27 April 2000 GST/HST Interpretation 28979 - Property Taxes Paid by Tenants Directly to Municipalities

Dear XXXXX

Thank you for your letter of February 21, 2000 in which you asked for a written confirmation of your understanding of how the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) applies to the supply and payment described below. During our telephone conversation of April 19, 2000, you indicated that an interpretation, which may apply to similar situations faced by your members, would be more useful to your XXXXX than a ruling which would apply to one specific actual situation only.

Please note that as of November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (the "CCRA").

Statement of Facts

Your representation describes a situation of general interest to your members and not an actual current case. From your letter, I understand the pertinent facts are as follows:

1. A lease on a industrial property calls for the tenant to pay the property taxes.

2. The landlord requires the tenant to pay the property taxes directly to the municipality and forward the GST on the property taxes to the landlord.

Interpretation Requested

It is your understanding that:

1. The fact that the property taxes are part of the lease agreement requires that the tenant pay GST on the amount of the property taxes; and

2. It is the landlord's responsibility to collect and remit the GST.

Interpretation Given

Based on the information provided, I am confirming your understanding with the following additional explanation.

Property taxes are not subject to the GST/HST when incurred by the property owner and as such, a municipality does not charge or collect the GST/HST on property taxes. Nonetheless, the payment of property taxes by a tenant, pursuant to the terms of a lease agreement, constitutes consideration for the lease of property where the landlord has a joint liability to pay such property taxes.

The subject payment is made by the tenant directly to the municipality as part of his (her) contractual obligation under his (her) lease agreement with the landlord in respect of the industrial property. As such, it is part of the consideration for the supply of real property by the landlord to the tenant. In this case, the subject payment is considered as part of a lease payment or additional rent. The supply of the industrial property by way of lease is subject to GST/HST under subsection 165(1) of the Excise Tax Act (the Act) as there are no provisions to exempt that supply.

In this situation, the nature of the payment (i.e. consideration paid by a recipient (tenant) for a supply of real property) differentiates it from a payment of property taxes by the supplier (landlord) to meet his (her) tax liability.

As the supplier, the landlord is liable to collect and remit GST/HST under sections 221 and 225 of the Act.

The tenant, if registered for the GST/HST, may claim an input tax credit under subsection 169(1) of the Act in respect of GST/HST paid on the supply of additional rent, subject to the general provisions of the Act.

On April 1, 1997, the harmonized sales tax (HST) replaced the goods and services tax (GST) and the provincial sales tax (PST) in the three participating provinces of Nova Scotia,

New Brunswick and Newfoundland with a harmonized tax rate of 15%. To the extent that they are taxable supplies (which are not zero-rated), tax must be collected at the harmonized rate.

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.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9587.

Yours truly,

Bao Tran
Real Property Unit
Financial Institutions & Real Property Division
Excise and GST/HST Rulings Directorate