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: 245296
Dear [Client]:
Subject: GST/HST INTERPRETATION
Supply of real property by a government
Thank you for your correspondence of [mm/dd/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to supply of real property by a government.
The 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.
We understand the following from your email correspondence and our phone calls:
1. The mandate of […][Provincial Department A] is to set the overall strategic and operational policy direction, establish and allocate funding for […], ensuring accountability for outcomes. This includes allocating funding to the various school divisions in the Province […].
2. […][Provincial Department B] is building […][a School] on […] land that will be transferred to the […] (the School Division) at a nominal amount of $1 once construction is complete.
3. The School Division is registered for GST/HST purposes and is considered to be a school authority for GST/HST purposes.
4. The School Division is primarily engaged in exempt activities, and is eligible to claim the public service bodies rebate (PSB rebate) on a monthly basis as a school authority. It is also engaged in commercial activities which includes the supply of parking spaces.
5. Typically, the School Division coordinates their school builds directly and pays the contractor invoices (on which […][GST/HST] is paid). The School Division subsequently claims a PSB rebate […]. The School Division does not have an exemption certificate and is not a listed entity under Schedule A to a Reciprocal Tax Agreement.
6. In ordinary circumstances, the [Provincial] Government […] provides the majority of the funding to the School Division and flows funding to the School Division […] so that they can repay their long-term capital loans taken out to pay for the school builds.
7. Due to delays with the land ownership transfer, [Provincial Department B] coordinated the building of the School. Construction of the School will be complete in [yyyy], at which point the School and the land will be transferred to the School Division at a nominal value.
8. [Provincial Department B] is registered for GST/HST purposes, and is entitled to full relief from GST/HST on its purchases pursuant to the Reciprocal Taxation Agreement between the Government of Canada and the [Provincial] (the RTA).
INTERPRETATION REQUESTED
You would like to know whether the School Division will be required to collect and remit the [GST/HST] on the nominal cost only, or on the fair market value (FMV) of the Schools at the time of transfer.
INTERPRETATION GIVEN
Where the legal ownership of real property is transferred under an agreement, the transfer generally represents a sale, and hence a supply of the property for GST/HST purposes.
Generally, all supplies of real property made in Canada are taxable for GST/HST purposes unless a specific exemption applies. Exempt supplies are listed in Schedule V and are not subject to the GST/HST. There are no exemptions in Schedule V that apply to the scenario presented.
As noted in Fact #8, [Provincial Department B] is entitled to full relief from GST/HST payable as the recipient of a supply, however this is not extended to its obligations as the supplier of a particular supply. As the School Division is not a listed entity in Schedule A to the RTA, the School Division is not relieved of its GST/HST obligations. Therefore, [Provincial Department B], as the supplier, would generally be required to collect and to remit the GST/HST in respect of taxable supplies it makes to the recipient, pursuant to paragraph 122(b).
Non-arm's length transfer
A supply made for no consideration, or for consideration less than fair market value (FMV) between parties not dealing at arm's length may possibly be subject to subsection 155(1) which generally deems the value of the consideration for the supply to be equal to the FMV of the property or service at the time the supply is made, with certain exceptions. The relevant exceptions are discussed below under the heading “Exceptions to the non-arm's length provision”.
It is a question of fact whether persons are, at any particular time, dealing with each other at arm's length. The term “non-arm's length” is not defined in the ETA and is generally understood to mean a relationship where persons are acting in concert without separate interest, rather than acting independently of each other.
The term “non-arm's length” also includes persons who are related, which is a defined term in subsection 126(2) to include persons who are related under subsections 251(2) to (6) of the Income Tax Act. These provisions generally only speak to persons that are individuals or corporations and are generally contingent on whether one person has a controlling interest in the other person, or a related third party.
For more information with respect to FMV and non-arm's length supplies please refer to GST/HST Policy Statement P-165R, Fair Market Value for Purposes of Part IX of the Excise Tax Act; Income Tax Folio S1-F5-C1, Related Persons and Dealing at Arm's Length; and Interpretation Bulletin IT-64R4 (Consolidated), Corporations: Association and Control.
Exceptions to the non-arm's length provision
Subsection 155(1) does not apply, in part, where the recipient of the supply is registered for GST/HST purposes and is acquiring the property exclusively (90% or more) for consumption, use or supply in the recipient's commercial activities.
Further, subparagraph 155(2)(b)(iii) provides that subsection 155(1) does not apply to a supply of property or a service by a person where, in the absence of subsection 155(1), the supply would be an exempt supply included in Part V.1 or Part VI of Schedule V. However, where no exemptions apply to a supply of property or a service under either of those Parts, subsection 155(1) would apply to the supply of real property which would generally deem the value of the consideration for the supply of real property to be equal to the FMV of the property at the time the supply is made.
Paragraph 221(2)(b) relieves a supplier who makes a taxable supply by way sale of real property from collecting the tax payable by the recipient of the supply in situations where the recipient is registered for GST/HST purposes. Therefore, if the School Division is the recipient of the supply of the School and is registered for GST/HST purposes at the time the supply is made, then [Provincial Department B] is relieved from collecting the GST/HST and GST/HST is not charged on the sale.
Where paragraph 221(2)(b) applies, the recipient of the supply of real property, the School Division, is required to self-assess the tax payable under subsection 228(4), which states,
“If tax under Division II is payable by a person in respect of a supply of property that is real property or an emission allowance and the supplier is not required to collect the tax and is not deemed to have collected the tax,
(a) where the person is a registrant and acquired the property for use or supply primarily in the course of commercial activities of the person, the person shall, on or before the day on or before which the person’s return for the reporting period in which the tax became payable is required to be filed, pay the tax to the Receiver General and report the tax in that return; and
(b) in any other case, the person shall, on or before the last day of the month following the calendar month in which the tax became payable, pay the tax to the Receiver General and file with the Minister in prescribed manner a return in respect of the tax in prescribed form containing prescribed information.”
Further information concerning who collects and remits the GST/HST in respect of a taxable sale of real property is available in GST/HST Memorandum 19.1, Real Property and the GST/HST, or Guide RC4022, General Information for GST/HST Registrants under the heading “Real property.”
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 interpretation(s) given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 902-430-8136. 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,
Darrell Kelloway
Senior Rulings Officer
Real Property Unit 2
Financial Institutions and Real Property Division
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