28 March 2001 GST/HST Interpretation 25402 - New Housing Rebates

We write in response to your memorandum of October 22, 1999, to Technical Interpretation Services, XXXXX, which was referred to this office for reply. Your memorandum requests assistance with new housing rebate claims made by sublessees of real property in developments at or near XXXXX, known as XXXXX and XXXXX.

The relevant facts and circumstances are as follows:

1. XXXXX ("the developer") is a corporation incorporated under the XXXXX.

2. Her Majesty the Queen in Right of Canada, as represented by the Minister of Indian Affairs and Northern Development ("the Minister"), ("the Crown") granted a lease made XXXXX, but effective XXXXX, to the developer for a term of XXXXX years commencing XXXXX respecting XXXXX. This lease was registered at the Indian Land Registry on XXXXX. The development of XXXXX is known as XXXXX and will be referred to hereafter as "Phase I".

3. The Crown granted a lease dated XXXXX to the developer for a term of XXXXX years commencing XXXXX respecting XXXXX. This lease was registered at the Indian Land Registry on XXXXX. The development of XXXXX is known as XXXXX and will be referred to hereafter as "Phase II".

4. Under the terms of each lease, the developer has the right, with the consent of the Minister, to sublease its interest in the leased lands. In this context, the Minister is represented by the XXXXX.

5. The property demised by each lease is stated, by definition, to consist of the lands described above and all improvements situated on the lands at any time, regardless of the person by whom the improvements were made.

6. The leases permit the developer or its sublessees to remove their moveable goods, chattels and tenant's fixtures during the term of the lease and up to 90 days after its termination. The lease also requires the developer to remove its and its sublessees goods, chattels, tenant's fixtures and improvements if the Minister makes a written demand to do so within 90 days of the termination of the lease.

7. The land comprising Phase I and Phase II was subdivided for sublease purposes into a large number of smaller lots, with the subdivision being registered in the Canada Lands Survey Records office.

8. The development of Phase I and Phase II by the developer consisted of XXXXX residential units and XXXXX residential units, respectively. Each unit was situated on a separate lot; however each unit in Phase I and XXXXX of the intended units in Phase II were one-half duplexes (i.e. sharing a common wall with the unit situated on an adjoining lot). The remaining units in Phase II were intended to be free standing units.

9. The process by which an individual acquired a residence in the development was to enter into an XXXXX (for Phase I) or an XXXXX (for Phase II) (for convenience, either type of document will be referred to hereafter as an "interim agreement"). Under the interim agreement, the individual agreed to sublease the lot from the developer and to "purchase" the residential unit situated on the lot. The total consideration was generally shown to be the total of the lot price and the home price.

10. Concurrently with the signing of the interim agreement, the individual would execute a construction contract engaging the developer to construct the residential unit on the subleased lot. The consideration payable for the construction services and materials was the price of the home as stated in the interim agreement.

11. Generally, prior to the completion date of the interim agreement, the developer and the acquiring individual entered into a sublease of the lot. The term of the sublease commenced on the date of its execution and is to end on XXXXX in the case of lots in Phase I and on XXXXX in the case of lots in Phase II.

12. The total "price" of the lots in Phase I and some of the lots in Phase II was payable at the time of closing as prepaid rent under the sublease. Other lots in Phase II were subleased under the XXXXX[.]

13. The terms of the various sample subleases provided are fundamentally the same and include the following:

14. By XXXXX, the developer had supplied XXXXX lots and residential units in Phase I and XXXXX lots and residential units in Phase II. All residential units were one-half duplexes.

15. In most cases, the construction of the residential unit had not taken place at the time the interim agreement was entered into. There were, however, certain cases in which the residential unit was a show home.

16. In all cases the residential units were constructed one at a time, generally for individuals. In cases where the adjoining residential unit in the particular duplex was not constructed at or near the same time as the first unit, the foundation for the entire duplex was laid and occasionally the shell of the second unit was erected.

17. With respect to Phase I, the interim agreements stated that the total land and building price included "net GST". The sample statement of adjustments provided indicates that both components included GST, with the tax attributed to the building reduced by 2.34% of the building price.

18. With respect to Phase II, the interim agreement stated the developer's belief that the sale of the improvement on the subleased lot was not subject to GST; however, should this not prove to be the case, the price of the improvement would be deemed to "include GST net of the applicable new housing rebate".

19. In the event, the developer collected GST only on Phase I supplies made before the start of Phase II. All subsequent Phase I supplies and all Phase II supplies were made on a tax-exempt basis.

20. XXXXX[.]

21. Your division has now received XXXXX GST new housing rebate applications from the recipients of the developer's supplies, filed under section 254.1 of the Excise Tax Act ("the Act").

Issue

You wish to know whether the recipients of the developer's supplies are entitled to the GST new housing rebates claimed in the above circumstances.

Response

Based on the above facts and circumstances, it is our view that the recipients are not entitled to claim GST new housing rebates under section 254.1 of the Act.

Analysis

A review of the various documents involved indicates that the developer is making a supply of real property by way of lease to the recipients. While the language of the interim agreement suggests that the improvements are being "sold" to the recipients, it is clear from the head lease that, barring a demand by the Crown, the improvements will revert to the Crown upon the termination of that lease. Therefore, the developer can be supplying only a leasehold interest in the improvements. The supply of that interest is to be found in the sublease where the improvements, specifically including the "residential home", are stated to be included within the leased premises.

The result is that, although the recipients are engaging the developer to construct a residential complex, the part of the residential complex consisting of a residential unit is an improvement to the Crown's real property. While the expense of constructing the building may be the recipients', the only interest that the recipients have in the building is a subleasehold interest as part of the leased premises. For that reason, the supply of the residential complex to the recipient is by way of lease and not by way of lease and sale.

Accordingly, when the residential complex is substantially completed and possession is transferred to the recipient, there will be a self-supply on the basis of the sublease alone. From the facts, the legislative provision under which the self-supply is deemed to take place depends on whether or not the building in question is a single unit residential complex or a multiple unit residential complex at the time of substantial completion. If the building is a single unit residential complex, then the self-supply would be pursuant to subparagraph 191(1)(b)(i) of the Act. If the building has now become a multiple unit residential complex, then the self-supply would be under subparagraph 191(3)(b)(i). (In the case of the duplexes being built in the fact situation, this must generally result in the fair market value of the first unit being taxed "twice"; however, the tax deemed to have been paid on the self-supply of the first unit could be claimed as an input tax credit under subsection 193(1) of the Act.)

For purposes of GST/HST new housing rebates, the significance of this result is that neither of these self-supply provisions gives rise to a rebate under section 254.1 of the Act.

Please note further that, as the land in question is reserve land, if a recipient is an Indian (as defined in the Indian Act) the result could be significantly altered. If you should have such a case, please contact us and we will be pleased to assist as required.

Should you require further information, or have any questions on this matter, please do not hesitate to contact me at (613) 954-3772 or Michael Wolff at (613) 952-9212.

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