4 September 2003 GST/HST Ruling 46189 - Application of the GST/HST with Respect to Certain Proposed Real Property Transactions

Dear XXXXX:

Thank you for your letter XXXXX with the attached memorandum, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the proposed transactions described below.

We confirm that we have received a Third Party Authorization form authorizing your firm to act as a representative of XXXXX for GST/HST purposes and in respect of this ruling.

You confirmed that, to the best of your knowledge, none of the issues described herein is being considered by a Canada Customs and Revenue Agency Office in connection with a GST/HST return already filed and none of the issues is under objection or appeal.

Statement of Facts

Our understanding of the facts, the proposed transactions, and the purpose of the proposed transactions is as follows:

Legal description of Land-owner, Developer and Subject Property

1. The XXXXX (the "Land-owner") XXXXX

2. The Land-owner currently owns vacant land legally described as XXXXX (the subject property). The subject property has a municipal address of XXXXX. It is currently referred to as XXXXX.

Development Agreement and Ground Lease

3. In or around XXXXX, the Land-owner entered into the XXXXX Development Agreement (the Development Agreement) with XXXXX (Pursuant to an Assignment of Ground Lease entered into XXXXX, the Ground Lease was assigned from XXXXX (as assignor) to XXXXX (as assignee). Subject to the terms of the assignment agreement, all rights, title and interest in the Ground Lease were transferred from the assignor to the assignee as and from XXXXX. Refer to a copy of the assignment agreement in the file. Reference to the "Developer" in this ruling shall refer, in respect of the Ground Lease, to XXXXX until the end the lease term. In respect of all other GST matters pertaining to the subject property reference to the "Developer" in this ruling shall refer to XXXXX ) (the Developer) XXXXX. The Demised Premises are to consist of a mixed-use (i.e. residential and commercial) building (the Building) on the subject lands. Note, the subject lands together with the Building are hereafter referred to collectively as the "subject property".

4. In accordance with the Development Agreement, the excavation for the construction of the Building is to commence on or before XXXXX, with its completion (and readiness for occupancy) on or before XXXXX.

5. In or around XXXXX, the Land-owner, as lessor, entered into the Ground Lease with the Developer, as lessee, to supply the subject lands by way of lease. At the commencement of the Ground Lease the subject lands were vacant.

6. The Developer acquired the subject lands under the Ground Lease for the purpose of developing and constructing the Building for re-supply to third parties in the course of its business activities. The Building is to consist of XXXXX stories (above ground) and XXXXX stories underground, as a parking garage. The top XXXXX of the above ground stories and XXXXX of the underground parking garage will be used for residential purposes (the Residential Portion) with the remainder of the subject property (i.e. the first XXXXX stories above ground and XXXXX of underground parking) used for retail or other commercial purposes (the Retail Portion).

7. The Land-owner estimates that the Residential Portion and the Retail Portion of the subject property will consist of approximately XXXXX % and XXXXX %, respectively.

8. The Ground Lease provides that the Developer will have and hold the Demised Premises for and during the term of XXXXX years commencing XXXXX XXXXX, and terminating XXXXX, at which time the Developer will surrender and deliver to the Land-owner the Demised Premises XXXXX.

9. The Ground Lease provides that on the first day of each Lease Year, the Developer will pay an annual Base Rent to the Land-owner equal to the amount set out in the table included therein XXXXX. Moreover, the Ground Lease states:

XXXXX

10. The Ground Lease provides that for Lease Years XXXXX, no annual Base Rent will be charged to the Developer by the Land-owner XXXXX. This rent-free period is a deferral of rent and not a rent reduction. In other words the rent-free period was achieved by increasing Base Rent payments for the balance of the lease term. These adjustments where made without changing the present value of the total of the Base Rent payments for the entire lease term. (This information was provided in a telephone conversation with XXXXX.)

11. A letter from the Land-owner to the Developer dated XXXXX confirmed (or led to the confirmation of) an agreement between the Land-owner and the Developer whereby: the Developer proposed to upgrade the exterior (to XXXXX cladding) at a total cost of $XXXXX ; the incremental cost of the exterior upgrade was recognized as $XXXXX ; the Land-owner's and Developer's contribution to this incremental cost was $XXXXX and $XXXXX, respectively; and the Land-owner would pay for its contribution to the upgrade in the form of a rent reduction. (XXXXX confirmed in a telephone conversation XXXXX that there is a direct link between the Land-owner's rent reduction of $XXXXX and the Developer's provision of the exterior cladding upgrade. )

12. The Ground lease provides that at any time prior to the beginning of Lease Year XXXXX, being XXXXX, the Developer has the option of paying the entire base rent payable for the lease term in one single payment equal to the net present value of the Date of Commencement, using an agreed discount rate of XXXXX %. The Developer intends to exercise this option and to pay the entire base rent as a single lump-sum payment in accordance with this provision of the Ground Lease.

13. The Developer has recently exercised its option to pay the entire base rent.

14. The Ground Lease provides that "other rent" or "additional rent" will be charged by the Land-owner to the Developer in circumstances where the latter XXXXX of the Development Agreement. The Developer is required to make payments of $XXXXX for each of the following milestones the Developer fails to meet:

XXXXX

•   commence excavation for the Construction of the Building before XXXXX;

•   complete excavation and the foundation work for the Building by XXXXX;

•   complete the construction of the Building by XXXXX; and

•   complete construction of the Building by XXXXX.

15. The Ground Lease provides that XXXXX^.

16. The Ground Lease provides that the Land-owner consents to the registration of one or more declarations and descriptions that divide the Developer's leasehold estate in the subject property into units and common elements (referred to as leasehold condominium units (LCUs) XXXXX and create one or more leasehold condominium corporations (LCCs) XXXXX. Further, the Ground Lease permits the Developer to convey LCUs and their appurtenant interests in the subject property for fixed periods, not to exceed the term of the Ground Lease.XXXXX Residential Portion of the Subject Property

17. The Developer proposes to register a declaration and description that divides the Developer's leasehold estate in the Residential Portion into XXXXX dwelling units, XXXXX storage units, XXXXX (more or less) parking units and common elements and to create a LCC (the Residential LCC). Note, a dwelling unit together with a storage unit and one or more parking units are hereafter collectively referred to as a "Residential Unit".

18. None of the Residential Units or any of the common elements in the Residential Portion will be used for commercial purposes or other uses not ancillary to residential purposes.

19. The Developer will provide the following amenities for use by the owners and occupants of the Residential Units: XXXXX elevators connecting the Residential Units to the residential level of the parking garage; on level XXXXX exercise room, separate men's and women's change rooms and washrooms, games room, XXXXX sauna and XXXXX whirlpool; on level XXXXX - a reception room, a board room/dining room, a business centre, XXXXX offices, a kitchen and XXXXX washrooms; and on level XXXXX - a landscaped terrace area. For purposes of this ruling all of these amenities are presumed to be common areas of the Residential Portion.

20. The underground parking garage will have XXXXX designated parking units. Approximately XXXXX parking units will be assigned to Residential Units with the remaining XXXXX parking units on hand for public parking. Note, it is assumed for purposes of this ruling that the XXXXX parking units are available for customer parking only and thus form part of the Retail Portion of the subject property.

21. The Developer's draft Disclosure Statement XXXXX contains the following key articles:

(a) the proposed condominium property is referred to as being composed of a leasehold interest; XXXXX

(b) the proposed condominium property is to consist of XXXXX Residential Units, XXXXX (Article III of the Disclosure Statement states that there will be XXXXX parking units. However XXXXX the Declaration Statement states that there will be XXXXX parking units. For purposes of this ruling the number of parking units belonging to the Residential Units are considered to be XXXXX) parking units, and XXXXX storage units (i.e. Residential Units); XXXXX

(c) the corporation created in respect of the residential component of the development will be a LCC; XXXXX and

(d) the Developer does not intend to lease any of the proposed Residential Units unless, due to market conditions, there remains unsold Residential Units, in which case it intends to lease not more than XXXXX % of the proposed Residential Units. XXXXX

Agreement of Purchase and Sale

22. Pursuant to the sample Agreement of Purchase and Sale provided by the Developer, the Developer proposes to dispose of its leasehold interest in the Residential Units. The Agreement of Purchase and Sale contains the following key provisions:

(a) A person, as "Purchaser" agrees to purchase a Residential Unit from the Developer, as Vendor; XXXXX

(b) The "Purchase Price" for the Residential Unit will be inclusive of Goods and Services Tax (GST) net of the New Housing Rebate. In other words the purchaser agrees to "assign" or transfer his New Housing Rebate entitlement to the Developer, as "Vendor" and the "Purchaser" acknowledges having received from the Vendor a credit in the amount of such a New Housing Rebate; XXXXX

(c) Title to the Residential Unit is referred to as the XXXXX

(d) The Purchaser is a "home buyer" XXXXX

(e) The Purchaser agrees not to register its Agreement of Purchase and Sale against the title to the Property, Residential Unit or the Condominium; XXXXX

(f) Where the Residential Unit is substantially complete and fit for occupancy on the Closing Date (The Closing Date is, for purposes of this ruling, the actual occupancy date and the date Purchaser takes possession of the Residential Unit pursuant to the terms of the Agreement of Purchase and Sale.) but the condominium complex has not been registered, the Purchaser shall occupy the Unit on the Closing Date pursuant to the terms set out in XXXXX the Agreement of Purchase and Sale; XXXXX

(g) Residential Units are covered by the Warranty Program XXXXX

(h) At the Unit Transfer Date (The Unit Transfer Date is, for purposes of this ruling, the date the Purchaser receives assignment of the Developer's leasehold title to the Unit.) the risk in the Residential Unit transfers from the Vendor to the Purchaser; XXXXX

(i) Vendor's right to lease any unsold Residential Units is distinguished from its sale of such Units. XXXXX

23. Where a Purchaser occupies a Residential Unit from the Closing Date until the Unit Transfer Date the Purchaser obtains an occupancy licence from the Developer pursuant to the Agreement of Purchase and Sale with the following key terms XXXXX:

(a) The term of the occupancy licence shall be terminated, unless otherwise expressly provided for, on the Unit Transfer Date;

(b) The Purchaser shall pay the amount set forth in XXXXX the Agreement of Purchase and Sale; and

(c) The Purchaser shall pay to the Developer the Occupancy Fee calculated as:

i. the amount of interest payable in respect of the unpaid balance of the Purchase Price at the prescribed rate;

ii. the amount reasonably estimated by the Developer on a monthly basis for the municipal realty taxes attributable by the Developer to the Unit; and

iii. the projected monthly common expense contribution for the Unit.

24. Of the total of XXXXX Residential Units, XXXXX are to be assigned for consideration of less than $450,000.

Retail Portion of the Subject Property

25. The Retail portion does not form any part of the Residential Portion. Although the Developer is permitted to register a declaration and description that divides the Developer's leasehold interest in the Retail Portion into units and common elements (Retail Units) and creates a LCC (Retail LCC), the Developer has not provided a draft Disclosure Statement with respect to a Retail LCC.

26. Alternatively, where the Developer does not create Retail Units, the Developer proposes to sub-lease space in the Retail Portion to various tenants for their retail or other commercial use.

Proposed Transaction(s)

1. The Developer, as Vendor, proposes to enter into Agreements of Purchase and Sale with prospective purchasers for the purpose of selling its leasehold interest in the Residential Units of the subject property.

2. To the extent that the Developer is unable to sell its leasehold interest in some of the Residential Units, the Developer intends to lease those Residential Units. It is anticipated that the Developer will not lease more than XXXXX % of the total Residential Units.

3. Where the Closing date is prior to the Unit Transfer Date under a particular Agreement of Purchase and Sale, the Developer proposes to give possession of the Unit to the Purchaser under a lease, licence, or similar arrangement from the Closing date to the Unit Transfer Date pursuant to the terms set out in XXXXX the particular Agreement of Purchase and Sale.

4. The Developer, as Vendor, proposes to enter into Agreements of Purchase and Sale with prospective purchasers for the purpose of selling its leasehold interest in the commercial Units of the subject property.

5. Alternatively, where the Developer does not register a condominium complex in respect of the Retail Portion, the Developer proposes to lease the commercial space in the Retail Portion to various tenants for the purpose of enabling the tenants to conduct their retail business operations from such commercial space.

Ruling Requested

1. (a) Confirm that the Developer is required to collect and remit GST on the sale of the Residential Units.

(b) Confirm that the Developer will not be required to self-assess GST on the fair market value of the Residential Units when first occupied.

(c) Confirm that the Purchasers of Residential Units, if eligible, are entitled to GST New Housing Rebates under section 254 of the Excise Tax Act.

2. Given that all of the Developer's activities with respect to the development of the subject property involve either the sale of new residential condominium units and either the sale of new commercial condominium units or the rental of commercial space, we would assume that the Developer is entitled to claim a GST ITC in respect of all GST paid with respect to this project.

(a) In general do you agree with this statement?

(b) In particular, should GST apply to lease payments made to the Land-owner or to any costs reimbursed by the Developer to the Land-owner, will full ITCs be available?

Ruling Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the facts, the proposed transaction(s), and the purpose of the proposed transaction(s), and provided that the proposed transaction(s) are completed as described above, our ruling is as follows:

1. (a) Developer Required to Collect and Remit GST on Sales of Residential Units

Where the Developer's first supply of a Residential Unit is by way of assignment, this supply will be a taxable sale of real property for GST purposes. The Purchaser will be required to pay GST on the full consideration payable by the Purchaser for the sale of the Residential Unit under the Agreement of Purchase and Sale. In cases where the Purchaser is other than an individual and is registered for the GST, the Developer will not be required to collect GST. Rather, in these cases, the Purchaser will self-assess in accordance with subsection 228(4) of the ETA. In all other cases the Developer will be required to collect the GST.

In addition, where the Developer's first supply of a Residential Unit is an interim occupancy arrangement under Proposed Transaction (3), the Developer will be considered for GST purposes to have made a taxable sale of the Residential Unit at the time possession of the Unit is first given. The GST treatment will be the same as described above.

(b) Developer Not Required to Self-supply on Sales of Residential Units

Where the Developer's first supply of a Residential Unit is by way of assignment as described in 1(a) above the Developer will not be required to self-supply under subsection 191(1) on the fair market value of the Residential Units.

However, the Developer will be required to self-supply under subsection 191(1) where the first supply of the Residential Unit is by way of sub-lease (other than the interim occupancy arising under Proposed Transaction (3)) for use as an individual's place of residence and that individual is the first individual to occupy the Unit as a place of residence after its construction is substantially complete.

In this case the Developer will be deemed to have made and received a taxable sale of the particular Residential Unit at the later of the time the construction of the Residential Unit is substantially complete and the time possession is first given under the interim occupancy arrangement, referred to above. The Developer will be deemed to have collected and paid GST calculated on the fair market value of the Residential Unit at the time of the deemed taxable sale. The Developer's supplies of Residential Units by way of sub-lease will be exempt where the continuous term of occupancy of the individual (i.e. the tenant) is for a period of at lease one month, in accordance with section 6 of Part I of Schedule V.

In addition, the Developer will be required to self-supply under subsection 191(2) where: the Developer gives possession of the Residential Unit to a Purchaser under an Agreement of Purchase and Sale prior to the registration of the declaration and description; the Purchaser is the first person to occupy the Unit as a place of residence after substantial completion of the construction of the Residential Portion of the subject property; and the Agreement of Purchase and Sale is terminated for any reason other than by performance of the Agreement.

In this case, the Developer will be deemed to have made and received, at the time the Agreement is terminated, a taxable sale of the Residential Unit. The GST treatment arising from self-supply under subsection 191(2) will otherwise be the same as that described above.

(c) Purchasers of Residential Units Entitled to GST/HST New Housing Rebates

A Purchaser will qualify for a new housing rebate (NHR) under subsection 254(2) with respect to the GST paid on the taxable assignment of a Residential Unit, provided the other conditions of subsection 254(2) are met. Since one of the conditions in the calculation of a NHR is that the total consideration for the assignment (i.e. sale of the Residential Unit) not exceed $450,000, purchasers of Residential Units could potentially be entitled to new housing rebates in respect of XXXXX of the XXXXX Residential Unit sales sold. In addition, NHRs determined under subsection 254(2) may be transferred to the Developer subject to the requirements set out in subsection 254(4).

Note, if the Purchaser first enters into an interim occupancy arrangement arising under an Agreement of Purchase and Sale, the Purchaser will not be entitled to a new housing rebate, subject to meeting the other conditions of subsection 254(2), until ownership of the leasehold is transferred (i.e. assigned) to the Purchaser.

However, neither the occupant nor the Developer will be entitled to a New Housing Rebate if the first supply of the Residential Unit is by way of sub-lease (other than the interim occupancy arising under Proposed Transaction (3)) for use as an individual's place of residence and that individual is the first individual to occupy the Unit as a place of residence after the Unit's construction is substantially complete. In this case the Developer may be entitled to claim a New Residential Rental Property Rebate, provided the conditions set out in subsection 256.2(3) are met.

2. (a) Developer's Entitlement to Input Tax Credits

We agree with the statement that the Developer is entitled to claim an ITC in respect of all GST paid with respect to this project, with the exception of property or services acquired or consumed for the purpose of making exempt supplies of Residential Units by way of sub-lease. As stated above, the Developer's supplies of all newly constructed and not previously occupied Residential Units will be taxable supplies with the exception of supplies of Residential Units made by way of sub-lease, which are exempt under section 6 of Part I of Schedule V. The Developer's supplies of all Retail Units will be taxable supplies without exception.

The Developer will be entitled to claim ITCs in respect of all GST paid or payable with respect to the acquisition of property or services to the extent that such property or services are acquired or consumed for the purpose of the making of taxable supplies of Retail Units or Residential Units, in accordance with subsection 169(1) and subsections 141.01(2) and (3) of the ETA.

(b) Application of GST to Payments made by Developer under the Ground Lease

The Land-owner is considered for GST purposes to be making two supplies of two separate properties under the Ground Lease in accordance with subsection 136(2). One of these two properties being separately supplied is the Residential Portion (During the term of the Ground lease when the land is being excavated and the Building is under constructionthe land and building construction that is reasonably expected to form the Residential Units (once constructed) is deemed to be separate property separately supplied from the portion land and building construction reasonably expected to form the Retail Portion, in accordance with subsection 136(2) of the ETA.) of the subject property and the other property separately supplied is the Retail Portion. For purposes of this ruling the tax status of supplies made by the Land-owner under the Ground Lease will be given with respect to the Retail Portion and the Residential Portion, separately. The Apportionment Issue between the Retail and Residential Portions of the subject property will also be addressed.

Retail Portion

The Land-owner's supply under the Ground Lease of the Retail Portion of the subject property is a taxable supply in accordance with paragraph 123(1)(c) of the definition of commercial activity and the definition of taxable supply in subsection 123(1), as there is no exemption in Schedule V for this supply.

The Retail Portion is a taxable supply by way of lease throughout the entire lease term of the Ground Lease. This supply is taxable regardless of whether the Developer chooses to sub-lease space in the Retail Portion to tenants or to register a LCC to create Retail Units and to assign Retail Units to Purchasers. The Land-owner is required to collect and the Developer is required to pay GST calculated on the rent payable under the Ground Lease that is reasonably attributable to the Retail Portion of the subject property.

Residential Portion

The tax status of supplies made by the Land-owner under the Ground Lease of the Residential Portion will vary depending in which of the following 3 distinct time periods of the term of the Ground Lease the supplies are made:

Period I - from the date the Ground lease is entered into until immediately before the Residential Units first come into existence (XXXXX upon registering a declaration and description, the leasehold estate in the subject property is legally divided into units and common elements. For GST purposes, each of the Residential Units is a "residential condominium unit", as defined in subsection 123(1). Since the Developer has submitted as fact, supported by its proposed declaration, that it intends to register the condominium plan under XXXXX, for GST purposes the Residential Units are "residential condominium units" prior to the registration of the condominium provided the extent of construction of the condominium complex reaches a stage where the Units are reasonably capable of being used by individuals as places of residence. Therefore, once the Residential Units first come into existence by way of construction, the Land-owner will be considered for GST purposes to be making separate supplies by way of lease of the property comprising each Residential Unit.);

Period II - from the time the Residential Units first come into existence until immediately before a particular Residential Unit is assigned to a Purchaser; and

Period III - from the time a particular Residential Unit is assigned to a Purchaser until the end of the term under the Ground Lease.

Period I

During this period, the Land-owner's supply of the Residential Portion to the Developer is an exempt supply under subparagraph 7(a)(ii) of Part I of Schedule V to the ETA whereas the supply of the Retail Portion is a taxable supply. Thus, any payment of rent (The term "rent" used in this ruling refers not only to the base rent but also to any payment made by the Developer under the Ground Lease that is consideration for the lease of subject property. Refer to that portion of the ruling below that discusses additional or other rent.) under the Ground Lease during Period I must be apportioned between these two separate supplies.

In order to illustrate the application of the GST in Period I, we provide the following example. Assume that the Developer makes annual rent payments in Period I of $50,000 pursuant to XXXXX the Ground Lease. In this example, GST will only apply to the portion of this rent payment that is reasonably attributable to the Retail Portion. Refer to the section below under the heading "Apportionment Issues" for the ruling addressing the apportionment of rent issue.

Period II

The Residential Units first coming into existence by way of construction marks the ending of Period I and the beginning of Period II. Thus, the key difference between Period I and Period II is that for purposes of subsection 136(2) the Residential Portion now consists of Residential Units that are "residential condominium units", as defined in subsection 123(1) of the ETA. The other property remains the Retail Portion. At the beginning of Period II the supply of each Residential Unit to the Developer under the Ground Lease will be a taxable supply in accordance with the definitions of commercial activity in paragraph 123(1)(c) and taxable supply in subsection 123(1), as there is no exemption for these supplies. Subparagraph 7(a)(ii) of Part I of Schedule V will not exempt the supply of each Residential Unit since section 7 only applies to supplies of land (and not to supplies of residential complexes) made by lease, licence, or similar arrangement. XXXXX Finally, section 6.1 of Part I of Schedule V will not apply to exempt the lease of the Residential Units by way of lease from the Land-owner to the Developer under the Ground Lease since the Developer has acquired the Residential Units for the purpose of making supplies of the Units by way of assignment.

Where one or more Residential Units first come into existence at a time other than the beginning of a particular lease interval, the exempt supply of that Unit (or Units) will not become a taxable supplies (or supplies) until the beginning of the next lease interval. (A lease interval is the period of time within the term of the lease that is attributable to a lease payment and is deemed for GST purposes to be a separate supply of property for the duration of the lease interval in accordance with subsection 136.1(1).) The determination as to whether the balance of the lease term following the pre-payment of the base rent consists of only one lease interval or multiple lease intervals will depend on whether payments under the Ground Lease made subsequent to the pre-payment of base rent are also recognized as rent payments for GST purposes. Refer to the discussion of additional or other rents below.

Period III

The ending of Period II and the beginning of Period III occurs on a Unit-by-Unit basis, as each Residential Unit is assigned by the Developer to a particular Purchaser or sub-leased to a tenant such that sections 6 and 6.1 of Part I of Schedule V apply, as described below. Once the assignment of a Residential Unit takes place, the Purchaser effectively replaces the Developer as lessee under the Ground Lease. The Land-owner's supply of the Residential Unit by way of lease to the Purchaser (unlike the same supply to the Developer) is an exempt supply under section 6 of Part I of Schedule V.

Thus the Land-owner goes from making a taxable supply of a Residential Unit to the Developer to making an exempt supply of the Unit to a Purchaser, at the time of a Unit's assignment.

As stated in the Statement of Facts, the Developer will sub-lease Residential Units in the event that it is unable to sell (assign) them and, in such a circumstance, it will not sublease more than XXXXX % of the total Residential Units. For those Residential Units that are sub-leased by the Developer (rather than assigned) and such a sub-lease is an exempt supply under section 6 of Part I of Schedule V, the supply of the Residential Unit from the Land-owner to the Developer (under the Ground Lease) will be an exempt supply under section 6.1 of Part I of Schedule V to the ETA. However, for section 6.1 to apply, the Developer must sub-lease the Unit throughout a lease interval under the Ground Lease. The Developer's decision to sub-lease a particular Residential Unit will not affect the tax status of Land-owner's supply under the Ground Lease during Period II since it is our position that all of the Residential Units will be held by the Developer for the purpose of assigning them.

In those instances where section 6.1 applies to exempt the lease of the Residential Unit by the Land-owner to the Developer under the Ground Lease, the Developer will not be required to pay GST in respect of any rent payments made under the Ground Lease that are attributable to that Residential Unit.

As shown above, the ending of Period II and the commencement of Period III affects the extent to which the rent payable under the Ground Lease is subject to GST. As a result the Land-owner will require timely information as to the Developer's assignment or sub-lease of Residential Units.

Since the prepayment of the base rent has already occurred, the lease intervals for the remainder of the lease term will depend on when subsequent payments occur under the Ground Lease that are recognized as rent payments for GST purposes. Refer to the discussion of additional or other rents below.

Apportionment of Rent

In Period I, the division of the subject property into these two deemed properties separately supplied under subsection 136(2) is based upon the intent of the Developer to construct a building that consists, in part, of XXXXX Residential Units. These Residential Units are "residential condominium units" (RCUs) and "residential complexes" as defined in subsection 123(1) for GST purposes.

Since during Period I, the Residential Units will be under construction, it is necessary for GST purposes to apportion the rent payable under the Ground Lease between these two deemed supplies on a reasonable basis. In effect, such an apportionment amounts to estimating the extent to which the subject property will be comprised of Residential and Retail Portions upon its completion and to apportion all rent payable under the Ground Lease between the Residential and Retail Portions on this basis.

As stated above, the supply of the Residential Portion and the Retail Portion under the Ground Lease will be an exempt supply (or supplies) and a taxable supply, respectively, in Periods I and III. Therefore, during Periods I and III an apportionment of rent must be made between such supplies on a reasonable basis in accordance with subsection 153(2). Whether XXXXX % of the rent is reasonably attributable to the making of the exempt supply (or supplies) and XXXXX % to the making of the taxable supply (or supplies) is a question of fact for which a ruling cannot be provided.

However, it is our view that an apportionment of rent based on space (i.e. the floor space in the Building and the land areas) occupied by the Residential and Retail Portions would be reasonable where these Portions are identical in every significant respect (e.g. values attributable to improvements, etc.).

For example, where the Residential Portion occupies XXXXX % of the total space of the subject property then, subject to the proviso noted above, XXXXX % of the total rent payable under the Ground Lease would be reasonably attributable to the making of the supply or supplies of the Residential Portion.

Note however, apportionment in this manner is likely to apply only to ongoing annual rent payments (i.e. to other or additional rents) rather than to the prepayment of the base rent.

Prepayment of Base Rent

For an illustration of the application of GST to the base rent prepayment we provide the following example. Assume that the Developer makes a $XXXXX prepayment of the base rent on XXXXX, which is during Period I and during the first XXXXX years of the lease term where no annual base rent is charged (i.e. Years XXXXX). On the first day of the first lease interval following the beginning of Period II the Land-owner will begin to make taxable supplies of the Residential Units to the Developer. Although the prepayment of base rent is made in Period I, it is attributable to the balance of the lease term excluding Years XXXXX. As a result, the prepayment of base rent is not attributable in whole or part to Period I. Also, in respect of the Residential Portion, the Developer's lease term ends on Unit-by-Unit basis as Residential Units are assigned to Purchasers. As a result, the Developer has no Period III for those Units assigned (rather than sub-leased). Therefore the Developer's prepayment of the base rent must be apportioned as follows. First, the base rent must be apportioned on a reasonable basis between the Residential Portion and the Retail Portion. The base rent attributable to the Retail portion is fully taxable for the entire lease term.

Second, the base rent must be apportioned on a reasonable basis between those Residential Units that are supplied or held for supply by way of assignment and those Units supplied by way of sub-lease. However, since at the time of the base rent prepayment all of the Units were held for supply by way of assignment, all of the base rent prepayment is attributable to Period II and thus fully subject to GST.

Thus the Developer will be required to pay and the Land-owner will be required to collect GST XXXXX on the entire pre-payment XXXXX made by the Developer to the Land-owner. The Developer will be entitled to claim an ITC XXXXX XXXXX in respect of the GST it is required to pay to the Land-owner.

Rent Free Period

The Land-owner will be required to charge GST in respect of all taxable supplies made under the Ground Lease during Lease Years XXXXX of the lease term (referred to as the rent-free period) but only to the extent that rent is actually payable during the rent-free period. The Developer is not considered to be paying an amount referred to as "base rent" in the Ground Lease during the rent-free period.

The Developer's contribution to the costs of the exterior upgrade (i.e. $XXXXX) is not additional rent paid under the Ground Lease.

The Land-owner's payment XXXXX to the Developer is consideration for part of materials cost of the exterior upgrade. Since this supply of construction materials is a taxable supply, the Developer is required to charge the Land-owner GST in the amount of $XXXXX in respect of this supply.

Other or Additional Rents

The Ground Lease deems any amount payable by the Developer to the Landlord, other than the base rent, to be "rent" subject to all rights and remedies available to the Land-owner for the collection of rent in arrears under the Ground Lease.

Despite this description of such amounts payable under the Ground Lease, it remains a question of fact and law as to whether any such amounts are consideration for the supply of the subject property by way of lease or for any other supply. CCRA's policy is not to differentiate between the base rent and other amounts payable (often referred to as "additional rent" or "other rent") where such amounts represent a "pass through" or recovery of the lessor's costs of owning and leasing the real property subject to the lease.

Consistent with CCRA's general policy concerning additional rent, payments that meet the following conditions will generally be regarded as consideration for the supply of the subject property by way of lease under the Ground Lease and thus subject to GST as described above (i.e. depending on the Period in which the payment takes place):

•   the Land-owner, as lessor, is liable for the payment (either solely or jointly);

•   the payment is passed on to the Developer, as lessee, under the Ground Lease; and

•   the payment can reasonably be regarded as relating to the lessee's right to use the real property.

In accordance with this policy, the only consideration payable for the lease of the subject property under the Ground Lease (other than the base rent) is the Developer's requirement under XXXXX the Ground Lease to pay taxes that are levied by a government or other taxing authority against the Land-owner (or other lessor to whom the Ground lease has been assigned or transferred).

Milestone Payments

The payments XXXXX required to be paid by the Developer to the Land-owner pursuant to XXXXX the Ground Lease (referred to as "milestone payments") are not consideration for the supply of real property or for any other supply. Rather the milestone payments are the result of the Developer's breach of the Development Agreement and of the Ground Lease. Where the Ground Lease is an agreement for a taxable supply of property in Canada at the time the breach occurs, section 182 will deem the milestone payment to be a tax-included payment for the supply. The amount of the milestone payment that will be subject to section 182 will be in proportion to the rent reasonably attributable to the taxable supply under the Ground Lease at the time of the breach.

For example, if the breach giving rise to the milestone payment occurred in Period I and at the time of the breach XXXXX % of the rent payable under the Ground Lease was reasonably attributable to the making of the taxable supply of the Retail Portion, then XXXXX % of the milestone payment will be subject to section 182. If the breach occurs in Period II, XXXXX % of the milestone payment will be subject to section 182.

This ruling is given subject to the limitations and qualifications set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all the necessary facts and transactions for which you requested a ruling.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 613 954-8852.

Yours truly,

Daryl J.A. Hooley
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate