6 October 2003 GST/HST Interpretation 8479 - Grant of Joint Tenancy with a Reservation for a Life Estate

Dear XXXXX

Thank you for your letters XXXXX (with attachments) concerning the application of the Goods and Services Tax (GST) in the following situations. We regret the delay in our reply.

We understand that the property transactions described below are being contemplated by your clients, and that you therefore request our views on the possible tax implications of such transactions. Since we are not addressing documented facts pertaining to identified parties (at this point, the scenarios you contemplate are hypothetical), our reply is in the nature of an interpretation letter rather than a ruling.

Any legislative references below are to the Excise Tax Act.

Background

Described below are two situations that you would like us to address.

Situation A

A husband and wife jointly hold title to a quarter section of land that they actively farm. Their daughter wishes to construct a personal residence on this property; however, a subdivision is not feasible. The parents intend, therefore, to XXXXX[.]

You have provided information concerning the procedures for land transfers of this nature in the Province of XXXXX including an excerpt from the Government of XXXXX Manual. One portion of the Manual relevant to the transfer in question is as follows:

XXXXX

On the basis of the above, the supply to the daughter of co-ownership in Quarter #1 may be characterized as a supply to the daughter of the legal fee simple in joint tenancy of the quarter, with a reservation for a life estate in the parents.

In addition to the above supply, the daughter will also be given permission to use a two to three acre parcel (i.e., about a hectare) on the quarter section for her personal residence.

You have indicated that at present it is uncertain as to what form this "permission" would be. There are two possibilities: they could formalize the arrangement by way of a written lease or similar document, or more likely, the arrangement will be informal, the daughter in effect being informally granted exclusive possession of the hectare. We will refer to this as a supply of the right to use the hectare for her place of residence.

Situation B

The same couple owns two additional quarter sections of land that they actively farm, and for estate planning purposes, they wish to place their two sons on title of these two quarters as joint tenants. These children would have no active interest in the farming business and the titles would be subject to a life interest in the hands of the survivor of the parents.

XXXXX

Interpretation Requested

What are the GST tax implications with respect to each of the above situations?

Interpretations Given

Situation A

Concerning the nature of the supplies, it is apparent that two separate and distinct supplies are made by the parents to their daughter. One is the supply to the daughter of an interest as joint tenant in Quarter #1, and the other is the supply to the daughter of the exclusive right to use a one-hectare portion of Quarter #1 for her personal residence.

It is our interpretation that:

1. The supply to the daughter of the undivided interest in joint tenancy in Quarter #1 is a supply by way of sale of real property. Further, pursuant to subsection 136(2), this is deemed to be two supplies which are (including their tax status) as follows:

(a) the supply of the joint tenancy interest in Quarter Section #1 that is reasonably expected to form part of a residential complex is an exempt supply pursuant to section 10 of Part I, Schedule V;

(b) the supply of the joint tenancy interest in the remainder of Quarter Section #1 is a taxable supply. However, since no consideration is charged, and since the provisions of subsection 155(1) do not apply, there will be no tax payable on this supply.

2. The supply of the right to use an approximate one-hectare portion of Quarter #1 for a personal residence is a separate supply from that described above. The portion of this hectare that is reasonably necessary for use and enjoyment as a residential complex is an exempt supply pursuant to section 7 of Part I of Schedule V. The supply of this portion is also subject to self-supply in the hands of the parents pursuant to subsection 190(3).

If only a portion of this hectare is reasonably necessary for use and enjoyment by the daughter as a place of residence, the excess portion of the hectare is a taxable supply and, pursuant to subsection 155(1), the value of the consideration for that portion is deemed to be its fair market value.

Situation B

The supply by the parents to their two sons is a supply by way of sale of an undivided interest in joint tenancy of the two quarters for no consideration. Since there is no consideration, no tax is payable with respect to this supply, assuming that all of the conditions set out in Memorandum 19.5, paragraph 78 pertaining to supplies of farmland by joint tenancy are met.

Explanations

Situation A

1) The supply to the daughter of the undivided interest in joint tenancy in Quarter #1 is a supply by way of sale of real property. Further, pursuant to subsection 136(2), this supply is deemed to be two supplies which are (including their tax status) as follows:

(a) the supply of the joint tenancy interest in Quarter Section #1 that is reasonably expected to form part of a residential complex is an exempt supply pursuant to section 10 of Part I, Schedule V;

(b) the supply of the joint tenancy interest in the remainder of Quarter Section #1 is a taxable supply. However, since no consideration is charged, and since the provisions of subsection 155(1) do not apply, there will be no tax payable on this supply.

Pursuant to the definitions under subsection 123(1), "sale" in respect of property includes "any transfer of the ownership of the property ... ." Accordingly, since the supply of the joint tenancy estate to the daughter is a transfer of ownership interest, it is a supply of real property by sale.

Subsection 136(2) applies as follows:

... where a supply of real property includes the provision of

(a) real property that is

(i) a residential complex

(ii) land ... that forms or is reasonably expected to form part of a residential complex. .. and

(b) other real property that is not part of the property referred to in paragraph (a)

the property referred to in paragraph (a) and the property referred to in paragraph (b) shall each be deemed to be a separate property and the provision of the property referred to in paragraph (a) shall be deemed to be a separate supply from the provision of the property referred to in paragraph (b) ...

The supply to the daughter of the interest in Quarter #1 includes land that "is reasonably expected to form part of a residential complex" and the remainder is "other real property." Therefore, pursuant to subsection 136(2), these are deemed to be separate supplies.

The question then arises as to whether there is an exemption for these (deemed) separate supplies and, if not, whether any tax is payable on the transfer (supply) of the joint tenancy interest to the daughter. An analysis of these questions, with regards to each of the deemed supplies, follows:

(a) The deemed supply by sale to the daughter of the joint tenancy interest in that part of Quarter Section #1 that is reasonably expected to form part of a residential complex

As indicated under Background above, the daughter will be allowed to use about one hectare for a place of residence. This will be referred to as the "one-hectare parcel" although it is not a legally subdivided parcel (it is not legally subdivided from the quarter section).

Even though she is permitted to use the one-hectare parcel for purposes of a residence, our administrative policy as described in Policy Statement P-069 Land Allowance for Residential Complexes (copy attached), generally permits, at most, 1/2 hectare as being "reasonably necessary for the use and enjoyment of the building as a place of residence."

In order to recognize that land in excess of 1/2 hectare is part of the residential complex, P-069 states that the excess land must be necessary to allow the residential building "to properly fulfill its function as a residence ... ." The policy statement sets out several factors that may support a finding that land in excess of 1/2 hectare is part of the residential complex (e.g., where it is necessary to gain access to a public road, where there are minimum lot restrictions imposed by a municipality, ...).

Accordingly, it is possible that only part (e.g., 1/2 hectare) of the one acre parcel will be viewed as part of the daughter's residential complex. This area will be referred to as the "residential complex area." The residential complex area then, might be limited to 1/2 hectare but could possibly be the whole of the one-hectare parcel if the factors described in P-069 apply.

Section 10 of Part I of Schedule V provides an exemption for:

... a supply of farmland by way of sale made by an individual to another individual who is related to ... the individual where

(a) the farmland was used at time by the individual in ... the business of farming

(b) the farmland was not used, immediately before the time ownership is transferred ... other than the business of farming

(c) the other individual is acquiring the farmland for personal use and enjoyment ... of that other individual or any individual related thereto.

The exemption under section 10 applies to the supply of the residential complex area since all of the requirements of this section are met. Concerning paragraph 10(c) in particular, this provision requires the daughter to be "acquiring the farmland for (her) personal use and enjoyment." Since the daughter is acquiring the residential complex area for use as a place of residence, this requirement is met.

If it is accepted that the entire one-hectare parcel is expected to form the residential complex area, the exemption under section 10 will apply to the entire one-hectare parcel. If the amount of land considered as being reasonably attributable to the residential complex is less than one hectare (1/2 hectare, for example), then the exemption will apply only to that lesser acreage. Since it is not a legally subdivided parcel, the "excess" will be a constituent part of the deemed supply of the "remainder of the quarter" as described under (b) below.

(b) The deemed supply by sale to the daughter of the joint tenancy interest in the remainder of Quarter Section #1

There is no apparent exemption for this supply. Concerning section 10, described above, this provision would not apply since, on the basis of the facts, the daughter is not acquiring the remainder of Quarter Section #1 (the area outside of the residential complex area) for her "personal use and enjoyment" with the exception of the portion, if any, of the one-hectare parcel that is in excess of the residential complex area. The section 10 exemption would not apply to this "excess" portion since it would not be included in the deemed supply of the residential complex described above.

Accordingly, it appears that the supply to the daughter of the undivided interest in Quarter #1, outside of the residential complex area, is a taxable supply. The question then arises as to whether any tax is payable since the conveyance is made without consideration.

Subsection 155(1) applies to certain non-arm's length supplies. Where a non-arm's length taxable supply is made for no consideration or for consideration that is less than fair market value of the supply, and the recipient is a non-registrant, this provision deems the consideration to be equal to the fair market value of the supply.

However, Memorandum 19.5 Land and Associated Real Property sets out an administrative policy whereby subsection 155(1) will not apply to a supply of a joint tenancy in farmland where all of the following conditions are met (these conditions are set out under para 78 of the Memorandum):

(a) There is no "change in use of the farmland from business use to personal use. The land continues to be used solely in the farming operation as it was prior to the transfer into joint tenancy."

(b) The consideration is nil or nominal[.]

(c) The non-farming joint tenancy is not registered (and there are some exceptions where it is acceptable if that person is registered)[.]

(d) The non-farming joint tenancy does not share in the farm revenues in the form of business income[.]

(e) The non-farming joint tenancy is a related person[.]

(f) The non-farming joint tenancy is not involved in the farming business.

(g) the relative is not involved in the farming business.

It appears that the above factors apply in the present situation, so that we would not apply subsection 155(1) with respect to this supply to the daughter. In other words, even though it is a taxable supply, there will be no tax payable since there is no consideration.

We would allow this administrative position to apply notwithstanding that, strictly speaking, the first requirement above ("there is no "change in use of the farmland .... The land continues to be used solely in the farming operation ....") may not have been met with regards to a minimal part of the quarter. That "minimal part" would be the portion of the one-hectare parcel, if any, that is judged to be in excess of the residential complex area. We assume that this portion would be for the personal use and enjoyment of the daughter and would not be farmed by the parents. Even though this part of the quarter would be removed from the farm operation, we would consider the requirements set out above to be met in this circumstance since the amount of land not farmed would be quite minimal. (A hectare is 2.471 acres. Accordingly, a quarter section is 64.75 acres so that a 1/2 hectare would be about .7% (less than one percent of the quarter).)

(2) The supply to the daughter of the right to use a one-hectare parcel within Quarter #1 as a personal residence is an exempt supply pursuant to subsection 7(a) of Part I of Schedule V to the extent that the hectare is reasonably necessary for use and enjoyment as a place of residence.

If only a portion of the one-hectare parcel is reasonably necessary for use and enjoyment as a place of residence, the excess is a taxable supply and, pursuant to subsection 155(1), the value of the consideration for that portion is deemed to be its fair market value.

It is our view that this supply to the daughter is a supply by way of lease, licence or similar arrangement, allowing her exclusive use of a one-hectare parcel of the quarter for her residence. As previously noted, this supply of this "right to use" the one acre parcel is separate and distinct from the supply of the "sale" of the parcel (and the remainder of the quarter section) described under the preceding headings.

Paragraph 7(a) of Part I of Schedule V provides an exemption for:

A supply

(a) of land...made under a lease, licence or similar arrangement which provides for continuous possession or use of the land for a period of at least one month to

(i) the owner, lessee or person in occupation or possession of a residential unit that is or is to be affixed to the land for the purpose of its use and enjoyment as a place of residence for individuals ...

but not including any land on which the residential unit ... is to be affixed or situated, or any land contiguous to it, that is not reasonably necessary for the use and enjoyment of the unit ... as a place of residence for individuals.

If, after considering the criteria set out in Policy Statement P-069 as previously discussed, it is reasonable to conclude that the entire one-hectare parcel is the residential complex area, then the exemption provided under subparagraph 7(a)(i) of Part I, Schedule V will apply to the supply to the daughter of the right to use the entire one-hectare parcel.

Otherwise, the exemption under paragraph 7(a) will apply only to the supply by lease, licence or similar arrangement of that part of the one-hectare parcel (1/2 hectare for example) that is viewed as the residential complex area, and not to the excess.

The supply of the excess portion of the one-hectare parcel, in this situation, will be a taxable supply. Further, since there is no consideration for this supply, subsection 155(1) will deem there to be taxable consideration equal to the fair market value of the licence to use that portion. The treatment described under Memorandum 19.5 for a supply of a joint tenancy interest, as previously described, will not apply in this situation since the supply at hand is not a supply of a joint tenancy interest.

Since the paragraph 7(a) above is predicated on the "intended purpose" of using the residential complex area to affix a building to be used as a place of residence, the recipient could be requested to demonstrate by some reasonable means (e.g., construction plans, lot preparation) that this is the intended use of the parcel.

Finally, the application of subsection 190(3) must be addressed. The terms of this "self-supply" provision are as follows:

Where

(a) a person who has an interest in land makes a supply of the land by way of lease, licence or similar arrangement and the supply is an exempt supply described by section 6.1 or paragraph 7(a) of Part I of Schedule V,

(b) the person at any time gives possession of the land to the recipient of the supply under the arrangement,

(c) the last use of the land by the person before that time was not under an arrangement for a supply referred to in paragraph (a),

(d) the person was not deemed under subsection 200(2), 206(4) or 207(4) to have made a supply ...,

(e) the recipient of the supply is not acquiring possession of the land for the purpose of

(i) construction of a residential complex in the course of a commercial activity, or

(ii) making an exempt supply of the land described by section 6.1 of Part I of Schedule V,

the person shall, for purposes of this Part, be deemed

(f) to have made, immediately before that time, a taxable supply by way of sale of the land and to have collected, at that time, tax...calculated on the fair market value of the land at that time, and

(g) to have received, at that time, a taxable supply by way of sale of the land and to have paid tax...calculated on the fair market value of the land at that time.

It is apparent that the above-noted conditions apply with respect to the residential complex area. Accordingly, the parents will be subject to the self-supply provisions of subsection 190(3). Pursuant to paragraph 190(3)(a) above, they will be deemed to have collected tax calculated on the fair market value of the residential complex area, and consequently, will be required to remit this tax.

Situation B

The supply by the parents to their two sons is a supply by way of sale of an undivided interest in joint tenancy of the two quarters for no consideration. Since there is no consideration, no tax is payable with respect to this supply, assuming that all of the conditions set out in Memorandum 19.5, paragraph 78, are met.

For the same reason set out under Situation A above (i.e., ["]sale" in respect of property includes any transfer of the ownership of the property ...), the supply of the joint tenancy interest is a supply "by way of sale" of the fee simple interest in the two quarters, subject to an expressed reservation for a life estate in the parents.

There is, on the basis of the limited facts, no exemption that would apply to this supply. Accordingly, it appears that the supply of the joint tenancy interest to the two sons is a taxable supply.

The question then arises as to whether any tax is payable since the conveyance is made without consideration. As noted in the discussion concerning Situation A above, our policy as set out in Memoradum 19.5 provides an administrative concession concerning the application of subsection 155(1) where all of the conditions described in that memorandum are met. On the basis of the limited background facts, this appears to be the case; i.e.,

(a) There is no "change in use of the farmland from business use to personal use. The land continues to be used solely in the farming operation as it was prior to the transfer into joint tenancy";

(b) The consideration is nil;

(c) The non-farming joint tenants (the sons) are not registered or if they are registered, they are not, on the basis of the background facts, acquiring the property for use in a commercial activity (if they were, section 155 would not apply in any case);

(d) The non-farming joint tenants do not share in the farm revenues in the form of business income;

(e) The non-farming joint tenants are related persons;

(f) The non-farming joint tenants are not involved in the farming business.

Since it appears all of the above-noted factors apply, it is our opinion that the provisions of subsection 155(1) do not apply. Accordingly, since there is no consideration, no tax will be payable by the sons upon the supply of the joint tenancy interest.

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) 952-9587.

Yours truly,

Michael Place
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

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