6 November 1998 GST/HST Interpretation HQR0001020 - Supplies of Single Lots in a Bare Land Strata Plan which is a Residential Trailer Park

Dear Sir:

This letter is in reply to XXXXX letter of January 6, 1998 (with attachments), identified as your Case No. XXXXX concerning the application of the Goods and Services Tax (GST) to supplies by way of sale of single lots which formed part of a "residential trailer park" (RTP), as defined in subsection 123(1) of the Excise Tax Act (ETA).

Interpretation Requested

You asked us to review a draft interpretation letter that relates to supplies by way of sale of single lots from a strata-titled residential manufactured home park located in XXXXX[.] The lots in the park form part of a bare land strata plan registered unde XXXXX. We understand that each lot in the strata plan forms a separate title which can be sold or leased independently from any other lot.

The developer of the park may sell an individual lot, lease it to a person who has the intention of placing a mobile home on the lot or lease it to a person who has the intention of placing on the lot a prefabricated home which may not meet the definition of a "mobile home" given in subsection 123(1) of the ETA 11. Leased lots are generally leased for a period of 60 years with an option for the lessee to purchase the lot after five years.

In the draft interpretation letter the following diagram is provided in order to assist in analyzing possible transactions (note - certain modifications made for sake of clarity to the diagram in the draft letter submitted):

L represents a site which is a strata-lot that is leased where the lessee affixes a mobile home for the personal use of an individual;

S represents a site which is a strata-lot consisting of land and a mobile home or prefabricated home affixed to the site which has been acquired by way of sale by a person in one transaction; and

LNM represents a site which is a strata-lot that is leased where a mobile home is not situated thereon but rather where a lessee has affixed a prefabricated home to the site.

Your analysis indicates the following:

•   Site (1) is not a RTP as the land area included in one or more contiguous "trailer parks" (TPs) does not encompass at least two sites

•   Site (2) is not a "trailer park" (TP), as defined in subsection 123(1) of the ETA, and as such is not a RTP as the land is not leased for use with a mobile home.

•   Sites (3) and (4) would be a RTP as they are two contiguous TPs which together include a land area that encompasses at least two sites.

•   Site (5) is not a RTP as it is not a TP for use with a mobile home, travel trailer, ... (etc.).

•   Site (6) is not a RTP as it is a single site; refer to site (1) above.

•   Site (7) is not a RTP; refer to site (2) above.

With respect to Sites (1), (5) and (6) your conclusion is that the long term lease of each Site to individual lessees who intend to affix a building for use as their place of residence is an exempt supply by reason of subparagraph 7(a)(i) of Part I of Schedule V to the ETA.

In addition, with respect of Sites (1), (5) and (6), the lessor would be required to self-supply on the fair market value of the leased site pursuant to subsection 190(3) of the ETA. A subsequent sale of the leased site to the lessee under the option to purchase in the lease would be an exempt supply by reason of section 5.2 of Part I of Schedule V to the ETA provided that the requirements of paragraphs 5.2(a) and (b) are met.

With respect to Sites 2 and 7, your conclusion is that sale of each of these Sites is a taxable supply as they are not an interest in a RTP and are therefore not exempt under section 5.3 of Part I of Schedule V to the ETA and there is no other exempting provision that will apply to make them exempt.

With respect to Sites 3 and 4 your conclusion is that paragraph 7(b) of Part I of Schedule V to the ETA exempts a supply of a site in a RTP under a lease, which provides for continuous use or possession of the site for a period of at least one month, to the lessee, who is in occupation or possession of a mobile home provided that the entire site is reasonably necessary for use and enjoyment of the mobile home as a place of residence for individuals. You indicate that the lessor who leases a site in a RTP on an exempt basis under paragraph 7(b) of Part I of Schedule V to the ETA is deemed to have collected and paid tax calculated on the fair market value of the park at the time a site in the park is first occupied by the recipient of the exempt supply. As a result, the supplier is required to account for the tax under subsection 190(4) that is deemed to have been collected in the supplier's net tax remittance.

Your analysis with respect to Sites 3 and 4 goes on to indicate that section 5.3 of Part I of Schedule V to the ETA exempts the supply by way of sale of land that is a RTP by a person where the person was deemed under subsection 190(4) to have received a taxable supply of the land included in the park and that supply was the last supply of the park made by way of sale to the person. This provision does not apply where the person claimed an input tax credit in respect of the last acquisition by the person of the park. You indicate that the sale of Site 3 would be exempt under section 5.3 when sold prior to Site 4. The sale of Site 4 would not be exempt under section 5.3 as the single site would no longer meet the definition of a RTP. Instead, the sale of Site 4 under your analysis would be exempt by reason of section 5.2 of Part I of Schedule V to the ETA.

Interpretation Given

Based on the information provided we agree with the results of your analysis with respect to Sites 1, 2, 5, 6 and 7. With respect to Sites 3 and 4 our analysis and interpretation differs in some respects from that given in the draft letter.

We consider that, in order to meet the definition of a RTP in accordance with subsection 123(1) of the ETA, the land that forms the RTP must encompass two or more sites in one or more contiguous TPs.

In order to be considered to be a TP, as defined in accordance with subsection 123(1) of the ETA, a piece of land must be exclusively composed of one or more sites which are, or are intended to be, supplied by way of lease, licence or similar arrangement under the circumstances described in paragraph (a) of the definition of TP including the land that is reasonably necessary for the purposes described in subparagraphs (b)(i) and (b)(ii) of the same definition.

We do not consider that a bare land strata plan consisting of strata-lots which are sites held either for the purpose of sale or for lease can be considered to be exclusively composed of sites that are intended to be supplied by way of lease, license or similar arrangement as some or all of the sites in the development are intended to be supplied by way of sale. Therefore, the first lease of either of Site 3 or 4 to the owner of a mobile home to be affixed to the Site for use as a place of residence would not trigger a self-supply under subsection 190(4) of the ETA and the lease itself would not be an exempt supply by reason of subparagraph 7(b)(i) of Part I of Schedule V to the ETA. Rather, the first lease would trigger self-supply under subsection 190(3) of the ETA and the lease would be exempt under subparagraph 7(a)(i) of Part I of Schedule V to the ETA.

Assuming that Site 3(2)2 is leased first then, at the time when Site 4 is leased, Sites 3 and 4 together would meet the definition of a RTP on the basis that the land included in the contiguous TPs would encompass at least two sites, each of which is supplied by way of lease to an owner of a mobile home to be affixed to the Site for use as a place of residence. The initial lease interval for Site 4 and the lease intervals for Site 3 subsequent to the interval when the RTP was formed would be exempt supplies by reason of subparagraph 7(b)(i) of Part I of Schedule V. A deemed self-supply of this RTP (i.e. including the land which encompasses at least Sites 3 and 4) would be triggered by the lease of Site 4 pursuant to subsection 190(4) of the ETA

It is our view that although Site 4 may have been held for supply by way of sale, the actual leasing of this Site satisfies the requirement in the definition of TP that the piece of land [in the TP] be composed exclusively of one or more sites each of which is intended to be supplied by way of lease, licence or similar arrangement.

Where the supplier is a registrant, input tax credits would be available under subsections 193(1) and 169(1) of the ETA for GST relating to acquisition of, and improvements to, the land included in the RTP. At the time of the deemed self-supply under 190(4), a subsection 193(1) credit would be available to the extent that the land included in the RTP was used otherwise than in commercial activities immediately prior to the deemed sale.

In this case the subsection 193(1) credit would be equal to the basic tax content (BTC), at the time of the deemed sale of the RTP under subsection 190(4), of that portion (expressed as a percentage) of the RTP, which was used otherwise than in commercial activities (i.e. Site 3) immediately prior to the deemed sale of the RTP under subsection 190(4). In addition, subsection 169(1) credits would be available for GST/HST relating to acquisition of, and improvements to, that portion of the land included in the RTP which was used in commercial activates (i.e. Site 4) prior to the deemed sale of the RTP under subsection 190(4).

Where the supplier is not a registrant, a rebate under subsection 257(1) would be available equal to the basic tax content of the RTP at the time of the deemed sale of the RTP under subsection 190(4) of the ETA.

It is significant that at the time of the self-supply under subsection 190(4) the BTC of the RTP would include the tax that was deemed to have been paid as a result of the prior occurrence of self-supply under subsection 190(3). The BTC of the RTP is affected by the fact that the tax payable on the acquisition of Site 3 prior to the self-supply under 190(3) was replaced by the tax deemed paid under subsection 190(3), being the last acquisition of that property. It is our view that for purposes of determining BTC:

(1) "a taxable supply by way of sale [of property] deemed to have been received", and "tax deemed to have been paid in respect of that supply" under self-supply,

is equivalent to,

(2) "tax payable in respect of the last acquisition of the property" under BTC.

This position is based in part on the definition of "tax" found in subsection 123(1) of the ETA which states:

"... "tax" means tax payable under this Part; ..."

We do not consider that the sale of a single site in a RTP is, on its own accord, the sale of a RTP on the basis that the land included in an RTP must encompass at least two sites in accordance with the definition of RTP found in subsection 123(1) of the ETA. In this case, the object of the supply is land which includes only a single site and such a supply is therefore not the supply of a RTP. Also, the Department does not consider that the sale of a single site in an RTP is the sale of an interest in a residential trailer park, as described in section 5.3 of Part I of Schedule V. This interpretation is set forth in Policy Paper P-088: Sale of Single Sites in a Residential Park. Therefore, the sale of Site 3 would be a taxable supply as section 5.3 of Part I of Schedule V does not apply to exempt the sale.

Also, section 5.2 of Part I of Schedule V does not apply to exempt the sale because, immediately before the sale, the site was the subject of an exempt lease under subparagraph 7(b)(i) of Part I of Schedule V and not the subject of an exempt lease under paragraph 7(a) of Part I of Schedule V, which is a required condition for section 5.2 of Part I of Schedule V to apply.

Once Site 3 is sold, Site 4 would cease to be part of a RTP as Site 4, by itself, would not include land encompassing two or more sites in one or more contiguous TPs. The continuing lease of Site 4, during lease intervals subsequent to the interval where the RTP ceased to exist, would be exempt by reason of subparagraph 7(a)(i) of Part I of Schedule V.

The sale of Site 4 under the option to purchase in the lease exercised by the lessee, who is an owner of a mobile home affixed to the site and used as a place of residence for individuals, would be an exempt supply by reason of section 5.2 of Part I of Schedule V, provided all of the requirements of that section were met.

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 Hooley, CGA
Real Property Unit
Financial Services and Real Property Division
GST/HST Rulings and Interpretations Directorate

OUTLINE

Background

In XXXXX the Condominium Act allows for creation of a bare land strata plan. Such a plan creates a condominium development consisting solely of land and excluding any buildings located thereon. Lots in such a development can be sold individually as can lots in a regular subdivision. A bare land strata plan is particularly suitable for circumstances where proximity of structures will require a considerable degree of control to continue to be exercised over uses of land but where ownership of individual lots is still desired.

The enquiry from the XXXXX TIS Centre relates to how the provisions of the ETA governing residential trailer parks apply in the context of a bare land strata plan that allows for individual sites to be either sold or leased. In particular, the enquiry seeks confirmation as to whether the sale of a single site from such a development can be exempt as the sale of a RTP or of an interest in a RTP.

Analysis

1. Sale of a Single Site

GST policy statement P-088: Sale of Single Sites in a Residential Park indicates that the supply of a single site in a RTP should not be considered to to be exempt as the sale of a RTP or of an interest in a RTP unless it can be considered that the supply is of a beneficial interest in the RTP which gives the recipient an undivided percentage ownership interest in the park with the exclusive right to use a single site in the park. Sale of a site (strata-lot) in a bare land strata development gives the purchaser sole legal ownership of the particular site together with an undivided interest in common areas (if any) included in that particular strata plan. The purchaser's interest is a legal interest in a particular site not simply an exclusive right to use that site. The circumstances would therefore appear to fall clearly within the examples given in the policy statement of circumstances under which supply of a single site should not be treated as the supply of a RTP or an interest in a RTP.

In addition to the reasons set forth in P-088, it is the Department's view that sale of a single site cannot be an RTP because the object of the supply is land which does not encomapass at lease two sites, which is required as per the definition of RTP in subsection 123(1).

Further, treating the sales of "new sites" previously considered to form part of an RTP as exempt would prevent a purchaser who is affixing a mobile home or modular home to the site from being able to recover the GST applicable to the land as part of their claim for a new housing rebate. Whereas, treating the supply as taxable is consistent with the Department's interpretation with respect to sale of a part of a residential complex when the part being sold is not, in itself, a residential complex. Under these circumstances that part being sold is treated as not falling within the exemption provisions for residential complexes.

This approach is consistent with interpretive practice of determining tax status of a supply based upon the object of that supply. That is, although what is sold was part of an RTP immediately prior to the sale nonetheless what is being sold is not an RTP. In this circumstance the recipient cannot be said to have acquired an RTP, or an interest therein.

2. Whether a RTP Exists prior to Leasing Out Two Contiguous Sites

The second area of interpretation arising out of the enquiry is whether or not a site which is being marketed either for sale or for lease can be considered to be part of a RTP prior to it actually being leased. Treating units that are being marketed either for sale or for lease as part of a RTP would require the owner of the park to self-supply on the fair market value of the entire park at the time when the first site in the park is leased. Sites that might be sold a short time later would be subject to GST on the sale and the owner would need to claim a 257 rebate or 193 input tax credit for the GST/HST previously self-supplied in order to avoid double tax. Such treatment would significantly increase the incidence of imposing tax on the same land area twice (i.e. once under 190(4) for the whole RTP and again as the single sites are sold). Also, many of these sites may never have been actually used as sites in an RTP as the first supply of the site may be by way of sale.

Administratively, the process of imposing tax twice and crediting or rebating the first imposition would create additional steps when essentially the same amount of GST is being collected from the end-user (purchaser) in either event. Problems of valuation and interpretation could arise with repect to what part of the self-supplied value relates to the sale of a particular site.

3. Whether Subsection 190(3) applies to Site 4 when Site 3 is Sold

As stated in the letter, when Site 3 is sold Site 4 ceases to be part of a RTP, and commencing in the lease interval immediately subsequent to the interval where the RTP ceased to exist the continuing lease of Site 4 would "convert" from a lease exempt be reason of paragraph 7(b)/IV to a lease exempt by reason be paragraph 7(a). It is our view however that in this case self-supply would not occur under subsection 190(3) as the condition in paragraph 190(3)(b) would not be met. That is, possession would not have been given under a lease arrangement described in paragraph 7(a) as possession was given previously under a lease described in paragraph 7(b).

4. Other Interpretive Issues

Although the interpretive approach recommended in the above analysis is, in our view, preferred over the alternatives it is not free from problems. The following summarizes the problems identified with applying the existing legislative provisions to such developments:

Subsection 193(1) - In the case at hand, for double tax to be avoided the registrant's 193(1) credit would need to equal the deemed tax paid by application of 190(3) to Site 3. However the formula ("A x B") in 193(1) may not, in all cases, equal the tax paid on the last acquisition of Site 3. The "property" referred to in 193(1) would be the entire RTP subjected to the deemed sale under 190(4); whereas the amount, which is "the BTC of the entire RTP multiplied by the portion of the RTP used otherwise than in commercial activities expressed as a percentage of the of entire RTP", may not equal the BTC of Site 3 before the RTP was formed.

For example, if significantly more improvements where made to Site 3 than Site 4, yet as a percentage of the total land area, Site 3 is 50% of the RTP then 193(1) credit may be less than the BTC of Site 3 as a separate property. The issue then becomes whether ITCs under subsection 169(1) would ensure that there is a complete recovery of all tax paidpayable for the acquisition of, and improvements to, the entire RTP. Arguably any of the GST costs in respect of the acquisition of, and improvement to, Site 3 would not be eligible for ITCs under 169(1) because at the time of the last acquisition of Site 3 (i.e. the deemed purchase under 190(3)) that property was acquired for use in non-commercial activities.

(Note the GST costs in respect of Site 3 which arose prior to the self-supply under 190(3) would have been previously recovered and are not considered, at the time of the next self-supply under 190(4), to be tax paid in the course of the current commercial activity.)

Sale of Site 3 - Although the letter states that the sale of Site 3 would be taxable because neither 5.3 or 5.2/IV would apply, this position is predicated on the assumption that the sale of Site 3 would take place in a lease interval subsequent to the interval where the RTP was first formed. If that were not the case and the sale of Site 3 took place in the same lease interval as the leasing of Site 4 causing the RTP to be formed, then the sale of Site 3 would be exempt under 5.2 by reason of Site 3 being supplied in a lease described in subparagraph 7(a)(i)/IV at that time. This fact demonstrates the inconsistencies of tax treatment based upon related effects of an RTP coming into existence and then ceasing to exist.

Sale of Site 4 - When events occur as described in the letter the sale of Site 3 is taxable and the sale of Site 4 is exempt. This inconsistency alone could be perceived as an unintended legislative result particularly where the sales of Sites 3 and 4 occur within a short time period. For example, where an agreement to sell Site 4 is entered into in the same lease interval as the sale of Site 3 (i.e. when the RTP ceased to exist but prior to the lease of Site 4 "converting" from paragraph 7(b) to a paragraph 7(a)) but transfer of possession under the agreement of sale does not take place until the next lease interval, the vendor of Site 4 would likely consider that the tax status of Site 4 would be the same as Site 3; however that would not be the case.

Conclusion

Sale of a single site in a bare land strata titled RTP should not be considered as exempt by reason of being the supply of a RTP or of an interest in a RTP.

Lots in a bare land strata titled development which are marketed either for sale or for lease should not be considered as falling within the definition of a RTP until they are leased and the other conditions of the RTP definition are met.

The issue of double taxation is dealt with on an interpretive level whereby tax deemed paid on a deemed acquisition under self-supply is treated as tax payable on the last acquisition for purposes of the calculation of BTC.

Legislative Amendment Recommended

To avoid the complex administrative and interpretive issues outlined above, it is recommended that land be excluded from the definition of "trailer park" found in subsection 123(1) of the ETA to the extent that the land includes:

•   sites which are separately titled by way of subdivision, or

•   sites and other related common areas which are separately titled by way of bare land condominium plan or strata plan.

Such a legislative amendment would result in sites which are separately titled and thus capable of being sold separately in "RTP type developments" being given the same tax treament as residential condominium units. That is, self-supply would occur on a "unit-by-unit basis" rather than on the entire condominum complex or strata plan, at the time of the lease of the first unit; as is the case with multiple unit residential complexes and RTPs.