20 June 2001 GST/HST Interpretation 35970 - Effects of Land Severance on Change in Use Provisions

Dear XXXXX:

Thank you for your electronic mail message of May 4, 2001, to Mr. Adrien Venne, requesting our interpretation of a situation that was discussed in a meeting held the previous day between you and Mr. Venne and other representatives of our office.

All legislative references are to the Excise Tax Act.

Interpretation Requested

You are enquiring as to whether the severance of a piece of land from a parcel of land (thereby creating two new legal land descriptions) would lead to the application of subsection 199(3) where one of the newly created pieces of land is used primarily in commercial activities. Prior to severance, the original parcel of land was used otherwise than primarily in commercial activities.

Interpretation Given

Section 209 provides in part that a registrant public service body (other than a financial institution or a government) is subject to the same rules with respect to their capital real property as they are with respect to their capital personal property. Specifically, subsection 209(1) provides that subsections 199(2) to (4) and subsections 200(2) and (3) apply to real property (or improvements to real property) acquired by such public service bodies as if the real property were personal property.

In effect, subsection 199(3) provides that where a registrant public service body (other than a financial institution or a government) last acquired real property for use as capital property, but not for use primarily in commercial activities, and the public service body begins to use the property as capital property primarily in commercial activities, the public service body is generally deemed to have received a supply of the property by way of sale. The deemed sale occurs at the time at which the body begins to use the property primarily in commercial activities. Further, paragraph 199(3)(b) deems the public service body to have paid tax in respect of the deemed sale equal to the basic tax content of the property at the time of the deemed sale.

Where a public service body holds a parcel of land that is used otherwise than primarily in commercial activities and severs or divides the parcel such that a newly created parcel has a separate legal land description and is used primarily in commercial activities, the provisions of subsection 199(3) would apply with respect to the newly created parcel, provided all other conditions in that subsection are met (e.g. the public service body is a registrant and the property is capital property). With respect to determining the basic tax content of the newly created parcel that is used primarily in commercial activities, the allocation of the various elements in the definition of basic tax content between the two parcels should be made on a fair and reasonable basis.

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 Canada Customs and Revenue Agency with respect to a particular situation.

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

Yours truly,

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