27 October 1998 GST/HST Interpretation HQR0001375 - Long Term Lease of Real Property Schedule V, Part VI, section 25

                                                                        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 September 29, 1998 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to long term leases of real property by public service bodies, written in response to our letter of September 23, 1998.

Interpretation Requested

You wish us to confirm your understanding, based on our earlier letter, that the following principles have been established with respect to real property transactions by a public sector body:

1. Paragraph 25(d) of Part VI of Schedule V to the Excise Tax Act ("the Act") applies to sales and leases of real property equal to or greater than one month in term.

2. Subparagraph 25(f)(i) of Part VI of Schedule V to the Act applies to leases of less than one month and all licences of real property.

3. An election under subsection 211(1) of the Act need not be executed with respect to leases of real property that is currently used primarily in commercial activities in order to effect a taxable supply of the lease.

Interpretation Given

1. Section 25 of Part VI of Schedule V to the Act exempts supplies of real property made by public service bodies (other than financial institutions), with certain exclusions. The expression "public service body" is defined generally in subsection 123(1) of the Act to mean a non-profit organization, a charity, a municipality, a school authority, a hospital authority, a public college or a university. For purposes of Part VI of Schedule V, charities are excluded from the definition by section 1 of that Part. The expression "public sector body" means a government or a public service body. Governments are not affected by section 25 of Part VI of Schedule V.

One of the exclusions to the exemption provided by section 25 of Part VI of Schedule V to the Act is found in paragraph 25(d). Paragraph 25(d) excludes a supply of real property where, immediately before the time tax would be payable in respect of the supply, the property was used primarily in commercial activities of the public service body making the supply. The definition of "supply" in subsection 123(1) of the Act means the provision of property or a service in any manner, including, among others specified, sale or lease. Under subsection 136(1) of the Act, a supply by way of lease, licence or similar arrangement of the use or right to use real property is deemed to be a supply of real property.

Accordingly, it is our view that sales and leases of real property, as well as any other supplies of real property, are excluded from the exemption in section 25 of Part VI of Schedule V to the Act by paragraph 25(d) where the most recent primary use of the property since it was last acquired was in the commercial activities of the public service body supplying it. With respect to leases, this is the case regardless of whether the term of the lease is less than, equal to, or greater than one month.

2. Another exclusion to the exemption provided by section 25 of Part VI of Schedule V to the Act is found in paragraph 25(f). Paragraph 25(f) generally excludes supplies of real property (other than short-term accommodation) made by way of lease, where the period of continuous possession or use under the lease is less than one month, or a licence for any period; in either case, the supply is only excluded if it is made in the course of a business carried on by the supplier. "Business" is defined in subsection 123(1) of the Act to include a profession, calling, trade, manufacture or undertaking of any kind, whether or not the activity is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement. It should be noted that, with respect to supplies under agreements pre-dating September 15, 1992, the exclusion applies to leases, licences or similar arrangements for periods of less than one month.

3. A third exclusion to the exemption provided by section 25 of Part VI of Schedule V to the Act is under paragraph 25(g). Where an election under section 211 of the Act is in effect with respect to real property at the time tax would become payable in respect of a supply of that property, the supply is excluded from the exemption.

If a supply of real property is excluded from the exemption in section 25 of Part VI of Schedule V to the Act by any paragraph of that section, then the exemption does not apply to that supply notwithstanding the fact that the supply may not be excluded by another paragraph. For example, a lease of real property having a continuous period of possession or use of one month or greater would not be excluded from the exemption by paragraph 25(f). However, if the lessor had used the real property primarily in its commercial activities immediately before the time tax would be payable in respect of the lease, the lease will be excluded from the exemption by paragraph 25(d). Therefore, the lease will be a taxable supply unless it is exempted from tax by a provision of the Act, or of a schedule to the Act, other than section 25 of Part VI of Schedule V.

Accordingly, as the lease described in the previous example is excluded from the exemption in section 25 of Part VI of Schedule V to the Act by paragraph 25(f), it would not be necessary for the lessor to further exclude the lease by making an election under subsection 211(1) in respect of the subject property. Please note, however, that if the property was exempt under a provision other than section 25, such as one of the sections in Part I of Schedule V to the Act, the section 211 election would not be sufficient to exclude the lease from that other exemption.

The foregoing comments represent our general views with respect to the subject matter of your letter. 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.

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