13 September 2000 GST/HST Interpretation 32167 - Excise Tax Act, Schedule V, Part I, paragraph 9(2)(c)

We write in response to your e-mail message of July 21, 2000, in which you requested assistance in the application of the above provision in the following circumstances:

1. In 1997, an individual owns a parcel of vacant land ("X").

X

The individual is not in the business of selling real property. The land in question is not capital property used primarily in a business carried on by the individual with a reasonable expectation of profit. The individual has never subdivided or severed parcel X into parts and has not subdivided or severed parcel X from another parcel.

2. In 1997, the individual severs parcel X into two parts, "A" and "B".

3. In 1998, the individual severs "A" into two parts, "A1" and "A2"

and sells both A1 and A2 at arm's length.

4. In 2000, the individual sells B at arm's length.

Issue

You wish to know which, if any, of the above transactions are exempt from GST.

Response

It is our view that the sales of A1 and A2 are both taxable at 7% pursuant to subsection 165(1) of the Excise Tax Act ("the Act"), while the sale of B is exempt from GST pursuant to subsection 9(2) of Part I of Schedule V to the Act.

Analysis

The supply of real property made by way of sale by an individual or a personal trust is exempt from GST under subsection 9(2) of Part I of Schedule V to the Act, except where the supply is excluded from the exemption by one of paragraphs 9(2)(a) through (e). In the circumstances described above, the exclusions in four of those paragraphs would not apply to the transactions in question for the following reasons:

(a) the real property in question is not capital property used primarily in a business carried on by the individual with a reasonable expectation of profit;

(b)(i) the individual does not carry on a business of selling real property, and therefore the sales of the land would not be made in the course of such a business and

(ii) while the sales may be made in the course of an adventure or concern in the nature of trade of the individual, there is no indication that the individual has elected to make the sales taxable;

(c) the subject sales are actual not deemed supplies; and

(e) the sales are supplies of vacant land, not of residential complexes.

Consequently, the circumstances direct us to consider only paragraph 9(2)(c). Further, because the sales are at arm's length and there is no indication that they are being made to a person who has the right to acquire the property by way of expropriation, the only relevant parts of that paragraph are the following:

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

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

Under paragraph 9(2)(c), where an individual subdivides or severs a parcel into parts, the supply of each of those parts will be excluded from the subsection 9(2) exemption (i.e. generally taxable). Subparagraph 9(2)(c)(i) provides an exception to this general rule: where the individual has subdivided or severed the parcel into only two parts and the individual did not subdivide or sever that parcel from another parcel, then the supply will be exempt. The circumstances in question provide a good example of how this provision works in practice:

-    The sale of either A1 or A2 is the supply of a part of parcel A. Parcel A was subdivided or severed into only two parts; however, it was also subdivided or severed by the individual from the original parcel X. For this reason, the supply of A1 or A2 does not come within the subparagraph 9(2)(c)(i) exception to the paragraph 9(2)(c) exclusion and is taxable.

-    The sale of B is also the supply of part of a parcel, in this case parcel X. Parcel X was also subdivided or severed into only two parts (A and B), but unlike parcel A parcel X was not subdivided or severed by the individual from another parcel. Consequently, the supply of B meets both requirements of subparagraph 9(2)(c)(i). It is therefore excepted from paragraph 9(2)(c).

Key to the understanding of paragraph 9(2)(c) is an awareness that a part of a parcel is itself a parcel and that a subsequent subdivision or severance of that part does not constitute a further subdivision or severance of the original parcel. It is therefore important in responding to enquiries to understand the sequence of subdivisions or severances so that we are sure (a) which part of which parcel we are dealing with and (b) whether that parcel was or was not subdivided or severed from another parcel.

Please note that the above analysis would produce the same result as in case number HQR0000458. It does, however, differ significantly from the explanation provided in that case, which could produce different results in other circumstances. Accordingly, case number HQR0000458 should not be used as a reference in interpreting paragraph 9(2)(c) of Part I of Schedule V to the Act.

Should you require further information, or have any questions on this matter, please do not hesitate to contact me at (613) 952-9212.

Michael Wolff
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate