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
Case Number: 106371
Attention: XXXXX
January 14, 2009
Subject:
GST/HST RULING
Sale of new house by XXXXX
Dear XXXXX:
Thank you for your letter of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the sale of a new residential complex by your client, XXXXX. We apologize for the delay in providing a response.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified. As the real property in question is situated in British Columbia (BC), a province that is not participating in the HST, our response will be restricted to the GST implications.
Statement of Facts
We understand the following:
1. XXXXX is an individual who is currently employed in XXXXX (XXXXX) XXXXX.
2. XXXXX has a Business Number (XXXXX), however the GST/HST account under this Business Number (XXXXX) is in a "non-registrant" status.
3. Prior to the events described below, XXXXX had never owned a house; he currently lives in rental accommodation.
4. On XXXXX, XXXXX purchased a residential complex that consisted of a lot and a house at XXXXX, bearing the legal description of XXXXX (the Original House). The Original House was located within a XXXXX from his work and within a XXXXX from his wife's work.
5. XXXXX financed the purchase of the Original House through a mortgage with XXXXX, along with additional financial assistance, in the form of a personal loan, from XXXXX.
6. XXXXX did not pay GST when he purchased the Original House.
7. XXXXX's stated intention was to renovate the Original House. However, in the summer of XXXXX, after he had discussed the renovations that would be required with an engineer, he decided to remove the Original House and build a new house (the New House).
8. XXXXX obtained additional financial help for the removal of the Original House and construction of the New House from XXXXX.
9. XXXXX, a GST/HST registrant, was hired as the contractor to build the New House.
10. XXXXX's XXXXX is a shareholder/owner of XXXXX.
11. Construction of the New House began in the fall of XXXXX.
12. The New House was designed to be a three-bedroom house with a potential suite downstairs.
13. XXXXX's stated intention was to reside in the upper portion of the New House and rent out the suite in the lower portion of the New House.
14. XXXXX paid GST on the costs he incurred to remove the Original House and construct the New House
15. The New House was completed in XXXXX.
16. After the New House was completed, XXXXX listed the New House with XXXXX for $XXXXX. XXXXX's stated intention for listing the New House was to get an idea of its "price range".
17. In the listing with XXXXX, the New House was described as:
XXXXX
XXXXX.
XXXXX.
18. Of the offers received, XXXXX accepted one from XXXXX.
19. On XXXXX, XXXXX entered into a Contract of Purchase and Sale (the Contract) with the XXXXX for the sale of the New House for $XXXXX (with a deposit of $XXXXX). As per the Addendum to the Contract, XXXXX The XXXXX paid $XXXXX in GST, at the tax rate of 6%.
20. Ownership and possession of the unoccupied New House was transferred to the XXXXX on XXXXX.
21. The commission paid to the realtor was $XXXXX plus $XXXXX GST, at the tax rate of 5%.
22. XXXXX did not complete and file a GST22 - Real Property - Election to Make Certain Sales Taxable in relation to the sale of the New House.
23. On XXXXX, XXXXX remitted the GST charged and collected from the XXXXX.
24. XXXXX's stated intention is to purchase another parcel of land and build another new house for his residence.
Ruling Requested
You have asked for a ruling on the tax status of XXXXX's sale of the New House and whether tax was correctly charged, collected and remitted. You have also asked for confirmation that XXXXX is entitled to recover the GST he incurred in constructing the New House through the rebate mechanism under section 257.
Ruling Given
Based on the facts set out above:
1. With respect to the New House, we rule that XXXXX is a builder, as defined in subsection 123(1), and that his supply by way of sale of the New House to the XXXXX was a taxable supply. As a result, XXXXX was required to charge and collect the GST at the tax rate of 5% for the supply of the New House.
2. As XXXXX is a non-registrant for purposes of the GST/HST, we rule that he is entitled to claim a rebate under section 257 equal to the basic tax content of the New House provided that the rebate is claimed in the prescribed form and manner within the time limit for claiming this rebate.
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
Ruling #1
A supply of real property made in Canada is subject to the GST/HST unless there is a specific exempting provision.
In examining the facts submitted, section 2 of Part I of Schedule V to the ETA must be considered to determine if XXXXX's supply of the New House is exempt. As section 2 of Part I of Schedule V to the ETA provides an exemption for a supply by way of sale of a residential complex or an interest in a residential complex made by a particular person who is not a builder of the complex, it is necessary to first determine if XXXXX is the builder of the New House for GST/HST purposes.
An individual who constructs a residential complex, or engages someone to construct the complex on land that they own is considered a builder within the meaning of "builder" set out in subsection 123(1), if the construction is made in the course of a business or an adventure or concern in the nature of trade of the individual. Where an individual constructs, or engages someone to construct, a residential complex on land that they own for his or her own personal use, without the primary or secondary intention of resale, the individual would not normally be viewed as constructing the complex in the course of a business or an adventure or concern in the nature of trade and such an individual would not be considered a "builder" within the meaning of the ETA. However, if the individual has constructed, or engaged someone to construct, the residential complex on land that they own with the primary or secondary intention of resale, the individual may have constructed the complex in the course of an adventure or concern in the nature of trade or in the course of a business. In such a case, the individual would fall within the definition of "builder".
Info Sheet GI-005 - Sale of a Residence by a Builder who is an Individual provides basic information on whether or not an individual is a builder for GST/HST purposes. An individual may be a builder if the individual's primary or secondary intention in building a new residential complex is the prospect of the sale of the residential complex at a profit. This intention may be inferred, for example, where the financing of the purchase of the residential complex is beyond the individual's means and may depend on increased value and saleability of the residential complex in a burgeoning housing market. An individual may also be a builder if the individual arranges for short-term financing or financing without balance repayment penalties, or the individual puts the new residential complex up for sale or undertakes other activities to attract buyers before the individual uses the residential complex as a place of residence.
In examining the various indicators, it was determined that XXXXX falls within the definition of "builder" under subsection 123(1). Therefore, his supply by way of sale of the New House is not exempt under section 2 of Part I of Schedule V to the ETA and he was required to charge, collect and remit GST at the tax rate of 5%.
Please refer to page 6 for information regarding the change in the tax rate and how, under section 261, the XXXXX may be entitled to claim a rebate for the amount of tax paid in error.
Ruling #2
Where a non-registrant person has made a taxable supply by way of sale of real property, the non-registrant person may be entitled to claim a rebate under section 257.
This rebate generally allows the non-registrant to recover all or part of the GST they paid when they acquired the real property and when they made any subsequent improvements to the property. The rebate is equal to the lesser of the "basic tax content" of the property and the tax payable by the purchaser on the sale of the real property made by the non-registrant.
The term "basic tax content" is defined in subsection 123(1). Generally, the "basic tax content" of a property of a person is the tax payable by the person on the last acquisition of the property, plus any tax payable on any subsequent improvements made by the person to the property (e.g., the removal of the Original House and the construction of the New House), less rebates (but not input tax credits) the person was entitled to claim, minus an adjustment for the depreciation, if any, in the fair market value of the property since the property was last acquired. Pursuant to subsection 123(1), "improvement", in respect of property of a person, means any property or service supplied to, or goods imported by, the person for the purpose of improving the property, to the extent that the consideration paid or payable by the person for the property or service or the value of the goods is, or would be if the person were a taxpayer under the Income Tax Act, included in determining the cost or, in the case of property that is capital property of the person, the adjusted cost base to the person of the property for the purposes of the Income Tax Act.
Detailed information on the calculation of the "basic tax content" as it relates to the rebate under section 257 is included in GST/HST Memorandum 19.3.6, Rebate on Non-registrant's Sale of Real Property, starting at paragraph 4. To claim a rebate under section 257, a person must complete GST189 - General Application for Rebate of GST/HST (GST189), using Reason Code 7. Step-by-step instructions on how to complete the rebate form are provided in the guide RC4033, GST/HST General Rebate Application.
As a non-registrant who made a taxable supply of real property by way of sale, XXXXX is entitled to claim the rebate under section 257 equal to the basic tax content of the New House provided that the rebate application is completed as required and filed by the time limit for claiming the rebate. Generally, in this case, the basic tax content of the New House is equal to the GST paid by XXXXX in respect of costs incurred to remove the Original House and construct the New House.
A rebate shall not be paid to a person under section 257 in respect of a taxable sale of real property made by the person unless the person files an application for the rebate (i.e., the GST189) within two years after the day the consideration for the supply of the real property became due or was paid without having become due.
ADDITIONAL INFORMATION
Effective January 1, 2008, the rate of the GST was reduced from 6% to 5%. Where a builder and a purchaser entered into an agreement of purchase and sale after October 30, 2007, the rate of the GST charged on the supply by way of sale of a residential complex depended on when ownership and possession of the complex was transferred. Where either ownership or possession transferred before January 1, 2008, the builder was required to charge and collect GST at the rate of 6%; where both ownership and possession transferred after December 31, 2007, the builder was required to charge and collect GST at the rate of 5%.
As the Contract was entered into after October 30, 2007, and both ownership and possession of the New House was transferred after December 31, 2007, the applicable tax rate for XXXXX's supply of the New House to the XXXXX was 5%, not 6%. In addition, the XXXXX are not entitled to claim the GST/HST transitional rebate. In this case, the transitional rebate is not available since the parties entered into the purchase and sale agreement after October 30, 2007.
Where a person paid an amount as or on account of tax in error, the person may be entitled to claim a rebate for this amount under section 261. To claim the rebate under section 261, the person would complete the GST189 using Reason Code 1. As with the rebate under section 257, step-by-step instructions on how to complete the GST189, using Reason Code 1, are provided in the aforementioned guide RC4033. The person must file the application for the rebate within two years after the day the amount as or on account of tax was paid in error by the person. Provided that all of the conditions for claiming the rebate are met, the XXXXX would be entitled to file a rebate application with the CRA to claim a rebate for the tax paid in error to XXXXX (i.e., the extra 1%). You have indicated that you will be advising the XXXXX of this rebate provision.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 604-691-4742. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Marjorie Stevens
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
FOOTNOTE:
XXXXX
UNCLASSIFIED
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