5 October 1998 GST/HST Interpretation HQR0001307 - Long-term Lease of Real Property by a Municipality

                                                                        GST/HST Rulings and Interpretations
 Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
XXXXX                                                                                 K1A 0L5

Dear XXXXX

Thank you for your letter of August 24, 1998 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the lease of a municipal campground by XXXXX ("the municipality") to an independent operator for a term of five years.

Interpretation Requested

You wish to confirm that GST may apply to the supply of the campground by the municipality under a long-term lease.

Interpretation Given

It is our view that the supply by the municipality of the campground by way of a long-term lease would be taxable if the municipality used the campground primarily in commercial activities immediately prior to making the supply in question, but otherwise the supply would be exempt from GST pursuant to section 25 of Part VI of Schedule V to the Excise Tax Act ("the Act").

Analysis

Section 25 of Part VI of Schedule V to the Act exempts a supply of real property made by a public service body (other than a financial institution) subject to certain exclusions. A supply of real property may be made by way of sale or by way of lease, licence or similar arrangement. One of the exclusions to the general exemption for supplies of real property by public service bodies is contained is found in paragraph 25(d) of Part VI of Schedule V to the Act: a supply of real property that was used primarily in commercial activities immediately before the time tax would be payable in respect of that supply if it were a taxable supply.

In determining whether paragraph 25(d) of Part VI of Schedule V applies with respect to a particular lease (or lease interval for that matter), it is the use of the entire parcel of property that includes the property being leased which must be considered. The same parcel of property that is examined under subsection 209(1) of the Act to determine the extent of use in commercial activities for the purpose of establishing eligibility for input tax credits should also be examined to determine whether the property to be supplied by way of lease can be considered to have been used primarily in commercial activities for the purposes of paragraph 25(d). Where the property is owned by the supplier, the appropriate parcel of property would generally be the smallest parcel encompassing the property being leased that has a single legal description. Where the property is leased by the supplier, the appropriate parcel would be all or part of the property subject to the head lease that is contained within a single legal description and encompasses the property being subleased.

Accordingly, it is the use of the entire parcel, including, but not limited to, the land that is the subject matter of the lease that must be examined to determine whether the use of the property was primarily in commercial activities immediately before the time tax would become payable in respect of the supply if it were a taxable supply. Please note that we consider the term "immediately before the time tax would be payable" in this context to refer to the period of time intervening since the last acquisition of the parcel, whether actual or deemed under the Act. If during this period the appropriate parcel was used primarily in commercial activities, then paragraph 25(d) of Part VI of Schedule V to the Act would apply and the supply by way of lease in question would be taxable.

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,

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