31 March 2000 GST/HST Interpretation 7964/HQR0001570 - GST On A Land Lot Purchased And Subsequently Exchanged For Another Land Lot

Dear XXXXX

Thank you for your facsimile letter of October 20, 1998, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to an exchange of land lots between a vendor developing a subdivision and one of your clients.

Your facsimile was sent to the XXXXX and was forwarded to us for our response. Please accept our apology for the delay in responding to your inquiry.

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

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

Our understanding of the situation is as follows:

1. You are acting for the purchasers (the Purchasers) of a land lot (Lot 1) in a subdivision developed by the vendors (the Developer).

2. For purposes of this interpretation, we will assume that the Developer sells these residential lots in the course of its business.

3. The sale of Lot 1 from the Developer to the Purchasers was completed on XXXXX[.]

4. The Purchasers paid GST at the time of this sale.

5. The Purchasers are not registrants for GST purposes.

6. The Purchasers acquired Lot 1 with the intention of building their residence on it.

7. For purposes of this interpretation, we will assume that the Purchasers are individuals (given their intention to build their residence on Lot 1).

8. Following completion of the sale on XXXXX differences arose between the Purchasers and the Developer. The nature of these differences is not known.

9. The two parties decided that the best way to resolve their differences was to exchange Lot 1 for another land lot in the same subdivision (Lot 2). The value of Lot 2 is the same as Lot 1 given up in exchange.

10. Deeds to the two land lots in question, drawn to express the parties' intention, would show the value of the consideration to be one dollar in both cases.

Interpretation Requested

You have asked what is the application of GST to such an exchange of real property.

Interpretation Given

Based on the information provided and our understanding of the situation, we are providing the following interpretation.

Characterization of the Exchange of Lots 1 and 2 between the Developer and the Purchasers

Subsection 123(1) of the Act defines "supply" as follows:

"supply" means, subject to sections 133 and 134, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition;

The exchange of Lot 1 for Lot 2 between the Developer and the Purchasers would be regarded as two supplies pursuant to the definition of supply in subsection 123(1). There would be one supply of Lot 1 from the Purchasers to the Developer in exchange for another supply of Lot 2 from the Developer to the Purchasers.

These two supplies constitute consideration for each other. Subsections 153(1) and (2) provide:

153(1) Subject to this Division, the value of the consideration, or any part thereof, for a supply shall, for the purposes of this Part, be deemed to be equal to

(a) where the consideration or that part is expressed in money, the amount of the money; and

(b) where the consideration or that part is other than money, the fair market value of the consideration or that part at the time the supply was made.

153(2) For the purposes of this Part, where

(a) consideration is paid for a supply and other consideration is paid for one or more other supplies or matters, and

(b) the consideration for one of the supplies or matters exceeds the consideration that would be reasonable if the other supply were not made or the other matter were not provided, the consideration for each of the supplies and matters shall be deemed to be that part of the total of all amounts, each of which is consideration for one of those supplies or matters, that may reasonably be attributed to each of those supplies and matters.

Consequently, the value of the consideration for the supply of Lot 1 is the fair market value (FMV) of Lot 2 at the time when Lot 1 is supplied pursuant to paragraph 153(1)(b) in conjunction with subsection 153(2). The value of the consideration for the supply of Lot 2 is the FMV of Lot 1 at the time when Lot 2 is supplied.

The Supply of Lot 1 from the Purchasers to the Developer

Under subsection 123(1) of the Act, a "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.

While it is understood that the purpose of the supply of Lot 1 from the Purchasers to the Developers was to resolve their differences, the earlier transaction between these parties completed on August 14, 1998, and the resulting transfer of ownership of Lot 1 to the Purchasers falls within the definition of sale under subsection 123(1) and cannot be ignored. Consequently, the subsequent transfer of ownership of Lot 1 from the Purchasers to the Developer is considered as another sale of Lot 1 for GST purposes under subsection 123(1).

Generally, the sale of real property is a taxable supply under section 165 except where the supply is otherwise an exempt supply.

Section 9 of Part I of Schedule V to the Act provides an exemption from the GST for a supply of real property by way of sale by an individual or a personal trust, subject to the following exceptions:

(a) a supply of real property that is, immediately before the time ownership or possession of the property is transferred to the recipient of the supply under the agreement for the supply, capital property used primarily in a business carried on by the individual or trust with a reasonable expectation of profit;

(b) a supply of real property made

(i) in the course of a business of the individual or trust, or

(ii) where the individual or trust has filed an election with the Minister in prescribed form and manner and containing prescribed information, in the course of an adventure or concern in the nature of trade of the individual or trust;

(c) a supply of a part of a parcel of land, which parcel the individual, trust or settlor of 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, or

(ii) the recipient of the supply is an individual who is related to, or is a former spouse of, the individual or settlor and is acquiring the part for the personal use and enjoyment of the recipient but, for the purposes of this paragraph, a part of a parcel of land that the individual, trust or settlor supplies to a person who has the right to acquire it by expropriation, and the remainder of that parcel, are deemed not to have been subdivided or severed from each other by the individual, trust or settlor, as the case may be;

(d) a supply deemed under section 206 or 207 of the Act to have been made; or

(e) a supply of a residential complex.

These exceptions restrict the exemption to certain supplies of personal-use land by an individual or personal trust. In most cases, land acquired or held for use or supply in a business remains taxable.

Based on our understanding of the situation, the sale of Lot 1 by the Purchasers to the Developer would be exempt from GST under section 9 of Part I of Schedule V as this sale would not fall within any of the exceptions to section 9 of the same Part and Schedule.

Supply of Lot 2 from the Developer to the Purchasers

The transfer of ownership of Lot 2 from the Developer to the Purchasers would be considered a "sale" for GST purposes under the definition of sale in subsection 123(1). As previously mentioned, the sale of real property is generally a taxable supply pursuant to section 165, except where the supply is otherwise an exempt supply. As the sale of Lot 2 by the Developer to the Purchasers does not fall within any of the exempting provisions in Part I of Schedule V, the sale of Lot 2 would be considered a taxable supply. Pursuant to subsection 165(1), the sale of Lot 2 by the Developer to the Purchasers is subject to GST at the rate of 7% on the value of the consideration for Lot 2. As previously mentioned, the value of consideration for Lot 2 is the FMV of Lot 1 at the time of the sale of Lot 2.

Although the sale of Lot 2 by the Developer is subject to GST, the Purchasers may qualify for a new housing rebate, up to a maximum of $8,750, under section 256 where the conditions of that provision are satisfied. For your convenience, please find enclosed a copy of the GST/HST New Housing Rebate Guide.

While we appreciate that GST would be collected twice from the Purchasers, as the Purchasers would be required to pay GST on their purchase of Lot 1 and subsequently on Lot 2, we have no alternative but to provide the interpretation given above. The Canada Customs and Revenue Agency is responsible for the administration of the GST legislation as passed by Parliament. Providing an alternative interpretation regarding the situation in question would entail an amendment to the Excise Tax Act, which falls within the responsibility of the Department of Finance. The Department of Finance has been made aware of this matter.

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 CCRA with respect to a particular situation.

For your convenience, please 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) 954-3772.

Yours truly,

Costa Dimitrakopoulos
Manager
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate