27 September 2002 GST/HST Interpretation 39625 - Subsection 272.1(1) and the Eligibility of Certain ITCs Claimed by a Partnership

We received your email and fax material concerning this case in XXXXX. We apologize for the delay in responding to your enquiry.

In your correspondence, you presented the following facts:

•   XXXXX is a new construction business involved in buying vacant lots and building residential homes for resale.

•   It appears to be a family business based on a verbal partnership agreement.

•   Family members purchased XXXXX adjacent, vacant lots under separate agreements of purchase and sale each dated XXXXX.

•   The partnership business name was not registered when these lots were purchased. (We note that XXXXX is now registered for the GST with a registration effective date of XXXXX.)

•   There is no reimbursement by the partnership to the individuals for the lots.

With these facts, you posed the following question:

"Should the ITC claimed by the partnership for GST paid on the lots be allowed and what are the GST implications to the individuals and the partnership?"

The GST implications for the individuals and the partnership depend on whether the individuals or the partnership purchased the lots. Eligibility to claim an ITC depends on the facts of the situation at the time the partnership registered for the GST. XXXXX[.] If, XXXXX, the facts are such that an individual or individuals, rather than the partnership, purchased the vacant lots, GST would apply in the following manner:

•   The vendor's sale of the vacant lot to an individual is a taxable supply. Here we are assuming that the vendor is not an individual, personal trust, public service body or a charity. If the vendor is one of these entities, an exemption could arise under section 9 of Part I, section 25 of Part VI, or section 1 of Part V.1 of Schedule V.

•   If the sale to the individual is indeed taxable, the individual is liable for the GST.

•   The making of a capital contribution to a partnership (in this case, an individual supplying a vacant lot to the partnership) is not included under subsection 272.1(1). If a person contributes capital to a partnership, the person is making a supply in exchange for partnership interest. Such a supply to the partnership is not deemed to have been done by the partnership in the course of the partnership's activities. Consequently, where the individual contributes the vacant lot to the partnership in exchange for partnership interest, the supply to the partnership is considered to be a sale, since there is a change of ownership.

•   If none of the exclusions to the exemption listed in section 9 of Part I of Schedule V apply, the individual's supply of the lot to the partnership is exempt.

•   If the individual's supply of the lot to the partnership is exempt:

i. GST does not apply to the acquisition cost of the lots for the partnership.

ii. There is no rebate or ITC provision that allows the individual to recoup the GST he/she paid on the acquisition of the land.

•   If the individual's supply of the lot to the partnership is taxable:

i. The partnership is liable to pay the GST on the supply. The amount of the partnership's liability is determined under the provisions of subsection 272.1(3). Paragraph 272.1(3)(a) fixes the consideration for such a supply where the property or service is for consumption, use or supply exclusively in commercial activities of the partnership. Any amount that the partnership agrees to pay to or credit the person in respect of the property is deemed to be consideration for the supply, whether it be cash or an increase in the supplying partner's interest in the partnership. The consideration is deemed to become due at the time the amount is paid or credited.

ii. The individual may be eligible for a rebate under section 257 for the amount of GST he or she paid the vendor when acquiring the lot.

•   The partnership's supply of the partnership interest to the individual is an exempt financial service.

The other possibility, in the case at hand, is that the individuals were acting as general partners on behalf of the partnership. The determination of whether a general partner does something as a member of a partnership for the purposes of subsection 272.1(1) depends on XXXXX partnership law and the facts of this situation. Factors to consider include, but are not limited to, the following:

•   The terms of the partnership agreement: Where there is no written partnership agreement, does the conduct of the parties imply a partnership agreement? Do the facts indicate that there was agreement among the partners that the partner was responsible for taking the action? Is the partner's conduct consistent with the terms of that agreement?

•   The nature of the action undertaken by the partner: Does the action taken by the partner relate to the purpose of the partnership's business? Who is liable for the action of the partner?

•   The partner's ordinary course of conduct: Is the partner doing the activity only for the partnership, or is the partner engaged in a separate business of doing the same activity for a number of other persons?

If, XXXXX, the facts are such that the partnership, rather than an individual, is the purchaser of the vacant land, GST would apply in the following manner:

•   Where individuals made cash contributions to the partnership in exchange for a partnership interest, no GST applies.

•   Where the partnership acquired the lots, the partnership is liable for the GST (even though purchase and sale agreements and statements of adjustments for each lot show different family members as purchasers of the lots).

Regardless of whether the individual or the partnership is the purchaser of the lots, if the partnership is a small supplier when it registers for the GST:

•   It is deemed under the provisions of section 171 to have received at that time a taxable supply by way of sale of the lots and to have paid GST in respect of the supply equal to their basic tax content at that time.

•   Based on the facts provided, when the partnership acquired the lots (whether from the individual or from the original vendor of the lots), it appears to have acquired them for consumption, use or supply exclusively in the course of commercial activities of the partnership. Consequently, the partnership would be eligible to claim an ITC equal to the amount of GST deemed paid, providing it satisfies the conditions for claiming an ITC set out in section 169.

When the partnership sells the new residential complex after constructing a house on the land, GST applies to the sale, provided it has not been occupied.

I trust these comments are of assistance to you. If you have further questions, please do not hesitate to contact me.

Doris McMullan
Corporate Reorganizations Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
(613) 954-4394