31 March 2000 GST/HST Interpretation 7308/HQR0000914 - Exchange of Land

Dear XXXXX

Thank you for your letter of May 23, 1997, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to an exchange of land lots between XXXXX and its client.

Your letter was addressed to the XXXXX and was forwarded to us for our response. Please accept our apology for the delay in responding to your query.

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. XXXXX is engaged in the business of buying and selling real property and is registered for GST/HST purposes.

2. In September 1994, XXXXX sold a land lot (Lot A) to an unidentified purchaser who is an individual (the Individual). XXXXX transferred ownership of Lot A to the Individual as a result of this sale.

3. XXXXX collected and remitted GST on this sale.

4[.] The Individual intended to build a residence on Lot A for his/her personal use.

5. In 1997, the Individual realized that s/he had title to the wrong land lot.

6. XXXXX agreed to transfer ownership of an adjacent land lot (Lot B) to the Individual and to take back Lot A into inventory. The two land lots are of equal value.

Interpretation Requested

You have requested a ruling concerning the application of the GST concerning the exchange of Lot A for Lot B between the Individual and XXXXX. We are unable to issue a ruling, as the identity of the Individual and the legal description of Lots A and B are unknown. Where insufficient facts are provided to issue a ruling, the CCRA may provide an interpretation of the relevant portions of the legislation in relation to your situation in order to assist you in complying with the Act.

Interpretation Given

Based on our understanding of the situation outlined above, we are providing the following interpretation.

Characterization of the Exchange of Lots A and B between XXXXX and the Individual

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 A for Lot B between XXXXX and the Individual would be regarded as two supplies pursuant to the definition of supply in subsection 123(1). There would be one supply of Lot A from the Individual to XXXXX in exchange for another supply of Lot B from XXXXX the Individual.

These two supplies constitute consideration for each other. Subsection 153(1) of the Act provides:

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.

Consequently, the value of the consideration for the supply of Lot A is the fair market value (FMV) of Lot B at the time when Lot A is supplied pursuant to paragraph 153(1)(b). The value of the consideration for the supply of Lot B is the FMV of Lot A at the time when Lot B is supplied.

The Supply of Lot A from the Individual to XXXXX[.] 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 Individual was mistaken in acquiring ownership of Lot A from XXXXX [i]n 1994, this transfer of ownership of Lot A to the Individual falls within the definition of sale under subsection 123(1) and cannot be ignored. Consequently, the subsequent transfer of ownership of Lot A from the Individual to XXXXX [i]s considered as another sale of Lot A 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 A by the Individual to

XXXXX 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 B from XXXXX to the Individual

The transfer of ownership of Lot B from XXXXX to the Individual 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 B by XXXXX to the Individual does not fall within any of the exempting provisions in Part I of Schedule V, the sale of Lot B would be considered a taxable supply. Pursuant to subsection 165(1), the 1997 sale of Lot B by XXXXX to the Individual is subject to GST at the rate of 7% on the value of the consideration for Lot B. As previously mentioned, the value of consideration for Lot B is the FMV of Lot A at the time of the sale of Lot B.

Although the sale of Lot B by XXXXX is subject to GST, the Individual 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 Individual, as the Individual would be required to pay GST on his/her purchase of Lot A and Lot B, 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