10 December 1998 GST/HST Interpretation HQR0001464 - Application of the GST/HST to Real Property Transactions Involving the Federal Government

Dear Mr. XXXXX

Thank you for your facsimile of November 24, 1998 concerning the certain points of interpretation with respect to section 25 of Part VI of Schedule V to the Excise Tax Act (ETA) for which you are seeking clarification.

Interpretation Requested

1. You have asked for an interpretation of the phrase "... other than a government ..." found in the preamble of section 25 of Part VI of Schedule V to the ETA.

2. You have asked for an interpretation of paragraph 25(b) of Part VI of Schedule V to the ETA in the context of real property transactions that Public Works Government Services Canada (PWGSC) is likely to become involved in.

3. You have asked for an interpretation of paragraph 25(g) of Part VI of Schedule V to the ETA in the same context as for (2) above.

Interpretation Given

1. The terms "public service body" and "government" are defined for purposes of Part IX of the ETA and for purposes Schedules V to X to the ETA. These definitions, found in subsection 123(1) of the ETA, are as follows:

•   "public service body" means a non-profit organization, a charity, a municipality, a school authority, a hospital authority, a public college or a university; ..." and

•   "government" means Her Majesty in right of Canada or a province; ...".

These definitions serve to establish that for GST/HST purposes the meaning of "government" is restricted to the Government of Canada and the governments of the provinces of Canada and does not include municipal or regional governments.

Therefore the phrase "other than governments" in section 25 of Part VI of Schedule V to the ETA ensures that the exemption applies only to "public services bodies" such as municipalities and not to the federal government or the provincial governments. Note that for purposes of Part VI of Schedule V to the ETA "public service bodies" are further defined to exclude charites.

In the context real property transactions involving the federal government, section 25 of Part VI of Schedule V to the ETA could only apply where the federal government is a recipient of a supply (i.e. a purchaser) of real property from a public service body.

2. Paragraph 25(b) of Part VI of Schedule V to the ETA is a provision which serves to exclude from exemption under section 25 all real property supplies of public service bodies which are deemed under Part IX of the ETA to have been made. Throughout Part IX of the ETA there are various provisions which operate to deem supplies of real property to have been made under certain circumstances. In general, when the ETA deems a person to have made a supply of real property, they are considered, solely by operation of statute, to have made a supply of real property even though in fact such a supply has not been made. The following provides some of the more common situations where a person, including a public service body, can be deemed to have made a supply of real property:

•   under the self-supply rules in section 190 of the ETA where land is first supplied by way of lease, licence or similar arrangement for residential use

•   under the self-supply rules in section 191 of the ETA where a residential complex (i.e. newly constructed residential housing) of a builder is supplied for the purpose of an individual's first use as place of residence and the provision of the complex is either entirely by way of lease, licence or similar arrangement or by way of sale, in respect of the building and lease, or assignment of such a lease, in respect of the land,

•   under the change-in-use rules in sections 199 to 200 or section 206 where capital real property of a registrant which was used in whole or in part in commercial activities of the registrant is converted in whole or in part to use in non-commercial activities of the registrant, and

•   under section 196.1 of the ETA where a registrant appropriates property for use as capital property of the registrant and where immediately prior such an appropriation the property was not held as capital property of the registrant.

In addition section 211 of the ETA, which applies only to public services bodies, may also result in the body having made a deemed supply of real property. This election, which is discussed in more detail below, may be made in respect of real property of a public service body which is either held as capital property of the body, held as inventory of the body, or acquired by way of lease, licence or similar arrangement for the purpose of supply by the body.

In circumstances where the election takes effect on a day subsequent to the day the body acquired the property in respect of which the election is made, the public service body will be deemed to have made a supply of the particular property.

3. Paragraph 25(g) of Part VI of Schedule V to the ETA excludes from exemption under section 25 all supplies of real property in respect of which an election under section 211 of the ETA was made. The provisions of section 211 enable public service bodies to opt out of certain real property rules specific to public service bodies and to fall under more general real property rules for persons such as corporations. Once the election is in effect with respect to a particular real property the supply of that property by way of sale or by way of lease, licence or similar arrangement will be taxable unless exempted by a provision other than section 25 of Part VI of Schedule V to the ETA.

For example, this election may be used where a public service body such as a municipality leases space in a office building held as capital property of the municipality. In the absence of the section 211 election, such a lease of real property would normally be an exempt supply under section 25 of Part VI of Schedule V to the ETA where the lessee receives continuous possession of the space for one month or more.

In such cases, making the election under section 211 of the ETA would accomplish the following:

•   cause the lease to be excluded from exemption and therefore taxable, and

•   permit the municipality to claim ITCs in respect of:

•   GST/HST paid or payable on operating expenses attributable to the lease, and

•   GST/HST paid or payable on the acquisition of the real property and improvements thereto (i.e. purchase of the land and the construction of the building) to the extent that the capital property, as a whole, is used 10% or more in commercial activities of the body and regardless of the fact that such commercial use may not be the primary use of the property.

The foregoing comments represent our general views with respect to the subject matter of your facsimile. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

A copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series, was sent to you previously with our letter of September 23, 1998.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-8852.

Yours truly,

Daryl J. A. Hooley, CGA
Real Property Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate