Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
GST/HST Rulings Directorate
Place de Ville, Tower A, 5th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 231643a
Dear [Client]:
Subject: GST/HST RULING
Partnership eligibility to claim input tax credits on the construction of houses for sale
Thank you for your facsimile of [mm/dd/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to the construction of two houses and whether you or a partnership can recover the GST/HST paid on certain costs to construct the houses. Previously, we provided you with an interpretation, dated [mm/dd/yyyy], under case number [#]. This letter replaces our previous letter and is provided to clarify certain information given in that letter.
The GST/HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
We understand the following:
1. You and two other individuals ([…], collectively referred to as, the Property Owners and individually referred to as, the Property Owner) purchased a lot with an existing house on it in […][Province A] in [mm/dd/yyyy]. The lot had a property identification number (PIN) of […] and a legal description of […].
2. The Property Owners engaged a contractor to demolish the house and they subdivided the lot into two lots. Each of these lots is owned by the Property Owners as tenants in common with […] having a % undivided interest in each lot and […] and […] each having a […] undivided interest in each lot.
3. The one lot has a civic address of […], a PIN of […] and a legal description of […].
4. The other lot has a civic address of […], a PIN of […] and a legal description of […].
5. In [mm/dd/yyyy] and subsequent to the subdivision, the Property Owners engaged another party to construct a house on each of the lots that you stated would each be used as the primary residence of at least one of the Property Owners. However, in [mm/dd/yyyy] and during the construction of the houses, it was decided that once construction of the houses was completed in [mm/dd/yyyy], each lot with the finished house would be sold.
6. The Property Owners registered a partnership for GST/HST purposes with the Canada Revenue Agency (CRA) in [mm/dd/yyyy] and having a registration number of […].
7. Before the partnership was registered with the CRA, certain costs were incurred by the Property Owners for the construction of the houses on which GST/HST was paid. Those costs were for survey services, architectural design, rental of a temporary toilet, rental of a temporary fence, excavation services, construction of foundation walls, purchase of wood/lumber, purchase of rebar, purchase of stone cladding and the purchase of windows for which you indicated that the GST/HST in the amount of $[…] was paid.
RULING REQUESTED
You would like to know if the partnership is eligible to claim input tax credits (ITCs) for the GST/HST paid on the construction costs incurred before the partnership registered for GST/HST purposes.
RULING GIVEN
Based on the facts set out above, we rule that the partnership is not eligible to claim ITCs for the GST/HST paid on the construction costs incurred before the partnership registered for GST/HST purposes.
EXPLANATION
The eligibility criteria for claiming an ITC are set out in section 169 and outlined in paragraph 3 of the GST/HST Memorandum 8.1, General Eligibility Rules. Specifically, one of the conditions that must exist before a person may be able to claim an ITC is that the property or service must be acquired, imported or brought into a participating province by a person for consumption, use or supply in the course of the person’s commercial activities. The term “person” is defined in subsection 123(1) to include an individual and a partnership. The inclusion of a partnership in the definition of person provides for a partnership to be treated for GST/HST purposes as if it were a legal entity. Therefore, for GST/HST purposes, a partnership exists as a separate person from its members.
In this case, the eligibility to claim an ITC for the tax paid on any of the construction costs will depend on who had acquired the goods or services (that is, an individual or a partnership), since it is a partnership that is registered for GST/HST purposes and the purchases were made before the partnership was registered for GST/HST purposes.
It is a question of fact and law as to whether a partnership exists and if it does, when that partnership was formed. Whether a partnership exists must be determined according to the law governing partnerships that applies in the relevant province or territory. The law governing partnerships in […][Province A] provides that a partnership is a relationship that exists between two or more persons who join together to carry on a business in common with a view to sharing the profits of the business. Since a partnership requires the carrying on of a business with a view to sharing the profits of the business, it follows that a partnership cannot exist before the business is commenced.
We note that when the Property Owners acquired the lot, engaged someone to demolish the existing house on the lot, subdivided the lot and engaged someone to build houses on the subdivided lots for the primary place of residence of at least one of the Property Owners, these activities did not constitute the carrying on of a business with a view to sharing profits of the business. Therefore, a partnership did not exist at the time that the Property Owners commenced these activities.
Since a partnership did not exist when the Property Owners acquired the lot and incurred costs with a view to constructing houses for their primary place of residence, these acquisitions would not have been done by the partnership or a person as a member of a partnership. Any partnership that may have been subsequently formed following these acquisitions would not be able to claim an ITC for the tax paid or that was payable on any of those acquisitions.
Furthermore, the GST/HST registration of the partnership cannot be backdated to a time when the partnership did not exist. Accordingly, the partnership is not eligible to claim an ITC in respect of any of the GST/HST that was paid by the Property Owners when they commenced the construction of the two houses in [mm/dd/yyyy].
ADDITIONAL INFORMATION
We understand that you would like all information pertaining to your situation to be addressed, which would include information about the partnership’s entitlement to ITCs on construction costs incurred subsequent to its formation.
As noted in the Explanation above, whether and when a partnership was formed is a question of fact and law. The documentary evidence and the surrounding facts, including the actual actions and activities undertaken must demonstrate an intention to carry on business in common with a view to profit. The mere fact that persons describe themselves as partners or register for GST/HST purposes as a partnership does not prevail over the actual facts or law. When dealing with an issue involving a partnership, it is necessary to examine the relationship between the persons, having regard to the relevant provincial law, the partnership agreement and the intention of the persons, as evidenced by their conduct and the manner in which they deal with each other and with other parties. Therefore, the fact that the Property Owners describe their relationship as a partnership is not determinative that a partnership actually exists.
If all of the members of a partnership are individuals, the business of the partnership is not a commercial activity if it is engaged in without a reasonable expectation of profit. A person must be engaged in a commercial activity in order to register for GST/HST purposes. Therefore, if there is no profit motive, then there is no partnership and GST/HST registration is not possible.
Ownership of the subdivided lots
As the Property Owners acquired the lot and subdivided it into two lots at a time when the intent was to construct a house on each lot for the primary place of residence of at least one of the Property Owners, it follows that a partnership did not have an interest in the two lots during this time.
Under real property law in common law jurisdictions (for example, [Province A]) the fee simple estate can be fragmented into its legal and equitable (or beneficial) component interests. Thus, while a partnership cannot hold legal title recognized by common law and provincial statute law, by severing the estate into its two component interests, for GST/HST purposes a partnership could lawfully own the beneficial interest in real property while the partners (or a third party nominee) own the legal interest in the same real property.
Based on the information provided, legal ownership appears not to have changed since the time the two lots were created and it is unknown whether beneficial ownership of the lots has been transferred to a partnership. Recognizing who has beneficial ownership of the two lots is significant for GST/HST purposes with respect to determining the tax status of any transfer of beneficial ownership, reporting and remitting the tax on the sale of a completed residential complex and whether a supply of property and/or services has been made by a partnership to individual owners of the real property (that is, to the Property Owners who have legal ownership of the lots).
It is the CRA’s position not to consider real property to belong to a partnership unless this can be reasonably substantiated. Without such substantiation, which would include relevant documentation, the CRA would consider the entire estate (including the beneficial interest) in the real property to belong to the person or persons who hold the legal interest (in this case, the Property Owners).
If there is no partnership when the houses and related land are eventually sold to third parties, each individual who has an interest in the lots may be considered to be making a taxable supply of their interest in the lots and at that time may be entitled to a rebate under section 257 in respect of their portion of the construction costs. For more information, please refer to GST/HST Memorandum 19.3.6, Rebate on Non-Registrant’s Sale of Real Property and under the heading “Rebate for taxable sale of real property by a non-registrant” of the guide RC4033, General Application for GST/HST Rebates.
Although it is not clear that a partnership exists, we will assume that there is a partnership for purposes of the following information. The application of the GST/HST to the activities of the Property Owners and the partnership will depend, in part, on whether there was a transfer by the Property Owners of their equitable interest in the lots during the construction phase. We are also noting which person may be able to recover the tax in respect of the construction of the houses and who must report the subsequent taxable sale of the houses and related land to a third party.
Scenario 1: Where beneficial ownership of the real property remains with the Property Owners
Where beneficial ownership of the subdivided lots has not changed, that is the Property Owners have not transferred their beneficial interest to a partnership, and where a partnership acquires goods and/or services to carry on the construction of a house on each of the subdivided lots, we would consider the partnership to have made a supply of those goods or services to the Property Owners to improve their property. Where the partnership is registered for GST/HST purposes (that is, it is engaged in a business with a reasonable expectation of profit), it is required to collect the GST/HST payable on that supply made to the Property Owners. The partnership may be eligible to claim an ITC for the tax paid or payable on its acquisition of such goods or services that it resupplied to the Property Owners.
It should be noted that where the members of the partnership are not GST/HST registrants and the partnership makes a taxable supply of goods or services to a member, the partnership will be required to account for tax on the supply based on at least the fair market value of the goods or services.
The sale of a house that has not been previously occupied and related land (or an interest in it) is generally considered to be a taxable supply. Therefore, although the Property Owners had formed a partnership in respect of the construction of the house, once a house and related land is sold to a third party, each of the Property Owners who has an interest in that property is considered to be making a taxable supply of their interest in the property.
Each Property Owner will be required to collect and account for the tax on the taxable supply of their interest in the property. The tax payable by the third party (that is, the purchaser) will be calculated on the value of the Property Owner’s interest in the property (for example, if a Property Owner has a […] interest in the property, the value of their interest would generally be […] of the total sale price of the property). For information on accounting and remitting the tax, please refer to the information under the heading, “Vendor collects and remits the tax” of the guide RC4052, GST/HST Information for the Home Construction Industry.
However, if the purchaser of the house and related land is registered for GST/HST purposes and is not an individual, then the purchaser is required to account for the tax payable on the sale. Please refer to the information under the heading, “Purchaser pays tax directly to the CRA” of the guide RC4052, GST/HST Information for the Home Construction Industry.
Note that generally, if a Property Owner who makes a taxable supply of their interest in the property is not a GST/HST registrant (that is, a person who is not registered for GST/HST purposes and not required to be registered for GST/HST purposes) at the time of the sale of their interest in the property, the Property Owner may be entitled to claim a rebate for the tax that the Property Owner paid (if any) when the property was acquired and on tax for improvements to the property that the Property Owner had acquired.
Therefore, the Property Owners may be entitled to a rebate of the tax that they paid the partnership for the taxable supplies of goods and services that were supplied to them by the partnership in respect of the construction of the house. For information on this rebate, please refer to GST/HST Memorandum 19.3.6, Rebate on Non-Registrant’s Sale of Real Property and the heading “Rebate for taxable sale of real property by a non-registrant” of the guide RC4033, General Application for GST/HST Rebates.
Scenario 2: Where beneficial ownership of the real property has been acquired by a partnership
Where beneficial ownership of a subdivided lot has been transferred to a partnership (and as indicated above, it would have to be reasonably substantiated with appropriate documentation), the transfer of that interest by each of the Property Owners to the partnership would be considered to be a supply of real property. Generally, the supply of an interest in the lot by the Property Owners would be an exempt supply if the transfer occurred at a time when a house was being constructed on the lot for use as the Property Owner’s primary place of residence. In this case, the Property Owners would not be able to claim a rebate or an ITC to recover the GST/HST that was paid when they acquired the lot and on improvements they made to the lot (that is, the construction costs).
However, if the Property Owners transfer a beneficial interest in a lot to a partnership at a time when they were constructing (or had engaged another person to construct) a house on the lot in the course of a business, the transfer of the interest in the lot to the partnership will be a taxable supply. The GST/HST payable on the transfer will be calculated on the value held by each Property Owner of the interest in the lot being transferred. Where the partnership is a GST/HST registrant, it is the partnership, rather than the Property Owner, that will be required to account for the tax and remit that tax applicable on the transfer of the interest in the lot. For information on accounting and remitting the tax, please refer to the information under the heading, “Purchaser pays tax directly to the CRA” of the guide RC4052, GST/HST Information for the Home Construction Industry.
Generally, if an individual who makes a taxable supply by way of sale of their interest in the property is not a GST/HST registrant at the time of the sale of their interest in the property, the individual may be entitled to claim a rebate under section 257 for the tax that the individual paid (if any) when the property was acquired and on tax for improvements to the property that the individual had acquired prior to the transfer of their interest in the property.
The partnership, if a GST/HST registrant, may be entitled to claim an ITC for the tax paid or payable on its purchases of goods or services for consumption or use in completing the construction of the houses on the subdivided lots that are for sale to third parties on which it has a beneficial interest. It may also be entitled to claim an ITC for the tax payable on the transfer of a beneficial interest in the lot from a Property Owner. In order to claim these ITCs, the eligibility criteria for claiming an ITC, as outlined in paragraph 3 of GST/HST Memorandum 8.1, must be met.
In this scenario, the house and related land that is subsequently sold to a third party will be a taxable supply made by the partnership. Therefore, the partnership will be required to collect and account for the tax calculated on the value of the consideration for the taxable supply. However, if the third party purchaser is registered for GST/HST purposes and is not an individual, then the purchaser is required to account for the tax payable on the sale.
DISCLAIMER
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, the CRA is bound by the ruling given in this letter provided that: none of the issues discussed in the ruling are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed. The interpretations given in this letter, including any additional information, is not a ruling and does not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretations or the additional information provided herein.
CONTACT
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 306-914-1122. Should you have additional questions on the interpretation and application of the GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Sincerely,
Ron Litzenberger
Industry Sector Specialist
Real Property Unit
Financial Institutions and Real Property Division
GST/HST Rulings Directorate
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