GST/HST Rulings and Interpretations
Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Avenue
XXXXX Vanier, Ontario
XXXXX K1A 0L5
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XXXXX
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Case: HQR0001101
XXXXX
XXXXX Code: 11950-3; 11950-4;
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May 26, 1998
Dear XXXXX
Thank you for your letter of July 7, 1997 (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transactions described below by your client, XXXXX.
As your client's property and transactions are situated in XXXXX, a non-participating province, our comments will be restricted to the application of GST.
Our understanding of the facts, the transactions, and the purpose of the transactions is as follows:
Statement of Facts
1. In 19 xx, your client XXXXX acquired two parcels (two legal titles) of forestry land, totaling XXXXX hectares (ha), surrounding and in the proximity of XXXXX, a lake of approximately XXXXX ha on XXXXX[.]
2. Originally, there were XXXXX unauthorized occupants who had constructed XXXXX cottages/cabins in which they were living. There was also some unauthorized transient use. This situation was resolved through licence agreements, the non-exclusive use of a portion of land for an annual fee XXXXX[.]
3. In the 19 XXXXX the number of licence lots increased several times and roads were extended. The lots were marked out and not subdivided, as a subdivision would have required a prospectus and formal approvals by the Superintendent of Real Estate. Currently there are XXXXX surveyed licence lots of which XXXXX are licenced to licence holders. The average size of these lots is XXXXX[.]
4. For property tax purposes, the lots have been classified as residential since the 19 XXXXX. The use of the lots has been for recreational residential purposes. Currently, XXXXX of the XXXXX licence holders have cabins or cottages on their lots. The assessor has assessed the XXXXX cabins and cottages at XXXXX not including the value of the land, or an average of about XXXXX per cabin cottage. Although there is a good gravel road access, there is no hydro, telephone, sewer or water utilities to these lots at the present.
Transaction(s)
5. Currently, your client has made a rezoning and development application to subdivide the property into XXXXX waterfront lots as a strata title subdivision. These lots, to a large degree, conform to the licence lots currently plotted but not subdivided. The strata title development, including common property, would total approximately XXXXX ha. In addition, XXXXX ha would be donated as a park; but it is likely that the majority of this acreage would be subdivided off an adjoining lot.
The intent would be to sell these lots by first offering them to the current licence holders and then to the general public if not purchased by the licence holder. It is noted that the licence holders own the improvements, and if the lot is not purchased by the licence holder, he would have to either remove the improvements or make arrangements with your client for your client to sell the improvements along with the lot, or possibly sell the improvements to your client.
6. Under the standard Recreational Licence Agreement with your client, a cabin or cottage cannot be used as a permanent residence and there are specific restrictions on cabins and cottages such as:
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
7. On January 23, 1991, our XXXXX office issued a ruling to XXXXX one of your client's licence holders, to the effect that the supply of land by licence to XXXXX is exempt from GST under section 7 of Part I of Schedule V to the Excise Tax Act (the Act).
8. You have made a previous inquiry with our XXXXX office concerning this ruling to XXXXX and you have been informed of the following:
• In order to be considered "residential units", the cabins/cottages at XXXXX must be affixed to land. The word "affixed" is not defined the Act. In the far XXXXX buildings lacking foundations or substantial footings are not uncommon and they are considered "residential units". The cabins/cottages at XXXXX qualify as "residential units" and the exemption under section 7 Part I Schedule V applies to the supply of the land.
• The fact that the licence lots are not serviced does not prevent the cabins/cottages from qualifying as "residential units".
As a consequence, you have been charging tax on licence fees for lots on which no cabin or cottage has been constructed, while no tax was charged on licence fees for lots on which cabins or cottages have been constructed.
Ruling Requested
1. You are asking for a confirmation of the GST status of the supply of land by licence by your client.
2. You are also requesting a ruling on the future sale of the subdivided lots which are currently supplied by licence.
Ruling Given
Based on the facts set out above, we rule that:
1. Your client's supply of "licence lots" by way of licence qualifies for exemption from GST under subparagraph 7(a)(i) of Part I of Schedule V to the Act in cases where there is a cabin or cottage which qualifies as a "residential unit" on the "licence lot" and the "residential unit" is affixed to land in the same manner as a house. Whether this residential unit is affixed to land is a question of fact which is determined by examining as a whole factors such as:
a) the type of residential unit (cabin cottage)
b) the use of the cabin cottage and the applicable land
c) the actual degree of permanency of the affixation of the cabin cottage with the land
d) applicable provisions of the licence agreement relating to the permanency and means of affixation of the cabin cottage to the land.
In the case at hand, based on our review of all the facts, including submitted photographs, the majority of the factors noted above have been met.
Where there is no cabin or cottage affixed to a lot, the supply of the lot (vacant land) by licence is subject to GST under subsection 165(1) of the Act. However, after the licencee builds a qualifying residential unit on his lot, subsection 136.1(1) of the Act deems the subsequent annual licence fee payment to be consideration for a separate supply, i.e. no longer a supply of vacant land, but a supply of a residential unit. Accordingly this subsequent separate supply will qualify for exemption from GST under subparagraph 7(a)(i) of Part I cited above.
2. Your client's supply of a subdivided lot by way of sale will qualify for exemption from GST under paragraph 5.2(a) of Part I of Schedule V to the Act if, immediately before the earlier of the time of transfer of ownership and the time of transfer of possession, the lot was subject to a licence which is exempt under paragraph 7(a) mentioned above, and, if a supply by sale were made of the residential complex immediately before that earlier time, the supply would be an exempt supply under any of sections 2 to 5 of the same Part I of Schedule V to the Act.
Where the lot does not form part of a residential complex, or where, immediately before the earlier of the time of transfer of ownership and the time of transfer of possession, it was not subject to a licence exempt under paragraph 7(a), the sale of the lot will be subject to GST under subsection 165(1) of the Act.
3. Your client is subject to self-supply under subsection 190(3) of the Act if the possession of the land is transferred under a licence after March 27, 1991, and if the licence holder is not acquiring the land for the purpose of constructing a residential complex in the course of a commercial activity or for resupply by way of licence or similar arrangement which is exempt under section 6.1 of Part I of Schedule V to the Act. After your client supplies the land by licence, your client must remit tax to the Department on the deemed sale (and purchase) of the "licence lot" based on the fair market value of the "licence lot" immediately before its supply to the licence holder.
This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to departmental interpretative policy; and that you have fully described all necessary facts and transactions for which you requested a ruling.
Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9587.
Yours truly,
Bao Tran
Rulings officer
Real Property Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate
| Legislative References: |
ss. 136.1(1); ss. 190(3); ss. 165(1); Sch. V, Part I, par 7(a), par 5.2(a); |
| NCS Subject Code(s): |
R-11950-3; 11950-4 |
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