24 July 2000 GST/HST Interpretation 31825 - Section 211 Election

Thank you for your electronic mail message of June 7, 2000, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a certain subdivision developed by XXXXX (the Town).

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

Our understanding of the situation is as follows:

1. The Town developed a certain subdivision in XXXXX including the installation of infrastructure in that subdivision.

2. All of the lots in the subdivision were supplied by way of sale. A section 211 election has not been filed in respect of any of the lots. Three lots were sold to individuals. The remaining lots were sold to persons other than individuals. The sales of lots to the individuals occurred on March 29, 1996 (Lot A), September 30, 1997 (Lot B) and July 8, 1999 (Lot C). These lots are not described as Lots A, B, and C on the subdivision plan, but are referred to as such for purposes of this memorandum. As you are aware, notwithstanding the fact that a section 211 election has not been filed, the sale of a lot to an individual is excluded from exemption by virtue of paragraph 25(c) of Part VI of Schedule V to the Act.

Your question concerning the effective date of a section 211 election has previously been addressed. We will answer your remaining questions in the order they were presented.

Application of Section 193

You are seeking information on the application of section 193. Specifically, you are enquiring as to why subsection 211(1) makes reference to subsection 193(1). You note that the deemed sale that occurs under section 211 occurs before the election is in effect and subsection 193(1) does not apply if an election is not in effect. You are questioning when subsection [1]93(1) would ever apply and why subsection 193(2) must be considered when section 211 does not make reference to that subsection.

Subsection 193(1) generally applies whenever a registrant, other than a public sector body (other than a financial institution), makes a taxable sale of real property by way of sale. You will note that subsection 211(1) provides that where a public service body (PSB) files an election in respect of real property identified in any of paragraphs (a) through (c) of that subsection, throughout the time the election is in effect, subsection 193(1) and section 206 apply and section 209 does not apply, to the property. Therefore, if at a particular time, a PSB were to sell a property in respect of which an election is in effect at that time, subsection 193(1) would apply provided the conditions of that subsection are met.

Subsection 193(2) will apply to a taxable supply of real property by way of sale by a registrant that is a public sector body (other than a financial institution), provided the conditions therein are met, when a section 211 election is not in effect. The application of subsection 193(1) can therefore be contrasted with the application of subsection 193(2) by considering the deemed sale that occurs under subsection 211(2). Upon filing an election under subsection 211(1), subsection 211(2) deems the public service body to have made a taxable supply of the property that is the subject of the election. However, under paragraph 211(2)(a), the body is deemed to have made the taxable supply of the property immediately before the day on which the election takes effect. Subsection 193(1) does not apply where a section 211 election is not in effect at a particular time. As the deemed sale under subsection 211(2) occurs before the effective date of the election, a section 211 election is not in effect and therefore subsection 193(1) cannot apply. However, subsection 193(2) could apply at least insofar as a section 211 election is not in effect. Although subsection 211(2) does not refer to subsection 193(2), one must consider the latter subsection if the facts of the case dictate such consideration.

You indicated that when the Town made a taxable supply of Lots A, B and C, it would be eligible for an input tax credit (ITC) under subsection 193(2). This is correct to the extent that immediately before the supply, the lots were not used primarily in commercial activities of the Town. It should be noted that the ITC eligibility that arises under subsection 193(2) is in respect only of the real property that is supplied by the Town. To the extent that the purchaser of any of the lots does not acquire an interest in the infrastructure situated outside the lot, no ITC eligibility arises on that portion of the infrastructure.

Recapture of ITCs Claimed Under Subsection 193(2) and the Application of Policy Statement P-168

You are enquiring as to whether the Town is required to recapture any ITCs it may have been entitled to under section 193. You are also questioning whether policy statement P-168, "The Entitlement Of Municipalities To Claim ITCs In Respect Of The GST Incurred For Infrastructure Development Relating To Sales Of Serviced Lots", applies in this case.

The Town is not required to recapture the ITCs which it may have been entitled to claim under subsection 193(2) in respect of any of Lots A, B or C.

In the circumstances you described, policy statement P-168 would not apply as the requirements for applying the policy have not been met. Specifically, the consideration for the sale of all the serviced lots within the subdivision was not subject to the GST/HST as most lots were sold to persons other than individuals and were exempt under section 25 of Part VI of Schedule V to the Act.

Valuation of Infrastructure

Although policy statement P-168 does not apply to the situation at hand, you asked about determining the 'scrap value' of infrastructure.

The recapture of ITCs would arise where policy statement P-168 applied. Where the conditions outlined in the policy have been met, a municipality is entitled to claim ITCs on the installation of the infrastructure. However, a change in use occurs at the time the subdivision development is complete and the municipality begins to use the infrastructure it owns in providing exempt municipal services.

We are not in a position to determine the scrap value of infrastructure as required under P-168. You may wish to contact the Appraisals Unit in your office for assistance in the valuation of any particular infrastructure.

Should you require further information, or have any questions on this matter, please do not hesitate to contact me at (613) 954-4393.

Hugh Dorward
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate