Place Vanier, Tower C, 10th Fl.
25 McArthur Road
Ottawa, Ont.
XXXXX K1A 0L5
April 16, 1997
Dear XXXXX
This is in response to an E-mail message, dated October 9, 1996, from XXXXX of your office, concerning the application of GST to a lease of farmland by joint tenants. Please accept our apologies for the delay in responding to his questions.Our understanding of the facts of this case is as follows:
Statement of Facts
A husband and wife own, as joint tenants, two XXXXX parcels of land. One parcel of land contains the couple's residence. The husband carries on a small XXXXX business in part of the residence. The remainder of this XXXXX parcel is used primarily by the wife in her farm business XXXXX[.] The wife is registered for GST. The husband is not a GST registrant.
The second XXXXX parcel consists of a cottage that is leased to an individual as a place of residence. The wife uses the remainder of this XXXXX parcel primarily in her farming business. The husband does not charge the wife any consideration for the use of the land in either parcel.
The husband reports the income from the cottage rental as rental income on his personal income tax returns. He also reports the income from his XXXXX business as a sole proprietor on his income tax returns. The wife reports the income from the farming business as a sole proprietor on her income tax returns.
The couple is leaving for XXXXX. The land that the wife is using primarily in her farming business (the farmland) will be leased to the individual who lives in the cottage. He will carry on a farming operation whereby he will raise short-term crops on the land and will pay rent for the use of the farmland. He may also use some or all of the farm equipment that the wife had been using in her farming operation. The amount of rent for the use of the farmland and equipment will be charged separately from the rent for the cottage and will be a fixed monthly dollar amount. When the husband and wife return from XXXXX they intend to resume their respective business activities.
The couple has stated that they intend to report the revenue from the lease for income tax purposes in any manner that will lessen the collective tax burden. They may report it: as a partnership; as individual joint tenants, splitting gross proceeds from the lease and reporting the income individually; as one or the other making the supply of the property by way of lease. XXXXX asked for our comments on the application of GST to the lease of the farmland to the individual cottage tenant.
Interpretation Given
Based on the facts provided the lease of the farmland will be a taxable supply. It is a lease of real property that was used primarily in the commercial activity of the wife. There is no exemption in the Excise Tax Act (ETA) that would apply to exempt or zero-rate the lease of this property. The farmland would not include the land reasonably necessary for the use and enjoyment of the cottage as a place of residence.It is our position that the wife will be making the supply by way of lease of the farmland. As the wife is a GST registrant, she will be required to collect and remit the GST in respect of the lease. If she is currently using the land less than 90 percent of the time in her commercial farming activity, a change of use may occur when she begins to lease the property to the cottage tenant. Provided the increase in use of the farmland in commercial activity will be 10 percent or more, she would be entitled to claim an input tax credit based on the formula in subsection 208(3) of the ETA.
Analysis
WHO IS MAKING THE SUPPLY OF THE FARMLAND BY WAY OF LEASE?
The reasons for the conclusion that the wife will be supplying the farmland to the cottage tenant are as follows:
1. The wife used the farmland in her farming business. The husband's joint tenancy interest in the part of the ten acres that is farmland appears to be incidental to the formation of the family unit. His business interest in the entire property is restricted to that part of the matrimonial house that he uses in his XXXXX business and the cottage that he leases to an individual as a place of residence.
2. The individual recipient of the lease will receive the use of the farmland and, incidentally, the use of farm equipment. It is the wife who operates the farming business and owns the farm equipment. The couple has provided no evidence that the husband is involved in the farming business in any capacity.
3. The couple has provided no evidence that a partnership arrangement has been undertaken with respect to the lease of the farmland. Ownership of property in joint tenancy is not, by itself, evidence that a partnership exists. XXXXX defines partnership as the "relation that subsists between persons carrying on a business in common with a view to profit." The amount of time that the farmland will be leased to the cottage tenant and the historical usage of the property indicate that there has been no partnership formed between the husband and the wife with respect to the lease of the farmland. For these reasons it is our position that the farmland and farm equipment are supplied by the wife.
POSSIBLE CHANGE IN USE
The facts provided by XXXXX state that the wife uses the farmland primarily in her farming operation. It is not specified whether there is use of the farmland in non-commercial activity. When the wife begins to lease the farmland to the cottage tenant, she may be increasing the extent to which the land will be used in commercial activity. The farmland will be used exclusively in the wife's commercial activity once she begins to lease it. Therefore, if her previous commercial use of the property was less than 90 percent, the leasing activity may entitle her to an input tax credit based on the extent to which she has increased the use of the farmland in her commercial activity. Please note that section 197 of the ETA precludes the application of subsection 208(3) where the increase in use in commercial activity is less than ten percent.
Should you have any further questions or require clarification on the above or any other Excise/GST matter, please do not hesitate to contact the undersigned at (613) 954-8852.
Yours truly,
Heather MacLeod
A/Rulings Officer
Financial Institutions and Real Property
GST Rulings and Interpretations
Legal References: ETA 165(1), 221(1).
Reference: Policy Papers P-109 and P-183
Gardner v. MNR (1988) 2 C.T.C. 2285, 88 D.T.C. 1649
Linke (E.) v. Canada (1994) 2 C.T.C. 2117
Cullen v. MNR (1985) 2 C.T.C. 2059, 85 D.T.C. 409
b.c.c.: Assistant Director, Verification & Enforcement
| b.c.c.: |
H.Q. Quality Assurance |
b.c.c.: hard copy - X/F GST - XXXXX
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