3 July 2001 GST/HST Ruling 36087 - Application of GST/HST Under Subsection 9(2) of Part I of Schedule V to the Excise Tax Act (the "Act")

Dear XXXXX:

Thank you for the letter of May 23, 2001, prepared by XXXXX, concerning the application of the GST/HST under Subsection 9(2) of Part I of Schedule V of the Act to the sale of a subdivided lot held by an individual.

Statement of Facts

Our understanding of the facts, the transaction, and the purpose of the transaction is as follows:

•   In the 1950's your client, XXXXX, became the legal owner of Lot 3 XXXXX ("Lot 3") which is approximately XXXXX acres of farmland.

•   In XXXXX, Plan XXXXX was registered which subdivided part of Lot 3.

•   The XXXXX access to the XXXXX River was subdivided into XXXXX lots and a road was constructed to give access to the landlocked farmland to the south.

•   During the 1980's, XXXXX acres on the XXXXX corner of Lot 3 was sold to a corporation owned by your client.

•   Since the advent of the GST on January 1, 1991, your client is the legal owner of one waterfront ("Lot 33") and approximately XXXXX acres of farmland at the XXXXX end of Lot 3.

•   Your client has not severed or subdivided Lot 3 since January 1, 1991.

•   Lot 33 has been used by your client's family for recreation use. At one time a mobile trailer was parked on the land. The land is currently vacant.

•   Your client is contemplating the sale of Lot 33 to a person other than a related individual, a former spouse or common-law partner of your client.

Ruling Requested

You are of the opinion that the sale of Lot 33 should be exempt under subsection 9(2) of Part I of Schedule V of the Act. Hence, you wish to obtain our view on the tax status of the sale of Lot 33 by your client and a confirmation as to whether the previous subdivisions of Lot 3 in the 1950's and 1980's exclude your client from selling the property exempt.

Ruling Given

Based on the facts set out above, we rule that the sale of Lot 33 by your client will be a taxable supply for GST purposes.

Explanation

Generally, every supply of real property is taxable for GST purposes, unless a specific exemption is provided for the particular type of transaction. Usually, sales of real property by an individual are exempt subject to certain exceptions.

Paragraph 9(2)(c) of Part I of Schedule V to the Act, introduced through the 1997 amendments to the Act in Bill C-70 (Received Royal Assent on March 20, 1997.), provides that the sale of a part of a parcel of land, made by an individual, a trust, or the settlor of a trust, is not exempt under section 9 of Part I of Schedule V where the parcel was severed or subdivided by the individual into parts, subject to two exceptions referred to in paragraph 9(2)(c):

•   The parcel was subdivided into two parts only and the individual, the trust or settlor did not subdivide that parcel from another parcel of land; or

•   The recipient is a related individual or a former spouse or common law partner of the individual and is acquiring the part for his/her personal use and enjoyment.

Since your client has subdivided Lot 3 into several parts (as a result of Lot 33) and the contemplated sale would not be made to a related individual or former spouse or common-law partner, none of the above exceptions are met. The sale would therefore not be exempt under subsection 9(2) of Part I of Schedule V to the Act. Given that no other exemption provision applies, the contemplated sale would be taxable for GST purposes.

In the Arsenault Tax Court case (Edwina Arsenault v. The Queen, [2000] GST C.88 (T.C.C.), Bell, J.), the Court concluded that the concerned subdivisions, which took place prior the implementation of the Act and prior to the amendment to section 9, should not be considered in determining whether the exemption applied.

You are of the opinion that the Judge Bell's decision in the Arsenault Tax Court case is right and that land subdivisions made by an individual prior to the institution of the GST legislation should not be considered in determining whether new paragraph 9(2)(c) applies to a real property sale made by an individual after April 23, 1996.

We are of the view that the application of paragraph 9(2)(c) of Part I of Schedule V to the Act by the Canada Customs and Revenue Agency (CCRA) is consistent with fairly settled law on the issue and the Arsenault decision should not be viewed as a persuasive precedent.

As explained by Judge Lambert of the British Columbia Court of Appeal in the Hornby Island Trust Court case (Hornby Island Trust Committee et al. v. Stormwell et al. (1989) 53 D.L.R.(4th) 435, Lambert, J.A., British Columbia Court of Appeal, pages 441-2.) and referred to in XXXXX 's letter:

"A retroactive status operates forward in time, starting from a point further back in time than the date of its enactment; so it changes the legal consequences of past events as if the law had been different than it really was at the time those events occurred.

A retrospective statute operates forward in time, starting only from the date of its enactment; but from that time forward it changes the legal consequences of past events."

Paragraph 9(2)(c) applies to supplies of real property made after April 23, 1996 (i.e. the announcement date of the amendment). It is retroactive only to the limited extent that the enactment did not receive Royal Assent until 1997. It is retrospective in that a supply of part of a parcel of land made after the effective date may be excluded from the general exemption provided by subsection 9(2) depending on whether and to what extent the supplier had subdivided or severed the parcel in the past. In other words, the exclusion in paragraph (c) will apply regardless of when the subdivision or severance occurred.

In reference to your comments with respect to the presumption against retroactive legislation as mentioned in the Gustavson Drilling Tax Court case (Gustavson Drilling (1964) Ltd v. Minister of National Revenue [1977] 1 S,C,R, 271, Dickson, J. ) and the flagrant violation of natural justice to deprive people of "vested" rights, we wish to add the following comments.

In our opinion, if a right to sell property tax-free can be said to be a "vested right", then the rights of owners of all property coming within the purview of Part IX of the Act as of January 1, 1991 were interfered with by the enactment of that legislation. It was the clear intent of the Parliament that Part IX applies to all property, not merely to property acquired after 1990.

Furthermore, the position of the CCRA has consistently been that, unless the Act requires "grandfathering" (as in the case of the transitional provisions in Division IX of Part IX), where the determination as to whether a supply of property is taxable or exempt is based on the manner in which that property is held. We are not restricted to looking at the period after 1990 alone.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Act, or to our interpretative policy; and that you have fully described all necessary facts and the transaction for which you requested a ruling.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 613-952-8816.

Yours truly,

Thérèse Desjardins
Technical Analyst
Real Property Unit
Financial Institution and Real Property Division
Excise and GST/HST Rulings Directorate