24 October 2003 GST/HST Interpretation 45329 - Expenditures on Property and Services that Qualify for a Type 7 Rebate

We refer to your e-mail messages XXXXX concerning whether amounts paid on the acquisition of certain properties and services qualify for a Type 7 rebate, the legislative provisions of which are set out in section 257 of the Excise Tax Act (the ETA).

All legislative references are to the ETA unless otherwise noted.

Issue

You submitted a list of property and services that have been included in various rebate claims received at the Summerside Tax Centre and have requested our opinion on whether the tax payable on these properties and services can be included in a Type 7 rebate claim. Our understanding is that the acquisition of these properties and services can generally occur in either of the following scenarios:

1. A person acquires land and constructs a residential complex thereon for the purpose of earning rental income. The person is not in the "business" (as that term is defined in subsection 248(1) of the Income Tax Act) of constructing and renting properties and does this on a one-time basis.

2. A person acquires land for the purpose of resale. On some occasions, a residential complex will be built on the land and the entire property is then sold.

Response

Section 257 provides for a rebate in circumstances where a person who is not a registrant makes a taxable supply of real property by way of sale. The rebate is equal to the lesser of the basic tax content of the property at the time of sale and the tax that is payable by the recipient in respect of the sale by the non-registrant (or the tax that would be payable but for section 167). Generally, the rebate allows a non-registrant to recover tax paid on the acquisition of the property and improvements thereto where the tax was previously not recoverable by the non-registrant. The rebate available under section 257 is identified on form GST189E, "General Application for Rebate of the GST/HST", as a Type 7 rebate.

As provided above, a Type 7 rebate is limited to the basic tax content of the real property at the time of sale (where the basic tax content is less than the tax payable on the sale of the property). The phrase "basic tax content" is defined in subsection 123(1). While the definition is lengthy, for the purposes of this response, we will consider only subparagraphs (i) and (ii) in the description of element A of the definition. It is our understanding that these are the relevant provisions for determining whether the tax payable on the items included in your list form part of the basic tax content in the situations usually encountered by the Summerside Tax Centre.

Subparagraph (i) of element A of the definition of "basic tax content" reads as follows:

"(i) the tax that was payable by the person in respect of the last acquisition or importation of the property by the person".

Hence, for purposes of the Type 7 rebate, the tax that was payable on the last acquisition of the property by the claimant will form part of the basic tax content. This last acquisition could be an actual acquisition or a deemed acquisition under a provision of the ETA.

Subparagraph (ii) of element A of the definition of basic tax content reads as follows:

"(ii) the tax that was payable by the person in respect of improvements to the property acquired, imported or brought into a participating province by the person after the property was last acquired or imported by the person".

The question therefore becomes whether the property and services included in your list constitute an "improvement" to a property within the meaning of that term in subsection 123(1). The definition provides that an improvement is a particular property or service supplied to a person for the purpose of improving property of the person to the extent that the consideration payable for the particular property or service would be included in determining the cost (or in the case of capital property, the adjusted cost base) of the property for purposes of the Income Tax Act (ITA).

We submitted your list of items to the Income Tax Rulings Directorate to obtain their views on whether outlays in respect of the items would be included in determining the cost (or adjusted cost base) of a property for purposes of the ITA. They advised us that a number of factors must be considered in making this determination and that each case must be examined in light of the particular facts. The factors they would ordinarily consider include all of the facts surrounding the acquisition of the property and its intended use; the person involved in the activities (e.g., whether an individual, corporation, etc., their history of property development, and the frequency of such activities), and generally accepted accounting principles. That Directorate indicated that there were insufficient details surrounding the items in your list to offer a definitive response to the question raised. However, they did provide us with a general response. (In order to provide us with a response, certain assumptions were made by that Directorate. For example, they limited the Scenarios to a situation in which it was an individual who was undertaking the activities.) Accordingly, the comments that follow are somewhat general in nature, but should provide some assistance to the Summerside Tax Centre in determining the type of expenditures that qualify for a Type 7 rebate. If questions arise with respect to a particular fact situation, you may want to contact us or the Income Tax Rulings Directorate.

For income tax purposes, whether a particular outlay constitutes part of the cost (or adjusted cost base) of property will depend in part on whether the amount relates to the acquisition, disposition or maintenance of a property. It appears that many of the items on your list could, depending on the circumstances, relate to more than one of these activities. ( For example, surveying costs could relate to the acquisition or disposition of a property; accounting and bookkeeping costs could relate to the acquisition, disposition, or maintenance (or a combination of these activities) of a property.) Rather than go through your list on an item-by-item basis, we will provide the rules for the treatment of outlays relating generally to acquisitions, dispositions and the maintenance of properties in the two scenarios identified above.

In this context, we would like to preface our comments by pointing out that there should be consistency between the treatment of outlays for purposes of the ETA and the ITA. For example, if a certain outlay is correctly expensed for income tax purposes, the amount of tax will not be included in the basic tax content of a property for GST/HST purposes. Therefore, in reviewing these rebate claims, you should ensure that the outlay is treated consistently for purposes of both the ETA and ITA.

We would also like to point out that it is only those items on which tax is payable that are eligible for a rebate. You indicated that applications sometimes include amounts paid in respect of rezoning land or amendments to by-laws. It must be noted that many supplies made by a municipality or government are exempt under section 20 of Part VI of Schedule V to the ETA and therefore not subject to the GST/HST. You should verify that tax was in fact payable by a rebate applicant on a particular supply before approving the amount as part of a rebate.

Scenario 1

We are of the general view that in this scenario, for purposes of the ITA, the person has acquired the land and constructed the building for the purpose of earning income from a source that is property.

Outlays in Respect of the Acquisition of Land and Construction of the Building

Outlays and expenses incurred in respect of the acquisition of the land and construction of the building will generally constitute part of the adjusted cost base (the ACB) of the property to which the amount relates. For example, architectural services in respect of the construction of a building in this scenario would form part of the ACB of the property. Similarly, accounting or legal fees in respect of the acquisition and construction of the property would also be included in the ACB. Note, however, that accounting or legal fees in respect of the ongoing operation of the property (i.e., the rental of the property) are generally deductible from income and do not form part of the ACB.

Many of the items in your list (e.g. garbage removal at the construction site, porta-pottie rentals, telephone calls relating to construction contractors, hotel accommodations and travel amounts paid to contractors) would generally be considered to be "in respect of" the acquisition of land and construction of the building and hence would form part of the ACB.

Based on the foregoing, amounts incurred in respect of the acquisition of land and construction of a building will be included in determining the basic tax content of the property. Therefore, the tax payable on such properties and services may be included in the rebate available under section 257.

We would add, however, that certain amounts incurred in respect of the acquisition of land and construction of the building, which may otherwise be added to the ACB, may be deducted in determining a taxpayer's income from a business or property. Where such amounts are deducted from income, the amounts will not form part of the ACB of a property. For example, certain provisions of the ITA allow a person to, in certain circumstances, deduct an amount from income from a property that would otherwise form part of the ACB of that property. Examples include:

•   paragraph 20(1)(aa) - amounts paid for landscaping of grounds (See Interpretation Bulletin IT-296 for the circumstances in which amounts paid for the landscaping of grounds can be deducted from income.), and

•   paragraph 20(1)(ee) - amounts paid for utility service connections. (See Interpretation Bulletin IT-452 for the circumstances in which amounts paid for utility service connections can be deducted from income.)

Outlays for the Disposition of Land and Buildings

Expenses in your list that are incurred for the purpose of disposing of the land and building would not form part of the ACB of the property and would therefore not form part of the basic tax content. For example, you indicated that real estate consulting fees are sometimes paid in order to determine whether it is an appropriate time to sell real estate. You also indicated that water quality tests or hydrologists reports are sometimes necessary in order to sell a property. To the extent that fees for such supplies relate to the disposition of property, such amounts will not form part of the basic tax content of the property and cannot be included in a rebate calculation under section 257.

Outlays for Maintenance and/or Improvements to the Property

Expenses in your list that are related to the maintenance of a property will not form part of the basic tax content of that property. For example, a person that constructs a residential complex in this scenario cannot include in a rebate application the cost of repainting a property that the person is renting. A rebate application can also not include such items as utility payments for which the person is responsible for a period during which the construction is complete and the person is renting or attempting to rent the property. However, utility costs incurred in the construction of a building (for example, heating costs to keep a building at an appropriate temperature while performing finishing construction of the property) would form part of the cost of acquisition and construction and, therefore, part of the basic tax content of the property.

With respect to some outlays, a determination will have to be made whether the amount is on account of capital and included in the ACB of a property or deductible as a current expense. In this regard, Paragraph 4 of Interpretation Bulletin IT-128R, "Capital Cost Allowance - Depreciable Property", provides more detailed guidelines that may be used in making this determination. You may also want to review Income Tax Guide T4036, "Rental Income", for a discussion of this issue.

Scenario 2

We are of the general view that in this scenario, for purposes of the ITA, the person is engaged in an activity with a view to generate profit and has commenced a "business" as that term is defined in subsection 248(1) of the ITA.

Outlays in Respect of the Acquisition of Land and Construction of the Building

Outlays and expenses incurred in respect of the acquisition of the land and construction of the building will generally constitute part of the cost of the property to which the amount relates. For example, geological surveys and environmental studies that relate to the development of a property may be in respect of the construction of a building. If that is the case, the cost of acquiring such services would form part of the cost of the property. As such, the amount would be included in determining the basic tax content of the property for GST/HST purposes. Therefore, the tax payable on these properties and services will form part of the rebate available under section 257.

Similar to what was stated for Scenario 1, certain amounts incurred in respect of the acquisition of land and construction of the building, which may otherwise be added to the cost of the property, may, in certain circumstances, be deducted in determining a taxpayer's income from a business or property. Where such amounts are deducted from income, the amounts will not form part of the cost of the property. In addition to the examples given in Scenario 1, the following costs may be deducted from income from a business where such costs would otherwise form part of the cost of a property:

•   paragraph 20(1)(cc) - amounts paid for expenses of representation (See Interpretation Bulletin IT-99R5 (Consolidated) for the circumstances in which amounts paid for legal and accounting fees can be deducted from income.), and

•   paragraph 20(1)(dd) - amounts paid for site investigation (See Interpretation Bulletin IT-350R for the circumstances in which amounts paid for site investigation can be deducted from income.).

Where otherwise capital amounts have been deducted in computing income from a business, the amounts are not included in the cost of a particular property. Such amounts would not be included in the basic tax content of the property, nor in the amount of a rebate under section 257.

Outlays for the Disposition of Land and Buildings

Expenses in your list that are incurred for the purpose of disposing of the land and building would not form part of the cost of the property and would therefore not form part of the basic tax content. For example, you indicated that water quality testing fees are sometimes paid in order to sell a property. To the extent that these fees relate to the disposition of property, such costs will not form part of the basic tax content and cannot be included in a rebate calculation under section 257.

Outlays for Maintenance and/or Improvements to the Property

The comments with respect to these costs as set out in Scenario 1 also apply to this scenario. In particular, we would draw your attention to paragraph 4(f), which deals with certain outlays for repairs undertaken in anticipation of a sale of a property.

Should you require further information or have any questions on this matter, please do not hesitate to contact me at (613) 954-4393.

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