23 December 2002 GST/HST Ruling 38588 - Property Taxes as Additional Rents

Dear XXXXX:

Thank you for your letter XXXXX (with attachments), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transactions described below. Your letter was forwarded from the XXXXX Tax Services Office for our direct response to you.

All legislative references are to the Excise Tax Act (the ETA) unless otherwise noted.

Statement of Facts

Our understanding of the facts and the transactions is as follows:

1. XXXXX (the "Landlord") entered into a lease agreement (the "Agreement") with XXXXX (the "Tenant") in XXXXX. The lease was for the supply of certain land (municipally described as XXXXX, the "Premises") situated in XXXXX made by the Landlord to the Tenant. The term of the lease was XXXXX years.

2. The Agreement makes the following provisions:

(a) XXXXX requires the Tenant to pay to the Landlord the rent and all additional rent as set out in the Agreement.

(i) XXXXX sets out that the initial rent was XXXXX per year (payable in monthly instalments) with provisions for increasing that amount at set times during the term of the Agreement.

(ii) XXXXX requires the Tenant to pay, as additional rent, XXXXX[.]

(b) XXXXX provides that at the expiration or termination of the Agreement, the Tenant is to peaceably surrender the Premises to the Landlord, although the Tenant may remove from the Premises all the Tenant's fixtures located on the Premises.

(c) XXXXX provides that the Tenant must pay to the Landlord the full rent payable under the Agreement.

(d) XXXXX provides that the Tenant is the owner and has the right, title, interest in and right to possession of all buildings, improvements, installations, fixtures, alterations, changes or additions to the Premises notwithstanding any rule of law that may vest the title to such properties in the name of the Landlord.

3. Both the Landlord and the Tenant are registered for the GST/HST.

Ruling Requested

You are enquiring as to whether the Landlord is required to charge and collect the GST in respect of the property taxes assessed against the Premises.

Ruling Given

Based on the facts set out above, we rule that the Landlord is required to charge and collect the GST on the rent payment received from the Tenant, including any amount that the Tenant may pay to the municipality in respect of property taxes assessed against the Premises.

This ruling is subject to the general limitations and qualifications outlined 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 necessary facts and transaction(s) for which you requested a ruling.

Explanation

Subsection 165(1) requires that every recipient of a taxable supply made in Canada is required to pay tax equal to 7% of the value of consideration for the supply. Where a separate amount is paid by a lessee on account of property taxes, this amount is part of the consideration for the rental of the property, even if the lessee pays the amount directly to the municipality. Since the lessee's payment is part of the consideration for a taxable supply, it is subject to GST/HST in the same way as the basic rent payable by the lessee.

While the Tenant may be responsible under the Agreement to pay property taxes to the municipality, the ultimate liability to pay the property taxes rests with the Landlord. Subsection XXXXX provides that land shall be assessed against the owner of the land. XXXXX XXXXX the person responsible for property assessments in XXXXX, interprets that provision to mean the registered owner of the land. Under the XXXXX the taxpayer is responsible for payment of property taxes. A taxpayer is defined in that Act as the person whose name is shown on the tax roll and the tax roll lists the name of the person against whom the land is assessed. As such, the Landlord, as the registered owner of the Premises, is responsible for the payment of property taxes.

Accordingly, the amount paid by the Tenant as property taxes is additional consideration for a taxable supply made by the Landlord and is subject to the GST.

Additional Information

In your ruling request, you were also seeking confirmation that no portion of the costs for building insurance, heating, maintenance repairs and general building upkeep are subject to the GST. As the Letter of Consent from the Landlord, XXXXX only authorizes us to disclose information relating to the Landlord's responsibility to collect the GST on land taxes pursuant to the Agreement, we are unable to issue a ruling on the other matters. However, for your information, we wish to point out the following.

Generally, if under an agreement between a tenant and a third party (e.g. a supplier of utilities), the tenant is liable under that agreement to pay consideration for the supply, there is no additional GST to be added to the rental payment received by the landlord from the tenant in respect of the utilities.

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