26 May 1998 GST/HST Interpretation HQR0000635 - GST Status of Rents Paid by a Municipality to a Corporation Wholly-owned by the Municipality

Dear XXXXX

Thank you for your letter of April 9, 1997 wherein you requested a review by this office of a GST interpretation dated February 12, 1997 issued by the XXXXX Tax Services Office to your client, the XXXXX ("the City").

We also acknowledge receipt of your letters dated June 12, 1997 and April 14, 1998 together with various agreements related to the development of the XXXXX

Interpretation Requested by the City

The City's interpretation request dated April 23, 1996 dealt with the GST status of rents paid by the XXXXX ("the City") to the XXXXX , a corporation wholly owned by the City, under the terms of a lease of a XXXXX building located XXXXX

Our understanding of the facts is as follows:

The building is situated on land owned by XXXXX In 19 XXXXX leased the land to XXXXX under the terms of a XXXXX year ground lease. Pursuant to the Ground Lease and the Construction Agreement entered into by XXXXX and XXXXX constructed XXXXX building on the XXXXX side of the property and the XXXXX building on the XXXXX side of the property. Pursuant to the Apartment Building Lease, XXXXX subleased the lands subjacent to the Apartment building and leased the apartment building to XXXXX Under the terms of the Office Building Lease, XXXXX as landlord, subleased the lands subjacent to the office building and leased the office building to the City in consideration for basic and additional rents (as defined in the lease). Under section XXXXX of the Office Building Lease, XXXXX directs the tenant to pay all basic rent to XXXXX has the option after the XXXXX year of the ground lease to purchase the portion of the lands on which the office building is situated and thereby acquire the office building. The terms of this purchase are set out in the Agreement of Purchase and Sale entered into by XXXXX and XXXXX on the same date as the ground lease.

The City requested confirmation that since the basic rents for the office building are paid to XXXXX a para-municipal organization of the City as defined in section 1 of Part VI of Schedule V to the Excise Tax Act ("the Act"), the rents qualify for exemption from GST pursuant to section 28 of that same Part.

Interpretation Provided by the TSO

The Department's position, as set out in the February 12 1997 interpretation, is that a direction by a lessor to a lessee to pay rents to a third party does not, in and of itself make the third party the supplier for GST purposes of the property which is the subject of the lease.

You have requested that we reconsider this position with respect to your client's situation in light of the overall structure of the XXXXX development.

We have reviewed your submissions as well as the Ground Lease, the Construction Agreement, the Office Building Lease, the Agreement of Purchase and Sale, the Security Agreement and the Development Agreement which you provided to us.

The Ground Lease provides at Article XXXXX that, during the term of the Ground Lease, XXXXX is the owner of the buildings constructed on the leased lands. XXXXX is clearly identified as the landlord under the Office building Lease.

While the direction regarding payment of basic rent under the Office Building Lease may result in a transfer of economic benefits resulting from the lease from XXXXX to XXXXX there is not a complete assignment by XXXXX of its rights and obligations as landlord to XXXXX For example, there appears to be no assignment of the right to receive the additional rent or of the right to receive any rent earned by the tenant from subleasing the premises to the extent that such rents exceed the rents payable by the tenant under the lease.

While under the Security Agreement, XXXXX assigns a security interest in its rights to benefit under the Office Building Lease, this assignment is to provide security for the performance by XXXXX of its obligations under the various agreements related to the development and is only enforceable by XXXXX in the event of default by XXXXX or such other event as set out in XXXXX of the Security Agreement.

Based on our review of the documentation and information provided, it remains our opinion that it is XXXXX that is the supplier of the office building by way of lease to the City. We therefore confirm the Department's position as set out in the February 9, 1997 interpretation.

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) 952-9212.

Yours truly,

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