18 December 1998 GST/HST Interpretation HQR0001492 - Application of the GST/HST to the Development Costs of Land

Dear XXXXX

This letter is written in response to a memorandum from XXXXX of December 2, 1998, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the operations of XXXXX[.] We understand the circumstances to be as follows:

Facts

1. In XXXXX commenced construction of an adult residential community on land owned by XXXXX and leased to XXXXX ("the land").

2. XXXXX developed the land and constructed on it single family detached dwellings and townhouses.

3. Residents of the community enter into agreements of purchase and sale with respect to the buildings and XXXXX subleases of the portions of the land contained within the respective residential complexes.

4. XXXXX has self-assessed on the sales/subleases under subsection 191(1) of the Excise Tax Act ("the Act"), with the tax being calculated on the selling price of the buildings plus the value of the related raw, unserviced land. The respective purchasers have claimed GST/HST new housing rebates under section 254.1 of the Act, calculated on the purchase price of the buildings.

5. The Department's Appraisals unit has reviewed the declared values of the residential complexes and is of the opinion that:

(a) the values are "relatively close" to the selling price of better quality homes located on freehold sites, noting that the homes constructed by XXXXX are of "average" quality; and,

(b) the declared allocation of values between land and improvements is not reasonable, and it appears that the cost of development of the land is incorporated in the selling prices of the various buildings.

Interpretation Requested

You wish to know the following:

1. Are the development costs of the land considered to comprise part of the land value or part of the building values, for purposes of the GST/HST new housing rebate under section 254.1 of the Excise Tax Act ("the Act")?

2. For the purposes of the GST/HST new housing rebate, is it appropriate to reduce the value of the buildings by the development costs of the land and increase the value of the land by a corresponding amount?

Interpretation Given

Based on the information provided, we are of the view that:

1. The development costs of the land are considered to be part of the land value for purposes of subsection 254.1(2) of the Act.

2. Pursuant to paragraph 254.1(2)(h) of the Act, it is appropriate to exclude from the calculation of the GST/HST new housing rebate under paragraphs 254.1(2)(h) and (i) that part of the consideration for the supply of the buildings that can reasonably be regarded as consideration for the supply of the land.

Analysis

Subsection 254.1(2) of the Act provides for a GST/HST new housing rebate in circumstances where the builder of a single unit residential complex or a residential condominium unit makes to a particular individual (i) one or more exempt supplies under a long-term lease, or a supply by way of assignment of a long-term lease, of the land attributable to the complex and (ii) an exempt supply by way of sale of the building or part of a building in which the residential complex part of the complex is situated.

Paragraphs 254.1(2)(h) and (i) specify that the rebate amount is to be calculated by reference to the "total consideration" payable for the sale of the building (or part) or of any other structure forming part of the complex. However, paragraph 254.1(2)(h) (and paragraph 254.1(2)(i) by reference to "total consideration", as defined in paragraph 254.1(2)(h)) expressly excludes from the calculation consideration that can reasonably be regarded as rent for the supplies of land or as consideration for the supply of an option to purchase the land.

In the given circumstances, part of the consideration attributed by the builder to the supply of the buildings has in fact been determined to relate to other improvements to the land. The Department has taken the position in similar cases that improvements form part of the land. In provisions such as subparagraph 191(1)(b)(ii) and section 254.1 of the Act, allowance is made for the separate supply of land and buildings. However, those improvements involving the development of the land itself cannot be severed from the land and should be considered to be part of the land.

Accordingly, that part of the consideration for the supply of the buildings which should be allocated to the development costs of the land is considered to be consideration for the supply of the land. As the land is being supplied by way of lease, it would be reasonable to regard that consideration to be lump-sum additional rent. Consequently, that amount should be excluded from the GST/HST new housing rebate calculation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-3413.

Yours truly,

J. Michael C. Wolff
Real Property Unit
Financial Institutions & Real Property Division
GST/HST Rulings and Interpretations Directorate