28 November 2002 GST/HST Interpretation 39470 - Sale of a New Residential Complex by Builder

Dear XXXXX:

Thank you for your letter of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the sale of a newly constructed residential complex by the builder.

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

Interpretation Requested

In your original request, you requested a ruling as to whether GST was applicable on the anticipated sale of a newly constructed residential complex where, prior to the sale, the builder gives possession of the residential complex to a tenant under a lease, but where the tenant never occupied the residential complex. We have since been informed that the transaction in question would not be completed, but that you still wished an interpretation on the issue.

Following are the facts of the case as provided in your letter:

•   In XXXXX, an individual, who is not a property developer by trade, built XXXXX row houses on some land he owned. The units were completed in XXXXX XXXXX.

•   GST was paid on the goods and services as the development was built. The owner/builder did not make any GST payments as a "self-supplier".

•   The residential complex was never owner-occupied, but on XXXXX XXXXX the owner/builder rented one of the units for one year pursuant to a written lease to a tenant who was and is at arm's length from the owner.

•   The tenant paid rent beginning XXXXX in accordance with the lease. For personal reasons the tenant never occupied the unit.

•   In XXXXX the tenant advised the owner that XXXXX would agree to an early termination of the lease if he found a buyer for the unit.

•   The property was listed for sale and a purchaser tentatively agreed to purchase the unit with a closing date in XXXXX at which time the lease would be terminated.

•   The Agreement of Purchase and Sale states that any GST exigible will be in addition to the purchase price and payable by the purchaser.

Interpretation Given

In general, a supply of real property is taxable unless specifically exempted. A supply of real property includes a supply of real property by way of lease, licence or similar arrangement.

Part I of Schedule V identifies supplies of real property that are exempt from the GST/HST. In particular, section 4 of Part I of Schedule V exempts the sale of a single unit residential complex where the sale is made by the builder and the builder has self-supplied under section 191 in respect of the complex, provided the builder did not claim an input tax credit (ITC) after the self-supply.

A "residential complex" is defined in subsection 123(1) of the ETA to include,

"(b) that part of a building that is

(i) the whole or part of a semi-detached house, rowhouse unit, residential condominium unit or other similar premises that is, or is intended to be, a separate parcel or other division of real property owned, or intended to be owned, apart from any other unit in the building ...

together with that proportion of any common areas and other appurtenances to the building and the land subjacent or immediately contiguous to the building that is attributable to the unit and that is reasonably necessary for its use or enjoyment as a place of residence for individuals,"

In most cases, the supply of a newly constructed residential complex by a builder is subject to tax. Likewise, if a builder, instead of selling the new home, leases it out or occupies it personally, subsection 191(1) applies to deem the builder to have sold the home, and to have paid GST/HST on the fair market value of the home. However, there is an exception to the self-supply rule where the builder occupies the complex as a place of residence. (Subsection 191(5) provides an exception to the self-supply rules under section 191 where the builder is an individual and where, after the complex is substantially completed, it is used primarily as a place of residence of the individual, or that of another individual who is either related to, or is a former spouse of, the individual, provided that the builder did not claim any ITCs in respect of the complex.) This exception does not apply where the builder occupies the complex as a place of lodging. The meaning attributed to a "place of residence", as opposed to "lodging", is based on a determination of the purpose of the stay, the amount of time of the stay, and physical presence, as set out in GST/HST Policy Statement P-130, Place of Residence.

Consequently, where the builder has already paid the tax as a result of the self-supply rules under subsection 191(1), GST/HST is not applicable on the subsequent sale by virtue of section 4 of Part I of Schedule V.

Conditions for Self-Supply

The conditions under which a builder is required to self-supply, account for and remit the GST/HST on the fair market value of the complex are set out in paragraphs (a), (b) and (c) of subsection 191(1).

Paragraph (a) specifies that this subsection applies to either the construction or substantial renovation of a single unit residential complex, or a residential condominium unit, once the construction or renovation is "substantially completed". For GST/HST purposes, "substantial completion" means that the construction or substantial renovation of the complex is at a state of completion (generally 90% or more) so that an individual is able to reasonably inhabit the premises.

Paragraph (b) sets out the three situations to which the rule in this subsection applies:

(i) the builder gives possession under a lease, licence or similar arrangement to a particular person to occupy as a place of residence;

(ii) the builder gives possession under an agreement for the sale of the building and lease of the land; and

(iii) the builder occupies the complex as a place of residence.

Finally, pursuant to paragraph 191(1)(c) self-supply is triggered only where the person who occupies the property as described in paragraph (b) is the first person to occupy the complex as a place of residence.

Where the builder rents out a newly constructed or substantially renovated unit, this paragraph ensures that the GST/HST is triggered only once; that is, at the time possession of the unit is given to the first occupant under a lease, licence or similar arrangement entered into for the purpose of the individual's occupancy of the unit as a place of residence. Consequently, any subsequent rentals of the unit will not trigger the self-supply rule under this subsection.

In the present situation, it is noted that if no one in fact occupied the residential complex prior to its sale, then the self-supply rule under subsection 191(1) would not apply. Subparagraph 4(b) of Part I of Schedule V, which exempts the sale of a single unit residential complex where the builder was deemed under subsection 191(1) to have received a taxable supply of the complex would not be applicable. Under these circumstances, the sale by a builder of a newly constructed residential complex, which had not been previously occupied, would be subject to the GST/HST. However, subject to the conditions set out in subsection 254(2), a new housing rebate may be available to an individual purchaser of a new single unit residential complex.

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 952-9212.

Yours truly,

Carmela Antonelli
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate