3 July 2002 GST/HST Interpretation 37096 - Review of GST/HST Application Ruling (Case 37096) Issued by the Tax Services Office

Dear XXXXX:

Thank you for your letter of XXXXX, addressed to XXXXX, Director, XXXXX Tax Services Office, requesting a review of the GST/HST Application Ruling of XXXXX, issued to XXXXX on your behalf. XXXXX has forwarded your letter to us for our response.

We understand that in XXXXX, you and three of your sisters inherited a parcel of land from the estate of your father. Title to the parcel was transferred from the estate to you and your sisters with each of you receiving a one-fourth undivided interest in the parcel as tenants in common. In XXXXX, you and your three sisters undertook a subdivision of the parcel into four separate parts. As a result of the subdivision, you and your sisters each acquired sole title to one of the four newly created parts of the parcel originally transferred from the estate of your father. You are now selling the part to which you have sole title. The purchaser of the land is not related to you nor is the purchaser a person who has the right to acquire the property by way of expropriation.

In the GST/HST Application Ruling (the Ruling) issued by the XXXXX Tax Services office, it was determined that your sale of the real property legally described as XXXXX was subject to the Goods and Services Tax (GST).

You state that the Ruling upholds a very technical interpretation of the legislation without assessing the facts with objectivity and fairness. Your view is that Part I of Schedule V to the Excise Tax Act (the Act) is meant to address business transactions resulting from subdivisions created for the purpose of making a profit which you state was not the intent in your case. You did not know that the subdivision of the parcel that took place in XXXXX would result in the application of tax when you sold the lot after April 23, 1996. You feel that legislation that is retroactive is unfair.

As you are aware, paragraph 9(2)(c) of Part I of Schedule V to the Act excludes from exemption from the GST a supply of a part of a parcel of land which parcel an individual subdivided or severed into parts, except where the parcel was subdivided or severed into two parts and the individual did not subdivide or sever that parcel from another parcel of land. (There is also an exception where the recipient of the sale is an individual who is related to, or is a former spouse or common-law partner of, the supplier and the recipient is acquiring the part of the parcel for his or her own personal use and enjoyment. Further, if the part of the parcel is sold to a person who has the right to acquire it by expropriation, that part and the remainder of the parcel are considered not to have been subdivided or severed from each other. Our understanding is that neither of these factors is relevant to your sale.)

When the parcel of real property passed from your father's estate to you and your sisters in XXXXX, you and your sisters each owned a one-fourth undivided interest in the entire parcel of property as tenants in common. In XXXXX, upon subdivision of the parcel, you and your sisters each gave up your one-fourth interest in the entire parcel in exchange for a full interest in one of the four newly created lots. The parcel was therefore subdivided into four parts and you are now selling one of those parts. As such, you are making the supply of a part of parcel of land which parcel was divided into parts. As the parcel was divided into more than two parts, the relevant exception to the exclusion (as noted in the preceding paragraph) does not apply. Therefore, your sale of the lot is properly subject to the GST.

You state that you did not have a profit motive in selling the part of the parcel of land. However, you will note that there is nothing in paragraph 9(2)(c) that restricts the exclusion from exemption only to those scenarios in which a profit motive exists or where the subdivision is undertaken in the course of a business. Paragraph 9(2)(c) excludes subdivided property from exemption (with the exceptions noted in the foregoing) whether or not there was a profit motive to the subdivision or whether or not the subdivision was undertaken in the course of a business. Contrast paragraph 9(2)(c) with subparagraph 9(2)(a)(i) which excludes from exemption certain real property used in a business of the vendor, but only if the business was carried on by the individual with a reasonable expectation of profit. (Subparagraph 9(2)(a)(i) reads as follows: "A supply of real property made by way of sale by an individual ... other than ... a supply of real property that is, immediately before the time ownership or possession of the property is transferred to the recipient of the supply under the agreement for the supply, capital property used primarily in a business carried on by the individual with a reasonable expectation of profit".)

Fairness in taxation law requires applying the law as it exists in a fair and consistent manner. As you are aware, paragraph 9(2)(c) became effective for supplies of real property made after April 23, 1996. Previously, the sale of a part of a parcel of land, where the parcel had been subdivided, was not necessarily excluded from exemption (unless one or more of the other exclusions in paragraphs 9(a) - (d) applied). While the sale of a part of the parcel made by your sister may not have been subject to tax, we understand that sale took place before 1996 and hence before the introduction of paragraph 9(2)(c). If your sister or anyone were selling a part of a parcel in the circumstances you described (i.e. the parcel is subdivided into more than two parts and the sale takes place after April 23, 1996), paragraph 9(2)(c) would apply to that sale as well.

There is a difference between retroactive and retrospective legislation. The difference was summarized by Mr. Justice Lambert of the British Columbia Court of Appeal in Hornby Island Trust Committee et al. v. Stormwell et al., (1989) 53 D.L.R. (4th) 435 as follows:

A retroactive statute 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 sales of real property made after April 23, 1996 (i.e. the announcement date of the amendment). It is retrospective in that a supply of a part of a parcel of land made after the announcement 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. It is retroactive only to the limited extent that the enactment did not receive Royal Assent until 1997.

While we regret that our response could not be more favourable, it is the responsibility of the Canada Customs and Revenue Agency to administer the Act as written. Accordingly, we must concur with the Ruling issued by the XXXXX Tax Services office.

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

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