9 March 2004 GST/HST Interpretation 41579 - Transfer of Farmland Upon Dissolution of Partnership

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:

This is in response to your request XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transfer of farmland. Your request has been forwarded to the Financial Institutions and Real Property Division at Headquarters for direct reply to you. We apologize for the delay in responding.

All legislative references are the Excise Tax Act (the Act) unless otherwise stated.

Statement of Facts

Based on your letter and telephone conversations, our understanding of the facts and transactions is as follows:

•   AB Partnership (the Partnership) is a family farm partnership owned equally by its partners (i.e. husband and wife). The Partnership is registered for GST/HST.

•   The Partnership is the owner of real property assets consisting of farmland and farm buildings.

•   The Partnership leases the farmland (For purposes of this ruling, a reference to farmland includes the farm buildings situated on the real property.) to a family farm Corporation (the Corporation), owned by husband and wife. The Corporation is registered for GST/HST.

•   The Corporation is engaged in the business of farming and is the owner of the farming machinery and equipment.

•   The partners wish to wind up the Partnership and transfer the farmland to their son and daughter-in-law.

•   Upon dissolution of the Partnership, each partner (i.e. husband and wife) will receive an undivided one-half interest in the assets of the Partnership.

•   Immediately after the windup of the Partnership, each partner will sell their respective interest in the real property to their son and daughter-in-law, who in turn will be renting the farmland to their own family farm corporation.

Ruling Requested

Whether the partners (i.e. husband and wife) are required to individually register in order to acquire the assets of the Partnership upon its dissolution.

Ruling Given

Based on the facts set out above, we rule that the individual partners (i.e. husband and wife) are not required to register under subsection 240(1) of the Act in order to acquire the assets from the Partnership.

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 240(1) of the Act requires every person who makes a taxable supply in Canada in the course of a commercial activity to register, subject to certain exceptions. Paragraph 240(1)(b) provides an exception to registration for a person whose only commercial activity is the making of supplies of real property by way of sale, otherwise than in the course of a business (The definition of "business" in subsection 123(1) of the Act includes "a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement".).

Subsection 240(3) permits a person who is engaged in a commercial activity in Canada to apply for voluntary registration. Pursuant to paragraph (c) of the definition of "commercial activity" under subsection 123(1) of the Act, a sale of real property, other than an exempt supply, constitutes a commercial activity, including anything done by the person in the course of or in connection with the making of the supply.

A "sale" in respect of property, is defined under subsection 123(1) of the Act to include any transfer of ownership of the property. GST/HST Policy Statement P-111 - The Meaning of Sale with respect to Real Property, provides that a sale of real property requires either a transfer of a legal interest in real property (e.g. a registrable interest), a transfer of an equitable interest in real property or a transfer of possession of real property under an agreement to transfer ownership of the property.

In general, all supplies of real property are subject to GST unless one of the exempting provisions in Part I of Schedule V to the Act apply. Section 9 of Part I of Schedule V exempts the sale of real property by an individual or a personal trust, subject to certain exceptions. However, section 9 would not be applicable to the transfer of the farmland from the Partnership (A partnership is a separate entity for GST/HST purposes. The definition of "person" in subsection 123(1) of the Act means an individual, a partnership, a corporation, the estate of a deceased individual, a trust, or a body that is a society, union, club, association, commission or other organization of any kind.) to the individual partners since a partnership is a separate person, and not an individual, for GST/HST purposes. Sections 10 to 12 of Part I of Schedule V exempt certain supplies of farmland where, before the transfer of ownership, the farmland was used in the business of farming, and where immediately after the transfer, the farmland is for the personal use and enjoyment of the purchaser or a related individual.

For purposes of the exemptions under sections 10, 11 and 12 of Part I of Schedule V, "farmland" is generally interpreted as being the land that is regularly used by a person for the purpose of gaining or producing income from a farming business carried on by the person. In addition, any fixtures (e.g. barns, sheds, fencing, etc.) on the farmland that a person regularly uses in the business of farming would generally form part of the farmland.

Based on the facts provided, the Partnership is not engaged in the business of farming. It is engaged in the business of making supplies of the farmland by way of lease to a family farm corporation, which carries out the farming operations. The transfer of the farmland by the Partnership to the individual partners (i.e. husband and wife) will not be for their personal use and enjoyment, or that of a related individual, but rather for purpose of re-supply. Therefore, the exemption under section 12 of Part I of Schedule V will not apply. Furthermore, sections 10 and 11 require that an individual make the supply of farmland. In this case, the transfer of farmland will be made by the Partnership to the individual partners. Consequently, none of the exemptions in sections 10 to 12 of Part I of Schedule V to Act will apply. The transfer of the farmland by the Partnership to the individual partners will be a taxable supply subject to GST/HST under section 165 of the Act, as no exemptions under Part I of Schedule V apply.

Subject to the exceptions under subsection 9(2) of Part I of Schedule V, the subsequent sale of the real property by the husband and wife to their son and daughter-in-law is exempt from GST/HST as a supply of real property made by way of sale by an individual. However, where the sale of real property is made in the course of an adventure or concern in the nature of trade, the individual may elect (The individual or personal trust that sells the real property must complete the prescribed from, GST 22, Election to Treat the Tax Exempt Supply of Real Property By Way of Sale by an Individual or Trust as a Taxable Supply and file the form with CRA before the sale to which it relates is made.) to treat the otherwise exempt sale of real property as a taxable sale under subparagraph 9(2)(b)(ii). A sale made in the course of an adventure or concern in the nature of trade (The CRA considers that a primary or secondary intention of resale from the time of acquisition to the time of disposition is normally a prerequisite for the sale to have been made as an adventure or concern in the nature of trade. See GST/HST Memoranda Series 19.5 Land and associated Real Property, Appendix C, Business vs. adventure or concern in the nature of trade.) usually involves acquiring property with the primary or secondary intention of resale on an isolated basis, with only passive or limited activities undertaken with respect to the resale.

Election for the Supply of Business Assets

Subsection 272.1(4) applies when a partnership transfers property to a partner. On the dissolution of a partnership, the property of the partnership is transferred to the partners. The property is deemed to have been sold at its fair market value. The partnership will be required to collect and remit GST/HST on the fair market value of the assets of the partnership.

Under certain circumstances, an election under subsection 167(1) of the Act may be available to the parties, which would eliminate the obligation to pay tax. For purposes of determining eligibility to use the election under subsection 167(1), the parties to the transaction must meet certain conditions including the two following tests: first, the supplier must sell a business or part of a business that was established or carried on; second, the recipient is acquiring, under the agreement, ownership, possession or use of all or substantially all of the property that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business or part as a business. When a business or part of a business is supplied to more than one recipient, each of whom will receive an undivided interest in the business or part of the business, the view of CRA (The CRA's position with respect to the availability of the election under subsection 167(1) where there is a supply of a business or part of a business is explained in Policy P-188, Supply of a Business or Part of a Business for the Purpose of the Election under Subsection 167(1).) is that there has not been the supply of a business (or a part of a business) to any one of the recipients. Therefore, the conditions in subsection 167(1) will not be met and the election will not be available.

The facts provided in this case indicate that, upon dissolution of the Partnership, each of the two partners will receive an undivided one-half interest in the assets of the Partnership. While the applicability of an election pursuant to subsection 167(1) is a question of fact in each case, the supply by a partnership of an undivided interest in the partnership property to the two individual partners would not be considered to be a supply of a business or part of a business, and as such, the election under subsection 167(1) would not be available.

Collection and Remittance of GST/HST

As a general rule, the vendor of taxable real property is required to collect the GST/HST from the purchaser, except where the vendor is relieved from the requirement to collect the tax under subsection 221(2) of the Act. Paragraph 221(2)(b) provides an exception to the general rule where the recipient of the supply is registered under Subdivision d. Where any of the exceptions under subsection 221(2) applies, subsection 228(4) requires the purchaser, if the purchaser is a registrant and is acquiring the property for use primarily in the course of commercial activities, to account for the GST/HST on the purchaser's regular GST/HST return for the reporting period in which the tax became payable. In any other case, the purchaser is required to account for the GST/HST on a special form, GST 60, by the end of the following month.

If the husband and wife file the GST 22, Election to Treat the Tax Exempt Supply of Real Property by Way of Sale by an Individual or Trust as a Taxable Supply, the transfer of the real property to their son and daughter-in-law will be treated as a taxable sale. As such, the husband and wife would be eligible to voluntarily register under subsection 240(3). If husband and wife are each registered at the time of the transfer of the farmland from the Partnership to themselves, the Partnership would be relieved, under subsection 221(2), from collecting the tax. The husband and wife would be required, under subsection 228(4), to self-assess the tax, but would be able to offset the tax payable on the transfer of the farmland from the Partnership by claiming an input tax credit on the same GST/HST return.

Section 257 Rebate for Non-Registrant Supplier of Real Property

Section 257 provides for a rebate of tax to a non-registrant who 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. 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.

In this case, if the husband and wife are not registered at the time of the transfer of the farmland from the Partnership, tax payable to the Partnership on the transfer would be recoverable by way of rebate under section 257 (The rebate available under section 257 is identified on form GST189E, "General Application for Rebate of the GST/HST", as a Type 7 rebate.) at the time of the subsequent taxable sale of the farmland by the husband and wife to their son and daughter-in-law. The limitation period for filing an application for a rebate under section 257 is two years after the day consideration for the sale of the real property was paid or became due to the non-registrant.

In summary, GST/HST payable by the husband and wife on the farmland at the time of the dissolution of the Partnership will be recoverable upon the taxable re-supply of the farmland to their son and daughter-in-law provided the husband and wife each file a GST 22 election before transferring ownership of the farmland, or possession under an agreement to transfer ownership of the farmland, to their son and daughter-in-law. The GST/HST payable by the husband and wife on the acquisition of the farmland from the Partnership can be recovered by either: (i) if registered, claiming an off-setting input tax credit on the same return in which the recipient, under subsection 228(4), is required to account for the tax on the acquisition of the farmland; or (ii) if not registered, claiming a rebate under section 257 at the time of the subsequent taxable sale of the farmland to the son and daughter-in-law.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9212.

Yours truly,

Carmela Antonelli
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate