28 February 2019 CBA Roundtable, Q.12

Where a vendor transfers an office tower without a s. 167 election being made, would a reimbursement to the vendor at closing for the portion of prepaid property taxes relating to the post-closing period be treated as a non-taxable reimbursement of taxes paid as agent for the purchaser. Before finding that such payment would instead be treated as an adjustment of the purchase price, CRA stated:

[S]ome refer to the adjustment to compensate the vendor for the property taxes the vendor paid as a non-taxable reimbursement, which implies that the vendor paid the property tax to the municipality as agent acting on behalf of the purchaser. … [T]here are three essential qualities that help in determining whether a person is acting as agent in making a transaction on behalf of another person. The three essential qualities are: consent of both the principal and the agent; authority of the agent to affect the principal’s legal position; and the principal’s control of the agent’s actions.]

Based on the scenario, there is no evidence that the essential qualities that determine whether a person is acting as agent in making a transaction on behalf of another person are met.

A vendor transfers an office tower without a s. 167 election being made:

(a) Would a reimbursement to the vendor at closing for the portion of prepaid property taxes relating to the post-closing period be treated as: (i) a non-taxable reimbursement of taxes paid as agent for the purchaser; or (ii) an adjustment of the purchase price.

(b) Would the assignment by the vendor of tenant leases form part of the single supply of the building where none of the purchase price was allocated to the leases?

CRA responded:

(a)

Based on the scenario, there is no evidence that the essential qualities that determine whether a person is acting as agent in making a transaction on behalf of another person are met. Consequently … no agency relationship exists between the vendor and the purchaser, and therefore, the prepayment of property taxes by the vendor cannot be treated as a non-taxable reimbursement of taxes paid as agent for the purchaser.

Consequently, it is our view that the adjustment for the amount equivalent to the portion of the property taxes that relates to the period during which the purchaser will be the owner of the real property is additional consideration for the supply of the real property.

(b)

In applying Policy Statement P-077R2 to the scenario: there is one supplier and one recipient; the sale of the office building is one element of the supply; the assignment of tenant leases is another element of the supply; none of the purchase price is allocated to the leases (but a single price does not in itself determine whether there are one or more supplies); and the recipient does not have the option to acquire the building without the assignment of tenant leases.

Consequently, it is our view that the sale of the office building and the assignment of tenant leases likely form a single supply. However, we would have to review the applicable agreements before we could make a definitive pronouncement on the matter.