Document HQR286
April 15, 1997
This concerns a facsimile message sent to XXXXX on September 13, 1996, concerning an interpretation request involving the purchase of land and the construction of a condominium complex on the land.
Facts
Based on the information contained in XXXXX facsimile messages of XXXXX our understanding of the facts of the scenario is as follows.
1. Four individuals in XXXXX A, B, C and D, decide to set up a corporation (Trustco) of which they will each own one quarter of the share. Pursuant to an agreement made by the four individuals, Trustco will be required to purchase a piece of land in the Province, and hold title to the land pursuant to a declaration of trust. The declaration will make it clear that Trustco, as bare trustee, has no ownership rights whatsoever, and no discretion to deal with the land except as specifically directed by the four individuals, who are the beneficial owners.
2. The agreement made by the four individuals will also require Trustco to construct a four unit condominium complex on the land. Trustco will be required to reimburse all suppliers and contractors or subcontractors who work on the construction of the condominium complex, but will be reimbursed by the four individuals for all such costs.
3. The agreement will also require that, once the condominium complex is constructed, Trustco will arrange for the registration of the condominium complex, pursuant to XXXXX[.] The registration of the condominium complex will cause the land registry office to register four strata lots, one for each unit of the condominium complex. The registration of the condominium complex will also cause the creation of a condominium corporation, of which Trustco will be the sole shareholder.
4. There would be no change in possession or title to the property before the condominium complex is registered. However, once the condominium corporation is registered, the four individuals will each take possession of a residential unit in the condominium complex and the agreement made by the four individuals will require Trustco to turn over one quarter of the shares in the condominium corporation to each of the four individuals. Trustco will also be directed to register the legal title to each condominium in the name of one of the four individuals at that time.
5. Neither Trustco nor any of the four individuals are registered for GST purposes during any of this activity.
6. It is our understanding that the agreement between the four individuals is not a joint venture agreement or partnership agreement, but merely an agreement to create a bare trust.
Questions
1. When the four individuals instruct the corporation to give them the shares to the condominium corporation, is there a supply by the corporation to the individuals, or a supply by each of the individuals to one another?
2. If there is a supply, what is the status of the supply for GST purposes?
Response Provided
The corporation, as a bare trustee, only holds the title to the property, and the beneficial ownership of the property remains in the hands of the group of individuals. Therefore, the mere transfer of the title by the corporation to the individuals is a supply for little or no consideration. However, when the individuals take title to specific units in the complex, there is an exchange of one type of beneficial interest for another, and this does have GST implications.
The individuals will be considered to be exchanging their interest in the property as a whole for individual ownership of specific residential condominium units. Section 9 of Part I of Schedule V to the Excise Tax Act (ETA), would not exempt any of the supplies. However, both the supply of the beneficial ownership of the property as a whole and the supplies of sole beneficial ownership of one unit would be exempted by section 2 of Part I. Since the supplies are exempt, the group of individuals cannot claim a rebate of GST pursuant to section 257 of the ETA for GST paid on inputs relating to the construction of the complex. Since each of the four individuals would have received title to their specific unit from the group as a whole as an exempt supply, the four individuals would not be eligible for new housing rebates under section 254 or section 256 of the ETA.
Rationale
Please refer to Tax Interpretation Bulletin #68 for information concerning trusts. In the case of a bare trust, we look through the trust, and consider the beneficial owners of the real property to be the ones who are making any supply or deemed supply of the real property, except for the title, which would have little or no value. Whether or not a corporation is a bare trustee in a particular situation is a question of fact and law. When the four individuals who are the beneficial owners of the complex as a whole each become the sole owner of one residential unit in the complex, this would be regarded as a barter of one supply for another. The division of the multiple unit residential complex into four parts would presumably involve the creation of a condominium corporation and four strata lots. The individuals are exchanging an interest in the condominium complex as a whole for sole ownership of one residential condominium unit.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, since the individuals were not constructing the multiple unit residential complex in the course of a business or an adventure or concern in the nature of trade, they would not be the builders of the complex. For this reason, and because they are not registered for GST purposes, we know that they will not have claimed any input tax credits. Therefore, the supplies would fit within section 2 of Part I.
The individuals could not claim new housing rebates under section 254 of the ETA because they are not builders, since they are not acting in the course of a business or an adventure or concern in the nature of trade. The individuals could not claim new housing rebates under section 256 of the ETA because subsection 256(2) refers to a situation where a particular individual constructs or engages another person to construct a residential condominium unit for use as the primary place of residence of the individual. Only one of the four individuals who constructed each residential condominium unit will use it as their primary place of residence.
If you require any further information concerning this letter, please contact me at (613) 952-9211.
Don Dawson
Policy Officer
Financial Institutions and Real Property Division
Policy and Legislation
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