1 May 1998 GST/HST Interpretation HQR0001100 - Proposed Subdivision of Land

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

Dear XXXXX

This letter is in response to a draft letter with attachments from XXXXX Tax Services Office of March 13, 1998, and his subsequent submission concerning the application of GST to a proposed subdivision of land.

Statement of Facts

Our understanding of the facts, and the proposed transactions is based upon two letters sent to the XXXXX TSO by M XXXXX dated XXXXX and XXXXX[.]

1. In 19 XXXXX and XXXXX purchased a XXXXX acre lot of residential/recreational land in XXXXX. They took title to the land as joint tenants.

2. Several years later, local zoning by laws changed and XXXXX and XXXXX decided to sub-divide the property into four building lots. Completion of the sub-division is now imminent.

3. XXXXX[.] The parties entered into a separation agreement which stipulated that each party would share development costs and that each would take title to two of the four lots that were to be created.

4. XXXXX does not intend to build on the lots that will be assigned to him, however, he is considering selling one or both of the lots when market conditions become favourable.

Interpretation Requested

XXXXX letter seeks to ascertain the GST consequences of the following proposed transactions:

1. XXXXX lists and sells both of the lots to be transferred to him to other parties.

2. XXXXX lists and sells one of the lots and retains the other lot for personal use (i[.]e. for personal enjoyment and not for business use).

3. XXXXX lists and sells one lot and retains the other for some years before also selling it. This scenario also raises a question with regarding when GST becomes payable on the sales.

Interpretation Given:

For the purpose of this interpretation we have assumed that the proposed lots referred to are lots on a registered subdivision plan. We have also assumed that neither XXXXX nor his former spouse are GST registrants and that the property in question is not capital property used primarily in a business.

Supply of Building Lots

A threshold issue which is not referred to in XXXXX letter, relates to the GST consequences of the proposed acquisition by XXXXX of his former spouse's half interest in two of the building lots.

In general, supplies of real property are taxable unless they fall within Part I of Schedule V to the Excise Tax Act (ETA). Section 9 of Part I exempts supplies of real property, however, paragraph 9(2)(c) excludes from the exemption:

(c) a supply of a part of a parcel of land, which parcel the individual, trust or settlor of the trust subdivided or severed into parts, except where,

(i) the parcel was subdivided into two parts and the individual, trust or settlor did not subdivide or sever that parcel from another parcel of land, or

(ii) the recipient of the supply is an individual who is related to, or is a former spouse of, the individual or settlor and is acquiring the part for the personal use and enjoyment of the recipient.

The acquisition by XXXXX of his former spouse's half interest in two building lots is a supply, and because the original lot has been subdivided into four building lots, the supply is caught by paragraph 9(2)(c) of Part I and is not saved by the provisions of subparagraph 9(2)(c)(i) of Part I.

Scenario 1: Re-Sale of Both Building Lots

Should XXXXX list and sell the two building lots that he acquires, GST will be payable on the sale of both lots because XXXXX subdivided the original parcel, from which the lots were created, into more than two parts. Thus he falls within paragraph 9(2)(c) of Part I, and he is excluded from the section 9 exemption.

However, because XXXXX will have previously paid tax to acquire his former spouse's 50% interest, he may be able to claim a rebate under section 257 of the ETA. The amount of the rebate will be equal to the lesser of the basic tax content of the property and the tax payable in respect of the supply.

Scenario 2: Retention of One Lot for Personal Use

Initial Supply of 50% Interest

Under this scenario, XXXXX acquires his former spouse's half interest in the two building lots with the intention of keeping one lot for personal use and selling the other lot. The acquisition of a lot for personal use will be exempt from GST because it falls within the provisions of subparagraph 9(2)(c)(ii) of Part I. Since the other lot is not acquired for personal use, GST must be paid on the FMV of the former spouse's 50% interest.

Note that this scenario is predicated on the assumption that XXXXX intends to acquire the lot for his personal use and enjoyment. If he acquires the lot with the intention of re-selling it, then subparagraph 9(2)(c)(ii) of Part I will not apply and the supply will be taxable. If, at some point after the acquisition, he changes his mind and decides to keep the lot for personal use, his action may constitute an appropriation of real property for personal use within the meaning of subsection 190(2) of the ETA. In that case, he will be deemed to have self supplied on the lot and he will have to pay tax on the FMV of the property, though he may be able to claim a section 257 rebate.

Subsequent Re-Sale of the Non-Personal Use Building Lot

When XXXXX sells the lot that he did not acquire for personal use, GST is payable on the sale price. As in the first scenario, XXXXX is entitled to claim a section 257 rebate up to the amount of the basic tax content of the property.

Scenario 3: Delayed Sale

Under this scenario there is a lapse of a year or two between the sale of the first building lot and the sale of the remaining building lot. The tax treatment for this scenario is the same as that described in Scenario 1 and is not altered by the lapse of time between sales. The availability of exemptions or rebates continues to be determined in accordance with Schedule V and section 257 of the ETA.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-4393.

Yours truly,

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