of the complex until ownership of the complex is transferred to the Purchasers is not necessary.
The Vendor's subsequent sale of the complex to the Purchasers was an exempt supply pursuant to section 5 of Part I of Schedule V to the Act, provided the conditions of that section were met.
Analysis
The property was a multiple unit residential complex at the time of the sale to the Purchasers. The Vendor leased the basement suite to XXXXX prior to the date that ownership or possession transferred to the Purchasers. The basement suite constituted a "residential unit" within the definition in subsection 123(1) of the Act. The upper level also constituted a residential unit. Therefore, when XXXXX obtained possession of the basement suite, the property was a "multiple unit residential complex" within the subsection 123(1) definition. Subsection 191(1) of the Act applies only to single unit residential complexes and residential condominium units. Subsection 191(3) of the Act applied when the Vendor leased the basement suite of the property to XXXXX[.] Subsection 191(3) of the Act does not contain the exclusionary phrase that forms the foundation of the XXXXX argument. As the builder, the Vendor was deemed to have made and received a taxable supply by way of sale of the entire multiple unit residential complex on the day that he gave possession of the basement suite to XXXXX pursuant to the verbal lease agreement. This deemed supply was at fair market value. The subsequent sale of the property which took place on XXXXX was exempt pursuant to section 5 of Part I of Schedule V to the Act. No GST was payable by the recipients in respect of the supply by way of sale.If you have any further questions or need clarification of this letter, please do not hesitate to contact me at (613) 954-8852.
Yours truly,
Heather MacLeod
A/Rulings Officer
Financial Institutions and Real Property
GST Rulings and Interpretations
Encl/1
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