8 September 1998 GST/HST Interpretation HQR0001177 - Defaulted Agreement of Purchase and Sale

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

Dear Sir:

Thank you for your letter of November 25, 1997, which was forwarded to this office for reply by XXXXX Region Technical Interpretations Services, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the following situation:

Facts

1. An individual entered into an agreement to purchase a new registered residential condominium unit from a developer. The purpose was to provide living accommodation for his partner.

2. The developer permitted the individual's partner to take early possession of the unit.

3. The individual was not able to complete the purchase and the individual's partner was required to vacate the unit.

4. The developer then sold the unit to a second individual because of the first individual's default under the original agreement.

5. The second individual completed his purchase and occupied the unit.

Interpretation Requested

You wish to know whether the second individual would be entitled to apply for a GST/HST new housing rebate.

Interpretation Given

Based on the information provided, it is our view that in such circumstances the sale to the second individual would be exempt from GST, pursuant to paragraph 4(b) of Part I of Section V to the Excise Tax Act ("the Act"), and accordingly the second individual would not be entitled to a GST/HST new housing rebate under section 254 of the Act.

Analysis

The first issued raised by the situation discussed in your letter is whether there was a supply by way of sale and, if so, whether that supply was taxable and when tax was payable. Subsection 123(1) of the Act defines a "sale" to include, for GST/HST purposes, any transfer of ownership of property and any transfer of possession of property under an agreement to transfer ownership of the property. Section 133 of the Act provides that where an agreement is entered into to provide property, then for the purpose of the GST/HST the entering into of the agreement is deemed to be a supply of the property made at the time the agreement is entered into.

Generally speaking, a developer would be taken to be the "builder" of a residential condominium unit, as defined in subsection 123(1) of the Act (i.e., a person with an interest in the underlying real property at a time when the condominium complex is under construction, not registered, and/or not yet occupied by an individual). Absent any specific exempting provisions, the sale of a residential condominium unit by a builder is taxable. Subsection 168(5) provides that the tax would be payable on the earlier of the date of possession and the date of ownership. It should be noted that a GST/HST new housing rebate would not be available under section 254 of the Act unless and until ownership (i.e. legal title) was transferred to the purchaser as required by paragraph 254(2)(e).

The second issue raised is the status of the subsequent sale. Where a default by a purchaser occurs after the date of possession, and as a result the vendor requires the purchaser to vacate the property, the vendor would be considered to have repossessed the unit from the purchaser. Alternatively, where as a result of the default the purchaser voluntarily vacates the property, the vendor would be deemed under subsection 183(9) of the Act to have repossessed the unit from the purchaser. In either case, under subsection 183(1) the purchaser would be deemed to have made, and the builder to have received, a supply of the property for no consideration at the time of repossession. The supply by the purchaser would be exempt under section 2 of Part I of Schedule V to the Act, as the purchaser was not the builder of the residential condominium unit. On that basis, the resale by the builder to a second purchaser would be exempt from GST under paragraph 4(b) of Part I of Schedule V, provided that after the repossession the builder had neither substantially renovated the unit nor claimed any input tax credits with respect to an improvement to the unit.

Finally, one of the conditions for a GST/HST new housing rebate, as set out in paragraph 254(2)(a) to the Act, is that the builder of the unit make a taxable supply by way of sale to the individual seeking to claim the rebate. Where the sale is exempt from GST, no rebate is available.

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.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

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