16 March 2004 GST/HST Ruling 44024 - Supply of Real Property

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter XXXXX and subsequent telephone conversations concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a supply of farmland property. I apologize for the delay taken in responding to you.

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

Statement of Facts

1. Neither you nor your spouse, XXXXX (hereafter referred to either as "XXXXX", "the vendors" or "the mortgagees"), is registered for GST/HST purposes.

2. The vendors owned a farmland property situated in XXXXX. The vendors sold this property to XXXXX.

3. The vendors (mortgagees) and XXXXX (mortgagor) entered into a Vendor Take Back mortgage agreement for the subject property at the time of the sale.

4. Prior to selling the property to XXXXX, the vendors had been using a building situated on the property as a second residence and had leased a portion of the land to a hay farmer for $XXXXX per year.

5. XXXXX, who was registered for GST/HST purposes at the time of his purchase of the subject property, leased a portion of the farmland to a third party.

6. The mortgage fell in arrears, the property taxes fell in arrears and XXXXX failed to place insurance on the property. It is your belief that XXXXX abandoned the property. Further to the preceding, the mortgagees instituted Power of Sale proceedings.

Transaction

1. XXXXX the mortgagees' lawyer made an offer to XXXXX lawyer on behalf of the mortgagees. The mortgagees offered to (i) forgive the mortgage payable by XXXXX, (ii) pay $XXXXX cash to XXXXX, and (iii) pay property tax arrears in respect of the subject farmland, in exchange for XXXXX transfer of the title to the farmland property to the mortgagees.

2. XXXXX accepted the offer outlined above. A "Transfer/Deed of Land" signed by XXXXX, his lawyer and the mortgagees' lawyer, indicates that XXXXX transferred the subject farmland property to the mortgages as joint tenants "in full and final satisfaction of a Vendor Take Back mortgage registered XXXXX" on the said property.

Ruling Requested

What is the application of GST to the XXXXX transfer of the farmland property from

XXXXX to you and your spouse?

Ruling Given

Based on the facts set out above, we rule that the transfer of the farmland property by XXXXX to you and your spouse is deemed to be two separate supplies by way of sale of two separate properties. The first supply - the portion of the farmland property that is a residential complex - is an exempt supply pursuant to section 2 of Part I of Schedule V to the Excise Tax Act.

The Canada Revenue Agency (CRA) cannot rule on the tax status of the second supply - the portion of the farmland property excluding the residential complex (i.e. the non-residential portion of the farmland property) - based on the information submitted.

This ruling is subject to the general limitations and qualifications outlined in the attached 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 for which you requested a ruling.

Explanation

All legislative references are to the Excise Tax Act.

Section 183 provides rules for the application of the GST/HST to property seized or repossessed by a creditor. A transfer of property via a quitclaim is a transaction that is subject to the rules found in section 183, when all of that section's requirements are met. Subsection 183(9) provides that where a person (i.e. a debtor) voluntarily transfers property to a creditor "for the purpose of satisfying in whole or in part a debt or obligation in respect of which the (...) person is in default", the creditor is deemed to have seized or repossessed the property from the debtor at that particular time. However, in the case at hand, the transfer was made in part for the purpose of satisfying a debt, and in part for the purpose of obtaining $XXXXX cash and payment of the property tax arrears. Accordingly, the transfer is not considered to be a voluntary transfer under subsection 183(9), but a sale for consideration.

Under subsection 136(2) the above transfer of the farmland property is deemed to be two separate supplies by way of sale of two separate properties, one supply being the portion of the farmland property that is the residential complex and the second supply being the non-residential (or farmland) portion of the farmland property.

The supply of that portion of the farmland property that is the residential complex will be exempt under section 2 of Part I of Schedule V. This legislative provision exempts the sale of a residential complex made by a person who is not a builder of the complex, unless the person has claimed input tax credits in respect of the last acquisition of the complex or in respect of improvements to the complex.

The GST treatment of the second supply (i.e., of the non-residential portion of the farmland property) is uncertain. This supply may be exempt under section 9 of Part I of Schedule V to the Excise Tax Act (sale of real property by an individual or a personal trust); however, the CRA does not have enough information to determine whether this supply is excluded from the exemption under section 9 by paragraph 9(2)(a) or paragraph 9(2)(b), which provide that the supply would be taxable in the following circumstances:

•   Subparagraph 9(2)(a)(i): The supply would be taxable if the non-residential portion of the farmland property was capital property of XXXXX and it was used primarily in a business carried on by XXXXX with a reasonable expectation of profit.

•   Subparagraph 9(2)(a)(ii): The supply would be taxable if XXXXX is a GST registrant and the non-residential portion was his capital property used primarily in making taxable supplies of that portion by way of lease, licence or similar arrangement, or a combination of the uses described in subparagraphs 9(2)(a)(i) and 9(2)(a)(ii).

•   Subparagraph 9(2)(b)(i): The supply would be taxable if it is sold in the course of a business of Mr. Tong.

For further information on the application of section 9 of Part I of Schedule V to the Excise Tax Act, please refer to attached Memorandum Section 19.5, Land and Associated Real Property of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-1433.

Yours truly,

Bao Tran
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate