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.
Excise and GST/HST Rulings
Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
XXXXX
XXXXX
XXXXX
XXXXX
Case Number: 61722
Attention: XXXXX
November 18, 2008
Subject:
GST/HST RULING
GST Treatment of Sale of Shares and Associated Rights to Use Land
Dear XXXXX:
Thank you for your letter of XXXXX, and your XXXXX, concerning the application of the Goods and Services Tax (GST) / Harmonized Sales Tax (HST) to supplies made under a shareholders' agreement. XXXXX.
The following is based on all of the documentation provided as well as the information provided during our various telephone calls, including the most recent call held on XXXXX. In our telephone conversation of XXXXX, you changed your request from an interpretation to a ruling.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified. Since the subject XXXXX of this ruling is not situated in a participating province, reference will only be made to the GST.
Statement of Facts
Based on the information provided we understand the facts for the purposes of this ruling to be as follows:
1. XXXXX (the "Company") is registered for GST purposes.
2. The Company is not a public service body for GST purposes.
3. The Company is not a strata corporation, a condominium corporation or a cooperative housing corporation.
4. The subject property of this ruling is land (i.e., real property) consisting of XXXXX, which is legally described as XXXXX (the "Property").
5. The Property is a single parcel with a single legal description and is located XXXXX. The Property is located XXXXX.XXXXX.
6. The Company purchased the Property and the XXXXX from XXXXX (the "Vendor") on XXXXX, for a total consideration of XXXXX.
7. XXXXX.
8. The Company is the sole owner of the Property in XXXXX.
9. The Company purchased the Property to allow for its use in XXXXX and for XXXXX shareholders of the Company (the "Shareholders") to have use of parts of the Property as set out in the below in this Statement of Facts.
10. In terms of land area, XXXXX was acquired by the Company for XXXXX and the remainder of the Property XXXXX was acquired by the Company for use by the Shareholders.
11. After purchasing the Property, the Company sold the XXXXX to a third party, XXXXX.
12. XXXXX.
13. XXXXX.
14. XXXXX.
15. XXXXX.
16. XXXXX.
17. XXXXX.
18. The Company entered into a shareholders' agreement, dated XXXXX (the "Agreement") with XXXXX (the "Shareholders").
19. XXXXX separate housing sites have been created on the Property (the "XXXXX Sites"). Each XXXXX Site consists of vacant land in the form of a serviced lot intended for residential use.
20. Notwithstanding the creation of the XXXXX Sites, the Property consists of one parcel of land with one legal description and has not been legally severed or subdivided into parts.
21. XXXXX.
22. XXXXX.
23. The Agreement permits the Company to issue XXXXX (a "block of Shares") to each Shareholder. XXXXX.
24. While the Shareholders collectively own and control the Company, the Shareholders have no ownership interest in the Property itself.
25. Under the Agreement, each block of Shares entitles the registered Shareholder to the exclusive use and occupancy, in perpetuity, of one XXXXX Site XXXXX:
XXXXX
XXXXX
XXXXX.
26. Each designated XXXXX Site is for the exclusive personal use of the Shareholder to whom it is designated under the Agreement and the privacy of other Shareholders is to be always respected. XXXXX.
27. Note, for purposes of this ruling, a Shareholder's exclusive right to use and occupy a designated XXXXX Site together with the Shareholder's shared right to use other parts of the Property that are reasonably necessary for the use of the XXXXX Site, including the XXXXX common facilities, are referred to as the "land-use rights".
28. A Shareholder's land-use rights, which include the construction and occupation of buildings on the Shareholder's XXXXX Site, XXXXX.
29. There is no requirement in the Agreement (or elsewhere) that a Shareholder affix a residential unit to their designated XXXXX Site after the Shareholder obtains the land-use rights under the Agreement.
30. The XXXXX Sites are not sites in a residential trailer park as defined in subsection 123(1) and no other part of the Property is included in a residential trailer park.
31. The Shareholders XXXXX, are entitled to the exclusive use and occupancy, in perpetuity, of their designated XXXXX Sites.
32. A Shareholder's land-use rights continue so long as the Shareholder continues to own a block of Shares and to remain a party to the Agreement.
33. At the time a block of Shares is issued and the land-use rights are granted by the Company to a Shareholder, a share certificate is issued to the Shareholder and the Agreement is entered into between the Company and the Shareholder. The Company provides no other documents to the Shareholder and no other agreements are entered into between the Company and the Shareholder.
34. The price each Shareholder is required to pay for the land-use rights and for the issuance of a block of Shares depends on the value of the XXXXX Site at the time of purchase, which in turn depends in part on the location of their designated XXXXX Site.
35. Based on the Agreement, XXXXX Sites XXXXX have not been supplied by the Company and are therefore not yet designated for a Shareholder's exclusive use.
36. At the time each of the XXXXX Shareholders entered into the Agreement, none of the Shareholders had affixed or situated a residential unit as defined in subsection 123(1) or travel trailer on their designated XXXXX Site.
37. As of XXXXX, only one of the XXXXX Shareholders had begun the construction of a single detached house.
38. XXXXX the Company has installed access roads and other facilities, such as XXXXX (referred to as the "common facilities"), necessary for the residential use of the XXXXX Sites and common areas by the Shareholders. Funds from the issuance of blocks of Shares and the granting of the associated land-use rights were used by the Company to install the common facilities.
39. Following the installation of the common facilities, the maintenance of these facilities is the responsibility of the Shareholders XXXXX. Once maintenance costs are assigned, payment is due, on a pro-rata basis, by each Shareholder within XXXXX days, unless otherwise arranged and agreed to by all Shareholders concerned.
40. A Shareholder is permitted to sell their block of Shares together with the associated land-use rights and any buildings that may be constructed on the Shareholder's designated XXXXX Site, subject to the terms of the Agreement, including approval of the proposed new Shareholder XXXXX.
41. In the event that a proposed new Shareholder is not approved XXXXX, the Shareholders have the first right of refusal to buy the block of Shares, together with the associated land-use rights and any buildings, from the selling Shareholder within a period of XXXXX days.
42. All proposed new Shareholders who are approved XXXXX must enter into the Agreement XXXXX, prior to having the transfer of the block of Shares approved by the Company.
43. XXXXX.
44. XXXXX. Following the annual meeting, each Shareholder will receive an assessment to be paid by the Shareholder to the Company, so that the Company can cover budgeted expenses, which include the maintenance of common facilities and other amenities.
45. XXXXX.
46. XXXXX.
47. XXXXX.
48. The Company has the responsibility for the payment of property taxes to the applicable taxing authority in respect of the Property as well as any buildings or other improvements affixed thereto. Each Shareholder is required to pay to the Company any property taxes due that are attributable to the buildings or other improvements associated with the Shareholder's XXXXX Site. XXXXX.
Rulings Requested
You would like to know the following:
1. Is the issuance of a block of Shares by the Company to a Shareholder as set out in the Agreement subject to GST?
2. Are there any other GST liabilities arising as a consequence of the Agreement entered into between the Company and a Shareholder?
Rulings Given
Based on the facts set out above, we rule that:
1. The issuance of a block of Shares by the Company to a Shareholder is not a supply for GST purposes but rather an element of a single supply of real property.
2. The GST liabilities arising as a consequence of the Agreement entered into between the Company and a Shareholder are as follows:
a) The Company's supply of real property made to each of the XXXXX Shareholders at the time the Agreement was entered into and the block of Shares were issued is a taxable supply of real property made by way of lease, licence, or similar arrangement and the Company is required to collect GST calculated on the value of the consideration payable in respect of these supplies.
b) The amount payable by a Shareholder to the Company as a consequence of receiving a block of Shares and the associated land-use rights under the Agreement is consideration for the taxable supply of real property made by the Company to the Shareholder.
c) The total annual amount payable to the Company by a Shareholder for property taxes and the maintenance of common amenities is consideration for the supply of real property by way of lease, licence or similar arrangement made by the Company to the Shareholder. Where the supply of real property by way of lease, licence or similar arrangement is a taxable supply, the Company is required to collect GST in respect of the supply.
d) The transfer of XXXXX rights from the Company to XXXXX is deemed not to be a supply for GST purposes in accordance with subsection 162(2).
These rulings are subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by these rulings provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
Explanation
Company makes a supply of real property
The Company provides a new Shareholder with a block of Shares together with the land-use rights (i.e., the exclusive right to use and occupy a designated XXXXX Site as well as the shared right to use certain common areas and facilities of the Property that are reasonably necessary for the use of the XXXXX Sites). The block of Shares and the land-use rights provided by the Company are interdependent and each is an integral part of what the Company is providing to the Shareholder. A Shareholder does not have the option to acquire a block of Shares separately from the land-use rights. In applying policy statement P-077R2, Single and Multiple Supplies, the Company is making a single supply to a Shareholder. The issuance of a block of Shares is considered to be an element of this supply. However, the provision of the land-use rights is the predominant element of the supply. As such, the Company is considered to be making a single supply of the land-use rights to a Shareholder.
For GST purposes, the Company's supply of the land-use rights is a supply of the right to use real property by way of lease, licence or similar arrangement (hereafter referred to as a "lease" (XXXXX)). Such a supply of the land-use rights by way of lease is a supply of real property in accordance with subsection 136(1).
Supply of real property is taxable
The supply of real property made by the Company to a Shareholder (which includes a XXXXX Site) is subject to GST unless an exemption applies under Schedule V to the ETA. Since the Company is not a "public service body" or a "charity" and XXXXX Sites are not sites in a "residential trailer park" (as those terms are defined for GST purposes), the only possible exemption for the supply of real property made by way of lease by the Company is paragraph 7(a) of Part I of Schedule V to the ETA.
Where a Shareholder is not in possession of a "residential unit" as defined in subsection 123(1) at the time the Agreement is entered into and the block of Shares is issued, the exemption under paragraph 7(a) of Part I of Schedule V to the ETA would not apply unless it can be clearly established at that time that the Shareholder will affix a residential unit to the XXXXX Site within a reasonable period of time. Since under the Agreement a Shareholder is under no obligation to affix a residential unit to their XXXXX Site and the XXXXX Shareholders were not in possession of residential units at the time they entered into the agreement, the supply of real property made by the Company to each of the XXXXX Shareholders at the time the Agreement was entered into and the block of Shares was issued is subject to GST.
Where GST is paid or becomes payable prior to July 1, 2006, on a taxable supply of real property made by way of lease, the GST applies at a rate of 7%. Where GST is paid or becomes payable on such a supply on or after July 1, 2006, but prior to January 1, 2008, the GST applies at a rate of 6%. And where GST is paid or becomes payable on such a supply on or after January 1, 2008, GST applies at a rate of 5%.
For a taxable supply of real property made by way of lease the GST becomes payable on the earlier of the day the consideration for the supply is paid and the day that it becomes due under subsection 168(1). Where the lease is under an agreement in writing, subsection 152(2) provides that the consideration, or any part of it, is deemed to become due on the day the recipient is required to pay the consideration or part of it to the supplier under the agreement.
The initial lump-sum payment made by each of the XXXXX Shareholders at the time a block of Shares was issued and the Agreement was entered into was a lease payment for the taxable supply of real property made by way of lease. As a GST registrant, the Company is required to collect GST from the recipient (i.e., the Shareholder) of a taxable supply of real property made by way of lease in accordance with subsection 223(1). Since each initial lump-sum payment was made prior to July 1, 2006, the Company is required to collect GST at a rate of 7% in respect of these payments.
Annual payments
For GST purposes, a "lease interval" is a period of time in a lease arrangement that is attributable to each lease payment. Since a Shareholder is required to make annual payments to cover the Company's costs for maintaining and managing the infrastructure and common facilities and the property taxes in respect of the Property, each one year period is a "lease interval". Under subsection 136.1(1), the Company is deemed to make and the Shareholder is deemed to receive a separate supply of real property by way of lease for each annual lease interval. Where the supply of real property for a particular annual lease interval is a taxable supply, the GST rate applicable to that supply will depend on the GST rate in effect at the earlier of the time the annual lease payment attributable to that lease interval is made and the time the annual payment falls due.
While the lease of the real property to a Shareholder is initially subject to GST, it may become exempt in a subsequent annual lease interval if it is clearly established at the beginning of that lease interval that the Shareholder intends to affix a residential unit to its XXXXX Site. For example, if a Shareholder was to begin to construct a house on their designated XXXXX Site sometime after the beginning of the second annual lease interval, the supply of the real property by way of lease would become exempt under paragraph 7(a) of Part I of Schedule V to the ETA at the beginning of the third annual lease interval. As a result, the Company would no longer be required to collect GST in respect of any further lease payments (i.e., the total amount paid annually for the property taxes and the maintenance of common amenities) made by the Shareholder.
Company's entitled to claim ITCs
Generally, a GST registrant is entitled to recover the GST paid or payable on any property or services acquired to the extent that the property or service is for use, consumption or supply in the course of its commercial activities by claiming and ITC. In this case, the Company acquired the Property for the purpose of making a supply of XXXXX by way of sale and the supply of real property by way of lease. While the supply of XXXXX, the position of the Canada Revenue Agency (CRA) is that the XXXXX. Therefore, XXXXX, the supply of the XXXXX, the Company is entitled to claim ITCs in respect of the property or services acquired (such as the Property) for the purpose of making the supply of the XXXXX. Also, since the supplies of real property made by way of lease are taxable supplies, the Company is entitled to claim ITCs on the purchase of property and services acquired for the purpose of making those supplies in accordance with paragraph (c) of element "B" of subsection 169(1).
While the Company did not pay GST on the purchase of the Property (as a result of having filed an election under section 167), the Company is entitled to claim ITCs on any improvements which may have been made by the Company subsequent to the purchase of the Property. For GST purposes "improvements" with respect to capital property are defined as property or services acquired for the purpose of improving the property to the extent that the cost of the property or services acquired is included in determining the adjusted cost base of the property for purposes of the Income Tax Act or would be so included if the person were a taxpayer under that Act. Generally, ITCs in respect of improvements to capital property of a person are based on the extent to which the property is used in the person's commercial activities immediately after the property was last acquired by the person.
Change in use
While the Company began to use the Property exclusively in commercial activities upon its acquisition, if one or more supplies of real property made by way of lease become exempt supplies in subsequent annual lease intervals, the Property may undergo a change-in-use. The extent of the Property's use in commercial activities for change-in-use purposes is based on the use of the entire Property. Provided the supply of XXXXX remains unchanged and there are no other changes in the use of the Property, then the event that could trigger a change-in-use for GST purposes would be the beginning of a particular annual lease interval where the conditions under paragraph 7(a) of Part I of Schedule V to the ETA are first met for a supply of real property made by way of lease to one or more Shareholders. This would result in a decrease in the extent to which the Property is used by the Company in commercial activities and, depending on the extent of this decrease, the Company may undergo a change-in-use under either subsection 206(5) or 206(4). However, a change-in-use would not be triggered for GST purposes unless the decrease in the extent of the Property's use in commercial activities is 10% or more on a cumulative basis, as described in section 197.
The extent to which the Property's use in commercial activities decreases will depend upon how many supplies of real property by way of lease become exempt. Where the change-in-use rules apply in a particular reporting period of the Company, there will be a recapture under subsection 206(5) of a portion of the ITCs claimed or under subsection 206(4) of all of the ITCs claimed by the Company with respect to the improvements made to the Property, depending on the extent of the change-in-use in that reporting period. Subsection 141.01(5) requires that the method used to determine the extent of use in commercial activities has to be fair and reasonable and used consistently throughout the year under. Calculating the extent of use based solely on land area is not fair and reasonable in cases where the value of the residential use areas is significantly higher than the other areas.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Goods and Services Tax Rulings, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
For your convenience, refer to GST/HST Memorandum 1.4, Goods and Services Tax Rulings which can be found at our Web site www.cra-arc.gc.ca.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 954-8852.
Yours truly,
Daryl Hooley
Industry Sector Specialist
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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