23 September 1998 GST/HST Interpretation HQR0000998 - Long-term Lease by a City Schedule V, Part VI, Section 25

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

Dear Sirs:

Thank you for your letter of December 18, 1997 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a supply by a city of real property by way of lease.

Facts

1. The city owns a parcel of real property containing several sports fields and an ice arena with an adjacent parking lot ("the parcel").

2. The parcel has a single legal description.

3. The city is going to lease some land within the parcel for a period of XXXXX years less one day, on which the tenant is going to build, own and operate an additional ice arena.

Interpretation Requested

You wish to know whether paragraph 25(d) of Part VI of Schedule V to the Excise Tax Act ("the Act") can apply to exclude a lease of real property made by a public service body from being an exempt supply by reason of section 25 of Part VI of Schedule V.

Interpretation Given

It is our view that paragraph 25(d) of Part VI of Schedule V to the Act can apply to exclude a lease of real property from exemption under section 25.

Analysis

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 for the purposes of paragraph 25(d) of Part VI of Schedule V 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.

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.

In light of the above comments, the information contained in our letter of May 31, 1996 is inoperative with respect to the situation under discussion.

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