5 August 1999 GST/HST Interpretation HQR0001738 - Sale of Real Property Situated at

Thank you for your letter of April 12, 1999, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the sale of a partially completed residential complex.

All legislative references are to the Excise Tax Act (the Act) unless otherwise noted.

Our understanding of the situation is as follows:

1. XXXXX (the Property). XXXXX purchased the Property as vacant land on XXXXX for the purpose of constructing a residential complex for their personal use.

2. XXXXX are not registered for the GST and have not claimed any input tax credits in respect of the Property.

3. XXXXX began to construct a house on the Property. Due to marital separation, the construction was suspended when the XXXXX had completed 50% of the complex.

4. XXXXX place a builder lien on the Property for non-payment of materials which were supplied to the XXXXX for construction of the complex.

5. XXXXX issued an order in this matter. Under the terms of the order:

(a) XXXXX has exclusive conduct of the sale of the Property and is entitled to list the Property for sale;

(b) XXXXX could pay from the selling price of the Property, the usual residential real estate commission to a real estate agent or firm which arranged a sale of the Property, and

(c) the sale, the price and terms of the sale, and the distribution of proceeds of sale are to be subject to further orders of the Court unless otherwise agreed by all of the parties of record.

6. XXXXX has not made any improvements to the Property nor has it claimed any input tax credits in respect of the property.

7. The provisions of subsection 183(3) would not apply to the sale of the Property by XXXXX[.]

Issue

You are enquiring as to whether the sale of the Property by XXXXX is subject to the GST.

Response

The sale of the property by XXXXX is subject to the GST at 7%. A purchaser of the Property may be eligible for a new housing rebate pursuant to section 256.

Analysis

With respect to the scenario described, subsection 183(1) provides that where, for the purposes of satisfying a debt owed to XXXXX the former seizes or repossesses property of the latter under a right or power exercisable by XXXXX are deemed to have sold the Property to XXXXX. Other than for the purposes of section 193 and 257, that sale is deemed to be made for no consideration. Pursuant to subsection 183(10), a creditor who exercises a right under an Act of Parliament or the legislature of a province to cause a supply of property, is generally deemed to have seized the property immediately before that supply and the supply is deemed to be made by the creditor. A sale ordered by a court is considered to fall within subsection 183(10) on the basis that the court has inherent jurisdiction to supervise such sales under the applicable rules of court which can be said to be a right to be exercised by a creditor under an Act of a legislature.

Subsection 30(2) of the XXXXX provides that the XXXXX may order and direct the sale of land, improvements, materials placed on the land or an interest of the owner, in circumstances where a claimant (e.g. XXXXX entitled to a lien for the amount found to be due.

The deemed sale under subsection 183(1) made by the XXXXX is an exempt supply pursuant to Part I of Schedule V. It is a question of fact as to whether the property in question is a residential complex for GST purposes. If the Property is a residential complex, the sale by the XXXXX will be exempt from the GST pursuant to section 2 of Part I of Schedule V to the Act since XXXXX are not a "builder" of the complex as defined in subsection 123(1). If the Property is not a residential complex, the sale of the Property will be exempt under section 9 of Part I of Schedule V to the Act provided none of the exceptions therein apply.

As mentioned, the issue as to at what point a "residential complex" comes into existence for purposes of subsection 123(1) is a question of fact. The following are some of the factors that may be considered when making such a determination: the degree of completion of the construction, the understanding of the parties involved in the supply (i.e. what is being supplied, an unfinished house or improved land?), the structure and wording of the agreement of purchase and sale, the nature of the building permit obtained from the municipality (or equivalent government body) and applicability of a new home warranty where the vendor is a "builder". The aforementioned factors are not individually conclusive in their own right and must be considered as a whole. As well, the factors listed are by no means the only ones that may be considered and other factors may be relevant depending on the circumstances.

Pursuant to subsection 183(2), the sale of the Property by XXXXX is deemed to be made in the course of a commercial activity unless the sale is an exempt supply. The sale of the partially completed house by XXXXX is not exempt under any of the provisions in Part I of Schedule V to the Act. Accordingly, the sale is subject to the GST at 7%.

If an individual purchases the partially completed house from XXXXX, the individual may be entitled to a new housing rebate. The rebate under section 254 would not be available as ownership of the complex would be transferred to the individual before construction was substantially complete and therefore paragraph 254(2)(e) is not satisfied. Note, however, that XXXXX were to complete construction of the complex and sell it, an individual may be eligible for a rebate pursuant to section 254. Based on the facts, however, entitlement to a rebate must be considered under section 256.

Four conditions must be satisfied under section 256 in order for a GST new housing rebate to be paid in respect of a newly constructed residential complex:

1. an individual must construct, or engage someone to construct, a single unit residential complex for use as a primary place of residence of the individual or a qualifying relative;

2. the fair market value of the complex must be less than $450,000;

3. GST/HST must have been paid on the land and/or construction materials and contracting services, and

4. either the individual or a qualifying relative must be the first occupant of the complex, or if the individual makes an exempt sale of the complex, ownership must be transferred before it is occupied as a place of residence.

The main issue with respect to the scenario discussed in this letter is the first condition outlined above: Could an individual who purchases the partially completed house be considered to have constructed, or engaged someone to construct, a single unit residential complex?

Given the particular circumstances of this case, the purchase of the partially completed house will, administratively, be considered to be part of the construction of a new residential complex. Therefore assuming the individual satisfies all of the remaining conditions outlined in subsection 256(2), the individual may apply for a new housing rebate in respect of a portion of the tax paid to both XXXXX and the suppliers of the goods and services necessary to complete construction of the complex.

Should you require further information, or have any questions regarding this matter, please contact me at (613) 954-4393.

Yours truly,

Hugh Dorward
Real Property Unit
Financial Institutions and Real Property Division