4 January 1999 GST/HST Interpretation HQR0001494340 - Pre-Incorporation Purchase

XXXXX

Further to our letter of October 13, 1998 and our telephone conversation with Ron XXXXX on October 19, 1998 we have been asked to provide a response concerning the application of the Goods and Services Tax (GST) where an organization took possession of real property under an agreement of purchase and sale, but as an unincorporated body was unable to take legal title to the property.

Statement of Facts

1. On May 24, 1995 XXXXX, as vendor, accepted an offer to purchase real property described as XXXXX (the "property") from XXXXX, as purchaser, forming a binding agreement of purchase and sale (the "agreement").

2. In July of 1995 XXXXX took possession of the property under the agreement.

3. At the time XXXXX received possession of the property from Ms. XXXXX and all times subsequent, XXXXX was an unincorporated body that is best described as an organization.

4. XXXXX is not a registrant for GST/HST purposes.

5. Under the terms of the agreement XXXXX was to take title to the property once it had met all of the conditions including the payment in full of total the consideration of XXXXX. The agreement called for XXXXX to pay initial deposit of $XXXXX and for the vendor to carry the balance of $XXXXX at a per annum interest rate of 8.34%.

6. Approximately two years after taking possession of the property, XXXXX completed its obligations under the agreement.

7. On or around completion of the agreement it was realized that XXXXX lacked the legal capacity to acquire or hold title to real property in the Province of XXXXX. As a result a newly incorporated company, XXXXX was formed to take title to the property.

8. Title to the property was transferred to XXXXX Inc. pursuant to a Land Transfer document dated XXXXX in accordance with the XXXXX.

9. XXXXX Inc. is not a registrant for GST/HST purposes.

10. The agreement of purchase and sale was not amended to replace XXXXX with XXXXX as the stated purchaser.

Interpretation Requested

You have asked whether, for purposes of the Part IX of the Excise Tax Act (ETA):

1. there was a sale of real property from an individual to XXXXX and a subsequent resale of the same property to XXXXX, or

2. there was sale of the real property from an individual directly to XXXXX given the possible application of the XXXXX.

Interpretation Given

Based on the information provided in the above statement of facts it is our view that:

1. there was a supply by way of sale of the real property from XXXXX as an individual, to XXXXX and a subsequent supply by way of sale of the same property from XXXXX to XXXXX Inc. in circumstances where the relevant provisions of XXXXX do not apply, or

2. there was a supply by way of sale of the real property from Ms XXXXX directly to XXXXX in circumstances where the relevant provisions of the XXXXX apply in such a manner so as to cause a substitution of XXXXX for XXXXX as the recipient of the supply under the said agreement of purchase and sale.

Analysis

Application of the Definitions of "Recipient" and "Sale" in Part IX of the ETA

1. The definitions of "sale" and "recipient", found in subsection 123(1) of the ETA, are as follows:

""sale", in respect of property, includes any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer ownership of the property;" and

""recipient", of a supply of property or a service means

(a) where consideration for the supply is payable under an agreement for the supply, the person who is liable under the agreement to pay that consideration, ...".

In this case XXXXX was the person liable to pay the consideration payable under the agreement for the supply and possession was transferred to XXXXX under the agreement to transfer ownership. Therefore, in accordance with and for purposes of Part IX of the ETA, XXXXX was the recipient of the supply by way of sale of the property.

Although XXXXX never received legal title to the property, XXXXX is considered to have acquired an equitable interest in the property from XXXXX

Upon execution of the Land Transfer document, XXXXX agreed to transfer legal title to the property to XXXXX Inc. At that time of the execution of the Land Transfer document, XXXXX held a contractual right to receive title to the property therefore Ms. XXXXX's considered to have transferred legal title to the property at the direction of XXXXX . XXXXX is considered to have transferred its equitable interest in the property to XXXXX Inc. at the same time as Ms. XXXXX transferred the legal title.

In our view, the purpose for which XXXXX directed Ms. XXXXX to transfer legal title to the property to XXXXX Inc. was to enable XXXXX Inc. to hold the full legal estate in the property. This is consistent with our view that XXXXX formed XXXXX Inc. for the purpose of enabling XXXXX Inc. to hold all of XXXXX's assets and to carry on the business of XXXXX.

Application of Subsection 155(1) of the ETA

In circumstances where the XXXXX has no application such that XXXXX is considered to have both received and made a supply by way of sale of the equitable interest in the property, it is necessary to consider whether the supplies made by XXXXX to XXXXX Inc. are subject to subsection 155(1) of the ETA.

The consideration paid or payable for the transfer of title is $1 as stated on the Land Transfer document. With respect to the transfer of the equitable interest, no evidence has been provided of any consideration having been paid or become payable. Since the agreement of purchase and sale entered between Ms. XXXXX and XXXXX called for payment of $XXXXX as consideration for the sale of the property, it is reasonable to conclude that the supply of the legal title from Ms. XXXXX to XXXXX Inc. for $1 was for consideration which is less than the fair market value (FMV) of the property. Also, as stated in the Statement of Facts, XXXXX Inc. was not a registrant at the time it acquired both title and equitable interest in the property.

Therefore, subsection 155(1) of the ETA will apply such that:

•   the supply of the equitable interest is deemed to be made for consideration the value of which is equal to the FMV of the property, and

•   the value of the consideration for the supply of the legal title is deemed to be equal to FMV of the property,

provided that XXXXX and XXXXX Inc. were not dealing with each other at arm's length with respect to the above noted supplies.

At issue in the application of subsection 155(1) is whether XXXXX and XXXXX Inc. were dealing with each other at arm's length. For purposes of Part IX of the ETA, whether persons are dealing with each other at arms length is determined in accordance with subsection 126(1).

Subsection 126(1) of the ETA states that related persons are in all cases deemed not to deal with each other at arm's length. Also, subsection 126(1) states that persons are related to each other for purposes of Part IX of the ETA where they are related to each other by reason of subsections 251(2) to (6) of the Income Tax Act (ITA).

In this case XXXXX as an unincorporated body, is a person for purposes of Part IX of the ETA but not for purposes of the ITA. Since XXXXX is not a person it cannot be a related person for purposes of the ITA. Due to the ETA's reliance upon the ITA for its definition of "related persons" (with the exception of subsection 126(3) of the ETA), XXXXX and XXXXX Inc. are also not "related persons" for purposes of Part IX of the ETA. Since they are not related persons, whether they are dealing with each other at arm's length is, in accordance with subsection 126(1) of the ETA, solely a question of fact.

In this case there are insufficient facts to conclude whether XXXXX and XXXXX Inc. are in fact not dealing with each at arms length with respect to the above supplies. However, reference to Interpretation Bulletin IT-419R, paragraphs 15 to 19 provides the Department's guidelines on determining whether unrelated persons are in fact dealing with each other at arms length.

Based upon these guidelines XXXXX and XXXXX Inc. would be considered to not be dealing with each other at arms length causing subsection 155(1) of the ETA to apply where either

•   XXXXX Inc. had de facto control over XXXXX, or

•   XXXXX Inc. and XXXXX, were acting in concert without separate interests,

with respect to the supplies made by XXXXX to XXXXX Inc.

XXXXX

1. As stated above it is our position that the application of XXXXX may impact upon the determination as to whether XXXXX or XXXXX Inc. is the recipient of the supply by way of sale of the property which occurs as a result of the transfer of possession under the agreement.

Therefore where the provisions of subsection 14(2) of the XXXXX are met, subject to the other provisions of section 14, it is our position that a corporation may become a recipient of a supply or supplies where the provision of that supply or supplies occurred under a contract which was entered into prior to the corporation having come into existence. It should be noted however that the Department does not purport to interpret or apply the provisions of the XXXXX and in this case provides no opinion as to whether any or all of the provisions found in section 14 have application to this fact situation.

However, should it be determined, independent of the interpretation letter, that the conditions of subsection 14(2) are met in this case, we would accept that XXXXX Inc. effectively replaces XXXXX as the recipient with respect to the supply by way of sale of the real property made by Ms. XXXXX. Although the replacement as recipient of XXXXX Inc. for XXXXX cannot occur until such time as the applicable provisions of section 14 of the XXXXX operate to do so, such an application of the XXXXX would cause XXXXX Inc. to become the recipient of the sale of the property for GST/HST purposes retroactive to the time possession was transferred to XXXXX under the agreement of purchase and sale.

Further, due to the retroactive nature of the replacement of XXXXX for XXXXX Inc. as recipient, XXXXX Inc. (and not XXXXX) would be subject to any obligations placed upon the recipient under the ETA which arise directly as a result of the supply under the agreement of purchase and sale. In this particular case, since XXXXX was not registered at the time of the supply of the property, XXXXX had no obligation to self-assess with respect to the GST payable. Rather XXXXX would have been obligated to pay the GST to Ms. XXXXX in respect of the supply.

Where XXXXX Inc. becomes the recipient, it also becomes liable to pay the GST to Ms. XXXXX. Given that XXXXX has likely paid the total amount of GST payable, whether or not such payment could be regarded as having been made on behalf of XXXXX Inc., as an agent for XXXXX, is a question of fact and law for which the Department does not provide an interpretation or ruling.

Since neither XXXXX or XXXXX Inc. are registrants for GST/HST purposes, ITC entitlements are not presently at issue.

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) 954-8852.

Yours truly,

Daryl J.A. Hooley
Real Property Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate