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
XXXXX
Case Number: 89039Business Number: XXXXX
Attention: XXXXX
February 27, 2009
Subject:
GST/HST RULING
Supply of land held in joint tenancy
Dear XXXXX:
Thank you for your letter of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain real property transactions between your clients XXXXX and XXXXX, and XXXXX. Your query was forwarded to our office for reply by the XXXXX GST/HST Rulings Centre. Please accept my apology for the delay in providing our response.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Statement of Facts
We understand the facts as follows.
1. XXXXX has been registered for GST/HST purposes as a sole proprietor since XXXXX, in relation to his XXXXX business.
2. His wife, XXXXX, is not active in the XXXXX business and is not registered for GST/HST purposes.
3. The XXXXX are the registered owners in joint tenancy of XXXXX-acre parcel of land in XXXXX, legally described as XXXXX, and hereafter referred to as "the Lands".
4. The XXXXX use or supply the Lands as follows:
a) Mr. XXXXX uses approximately XXXXX acres XXXXX in the course of his XXXXX business;
b) they lease approximately XXXXX acres to XXXXX under a verbal agreement stipulating semi-annual lease payments totalling $XXXXX plus GST per year. No residential structures are situated on this leased portion of the Lands;
c) they granted XXXXX ("CanCo") certain rights and interests as described below; and
d) they reserve the remainder of the Lands for their family home.
5. On XXXXX, the XXXXX and CanCo executed a Licence and Option to Lease Agreement in relation to the Lands (hereafter referred to as the "Licence Agreement"), the relevant provisions of which may be summarized as follows.
a) The Licence Agreement is for a XXXXX-year term (the "Term"), renewable by CanCo for a further term of XXXXX years ("Renewal Term").
b) The XXXXX grant CanCo, XXXXX an exclusive licence to enter the Lands, or certain portions of the Lands as determined by CanCo, for the purpose of assessing the suitability of the Lands for wind energy conversion and transmission of electric power and related activities.
c) In consideration of the rights and privileges granted in the Licence Agreement, CanCo agrees to pay the following sums yearly, in advance:
(i) $XXXXX for each of the first XXXXX years of the Term;
(ii) $XXXXX for the balance of the Term; and
(iii) $XXXXX for each year of the Renewal Term.
d) In consideration of these payments, the XXXXX also grant CanCo an exclusive and irrevocable option (the "Option") to lease the Lands, or certain portions of the Lands, as determined by CanCo.
e) Nothing contained in the Licence Agreement is to be construed as creating a relationship of principal and agent, lessor and lessee, or of partnership or joint venture between the parties. If the Option is exercised, a relationship of lessor and lessee is created.
f) The XXXXX permit CanCo to register a notice of the Option in the appropriate Land Registry Office or Land Titles Office.
g) Schedule XXXXX to the Licence Agreement sets out the terms and conditions for the lease of the Lands (the "Lease") in the event that CanCo exercises the Option.
6. On XXXXX, CanCo registered the Licence Agreement in the Registry Office XXXXX, confirming that it had an unregistered estate, right, interest or equity in the Lands.
7. On the same date, CanCo exercised the Option, bringing the Lease into effect in relation to approximately XXXXX acres of the Lands (referred to XXXXX as the "Portions"). The relevant terms and conditions of the Lease for purposes of this ruling may be summarized as follows.
a) The XXXXX, for the purposes and rental set out in the Lease, agree to lease the Portions to CanCo for a term of XXXXX for the purposes of wind energy conversion, the collection and transmission of electric power ("Energy") and related activities including, without limitation:
(i) determining the feasibility of wind energy conversion and other power generations, including studies of wind speed, wind direction and other meteorological data, XXXXX;
(ii) constructing, installing, maintaining and operating wind turbines, overhead and underground electrical transmission XXXXX, electric transformers, energy storage facilities, XXXXX, power generation facilities to be operated in conjunction with large wind turbine installations, XXXXX, meteorological towers and wind measurement equipment, XXXXX, and related facilities and equipment (collectively referred to as the "Wind Power Facilities") on the Portions; and
(iii) undertaking any other activities, whether accomplished by CanCo or a third party authorized by CanCo, that CanCo reasonably determines are necessary, useful or appropriate to accomplish any of the foregoing.
b) CanCo shall have the right for itself or may grant any utility the right to construct, operate and maintain electrical transmissions interconnections and switching facilities on the Portions pursuant to any standard form of easement, leasehold or any other agreement used for or proposed by the utility.
c) CanCo shall pay the XXXXX on the execution of the Lease and, if and when the Wind Power Facilities are installed on the Portions and begin delivering Energy to a utility or other purchaser, an annual rent equal to:
XXXXX.
d) Notwithstanding the foregoing, if the taxes, rates and assessments assessed or levied against the Lands are increased as a result of the use or occupancy of the Portions by CanCo, CanCo shall promptly pay and satisfy such increased taxes, rates and assessments and the XXXXX shall have no responsibility for same.
e) Notwithstanding the above, CanCo agrees to pay any multi-stage sales, sales, use, consumption, value added or other similar taxes imposed by the Government of Canada upon the XXXXX or CanCo in respect of this Lease.
8. In the course of its activities, CanCo installed Wind Power Facilities XXXXX on the Portions and began delivering Energy XXXXX to a third party who is not a consumer.
9. The XXXXX received the first of the rent payments described in Fact 7(c) in XXXXX.
10. As evidenced by XXXXX for the production month of XXXXX, issued by CanCo to XXXXX and dated XXXXX, the rental calculation did not initially reflect any GST payable. CanCo's position, XXXXX, was that "XXXXX".
11. In light of subsequent discussions with Canada Revenue Agency (CRA) representatives, CanCo paid GST calculated on the value of all rents described in Fact 7(c) that became payable in 2007 and early 2008. However, following the February 26, 2008, announcement of proposed amendments to the ETA, CanCo issued written notice to the XXXXX that it would refrain from paying tax on all future rents payable by it under the Lease.
12. Mr. XXXXX has declared for income tax purposes the value of all these rents as well as any expenses incurred in relation to the XXXXX' supplies under the Licence Agreement and the Lease. He has also reported GST collectible on these payments (treating them until 2007 as a GST-inclusive amount) and claimed ITCs related to this activity on his GST/HST returns.
13. Any and all taxes, rates and assessments described in Fact 7(d) levied against the Lands by the XXXXX have been paid by CanCo directly to that XXXXX.
14. The XXXXX did not collect, report or remit GST on the value of any payments made by CanCo directly to the XXXXX in relation to taxes or assessments described in Fact 7(d). Nor did either of them declare the value of these payments as income for income tax purposes.
15. Mr. XXXXX has for income tax purposes declared all revenue and expenses in relation to the land leased to XXXXX. As a GST/HST registrant, Mr. XXXXX has reported and remitted the GST collectible on the full value of these lease payments and claimed ITCs related to this activity.
16. The XXXXX have provided written authorization for the CRA to XXXXX, for purposes of this ruling request.
Ruling Requested
You would like to know if the supplies of the Lands to CanCo under the Licence Agreement and the Lease are taxable supplies subject to GST.
Rulings Given
Based on the facts set out above, we rule that:
1. the XXXXX' supplies of the Lands made under the Licence Agreement and under the Lease before February 26, 2008, and for which the consideration became payable prior to that date, are taxable supplies subject to GST;
2. the XXXXX' supplies of the Lands made under the Licence Agreement and under the Lease before February 26, 2008, and for which the consideration became payable on or after that date, or is paid on or after that date without having become due, are deemed not to be supplies and are therefore not subject to GST; and
3. the XXXXX' supplies of the Lands made under the Licence Agreement and under the Lease on or after February 26, 2008, are deemed not to be supplies and are therefore not subject to GST.
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
It is important to recognize at the outset that the fact that real property is owned in joint tenancy has a bearing on the GST/HST implications of a supply of the property. This stems from the nature of joint tenancy at common law.
When real property held in joint tenancy is supplied by way of sale, or by way of lease, licence or similar arrangement, the supply is a single supply made by all of the joint tenants. In turn, a payment of consideration and tax made by the recipient of a supply of real property that is held in joint tenancy is a payment made to all of the joint tenants. These points are relevant when considering the GST/HST implications of the XXXXX' supplies of the Lands.
The wording of subsection 136.1(1) is also relevant to the issue at hand. Subsection 136.1(1) stipulates in part that supplies of property made by way of lease, licence or similar arrangement are treated for GST/HST purposes as a series of separate supplies for each period (referred to as the "lease interval") to which a particular payment is attributable. The supply for each lease interval is deemed to be made on the earlier of the first day of the lease interval, the day when the payment attributable to that period becomes due, and the day on which the payment that is attributable to the lease interval is paid.
With the foregoing in mind, we will address the XXXXX supplies made under the Licence Agreement and under the Lease.
Nature of the supplies
A supply of real property made otherwise than by way of sale may be made by way of lease, licence or similar arrangement. Policy Statement P-062, Distinction between Lease, Licence and Similar Arrangement, addresses the characteristics of each.
The XXXXX granted CanCo, XXXXX an exclusive licence under the Licence Agreement to enter the Lands for the purpose of assessing the suitability of the Lands for its purposes, which is the predominant element of the supply made by the XXXXX under this agreement. This right or privilege is characteristic of a licence.
The XXXXX' subsequent supply of the Portions to CanCo made under the Lease is fully characteristic of a lease, in accordance with the aforementioned policy statement.
Tax status of the supplies
Supplies of real property made in Canada are taxable supplies for which GST/HST is collectible unless a specific relieving provision applies. CanCo relied on subsection 162(2) to relieve the XXXXX' supplies made under the Licence Agreement and the Lease from the GST.
As worded at the time of your enquiry, subsection 162(2) stipulated that for GST/HST purposes a supply of
(a) a right to explore for or exploit a mineral deposit, a peat bog or deposit of peat or a forestry, water or fishery resource,
(b) a right of entry or user relating to a right referred to in paragraph (a), or
(c) a right to an amount computed by reference to the production (including profit) from, or to the value of production from, any such deposit, bog or resource,
shall be deemed not to be a supply and any consideration paid or due, or any fee or royalty charged or reserved, in respect of the right shall be deemed not to be consideration for that right.
Moreover, subsection 162(3) provided that subsection 162(2) did not apply to a supply of a right to take or remove forestry products, products that grow in water, fishery products, minerals or peat, or a right of entry or user relating thereto, where the supply is made to a consumer or a person who is not a registrant and who acquires the right in the course of a business of the person of making supplies of the products, minerals or peat to consumers.
The above wording of subsection 162(2) did not extend relief to the supplies made by the XXXXX under the Licence Agreement or under the Lease. Given that no exemptions or other relieving provisions applied, the XXXXX are considered to have made taxable supplies to CanCo under the Licence Agreement and under the Lease.
However, proposed amendments to subsections 162(2) and 162(3), among others, were announced in the Budget tabled February 26, 2008. These proposed amendments were included in the Notice of Ways and Means Motion tabled by the Minister of Finance on March 11, 2008, and have now received Royal Assent.
Accordingly, subsection 162(2) is amended to add new paragraph 162(2)(d), which deems a supply of a right to enter or use land to generate, or evaluate the feasibility of generating, electricity from the sun or wind not to be a supply, and consideration for that supply not to be consideration, for GST/HST purposes.
In addition, subsection 162(3) is amended to provide that the deeming provisions in subsection 162(2) do not apply to a supply of a right to enter or use land to generate, or evaluate the feasibility of generating, electricity from the sun or wind if that supply is made to a consumer or to a non-registrant who acquires the right in the course of a business of making supplies to consumers.
As enacted, these amendments apply to supplies made on or after February 26, 2008. They also apply to supplies made before that date but only in respect of the portion of the consideration for the supply that becomes payable, or is paid without having become payable, on or after February 26, 2008.
To the extent that new paragraph 162(2)(d) applies to the Licence Agreement and the Lease, its effect is twofold. First, it means that any amounts payable by CanCo to which paragraph 162(2)(d) applies are not to be included in calculating Mrs. XXXXX' small supplier threshold. Second, it means that although Mr. XXXXX is a GST/HST registrant, he is not required to collect GST in respect of these amounts.
That said, it is necessary to establish the value of the consideration for those supplies made by the XXXXX to which this new provision does not apply.
Value of consideration
Establishing the value of the consideration is important both for purposes of calculating a person's small supplier threshold and for purposes of calculating the GST/HST payable for a given taxable supply.
"Consideration" is defined for GST/HST purposes to include any amount that is payable for a supply by operation of law.
Therefore, as new paragraph 162(2)(d) does not apply to any amounts payable by CanCo before February 26, 2008, in relation to supplies made by the XXXXX prior to that date, all of those amounts must be included when calculating Mrs. XXXXX small supplier threshold (refer to GST/HST Memorandum 2.2, Small Suppliers, for full details). They must also be included when calculating the GST payable by CanCo under the Licence Agreement and the Lease.
We note that wherever CanCo failed to pay GST on any sums payable under the Licence Agreement or on any of the rents described in Fact 7(c), Mr. XXXXX treated the payments as GSTincluded amounts. Based on the facts, this was incorrect. The full value of each payment is consideration under the ETA and GST should be calculated on the full value of each payment.
Furthermore, consideration generally includes any amount that a tenant is required under a lease agreement to pay in respect of property taxes assessed against the owner of the property. Where a separate amount is paid by a lessee on account of property taxes to meet the property owner's liability to pay the property taxes, this amount is part of the consideration paid for the rental of the property, even if the lessee pays the amount directly to the taxing authority. Where the lessee's payment is part of the consideration for a taxable supply, it is subject to GST/HST in the same way as the basic rent payable by the lessee.
While CanCo may be responsible under the Lease to pay any increased taxes, rates and assessments levied by the XXXXX as a result of CanCo's use of the Portions, the ultimate liability to pay the property taxes rests with the XXXXX as the registered owners of the property. Subsection XXXXX provides that land shall be assessed against the owner of the land. XXXXX is defined in section XXXXX to include "XXXXX".
In summary, the amounts paid by CanCo directly to the taxing authority XXXXX in respect of increased property taxes assessed against the XXXXX and to which new paragraph 162(2)(d) does not apply are additional consideration for the supplies of the Portions made by the XXXXX. As such, these amounts are also subject to GST.
Requirement to collect GST
As a general rule, every person who makes a taxable supply in Canada is required to collect the tax payable by the recipient in respect of the supply. However, section 166 excludes any part of the consideration for a taxable supply that becomes due, or is paid before it becomes due, when the supplier is a small supplier from the calculation of tax payable in respect of the taxable supply. The effect of section 166 is to relieve small suppliers who are not registrants from the requirement under subsection 221(1) to collect GST/HST in respect of their taxable supplies, with the exception of sales of real property and certain sales of capital property.
In light of section 166, Mrs. XXXXX would be relieved from collecting GST in respect of the taxable supplies made to CanCo under the Licence Agreement and under the Lease as long as she qualifies as a small supplier.
On the other hand, given that Mr. XXXXX is a GST/HST registrant, CanCo would be required to pay and Mr. XXXXX would be required to collect GST at the applicable rate on the value of the consideration payable for the taxable supplies made under these agreements to which new paragraph 162(2)(d) does not apply.
Effective July 1, 2006, the rate of the GST was reduced from 7% to 6% and the rate of the HST from 15% to 14%. The new rates generally apply to supplies made on or after July 1, 2006, and supplies for which the GST/HST is paid on or after July 1, 2006, without having become payable before that date. Effective January 1, 2008, the rate of the GST has been further reduced from 6% to 5% and the rate of HST from 14% to 13%. The new rates generally apply to supplies made on or after January 1, 2008, and supplies for which the GST/HST is paid on or after January 1, 2008, without having become payable before that date. Specific transitional rules apply to certain supplies, including real property. For more information on the transitional rules for the GST/HST rate reduction in 2006, please refer to Technical Information Bulletin B-096, GST/HST Rate Reduction and Real Property. For more information on the transitional rules for the 2008 rate reduction, please refer to GST/HST Notice 226, GST/HST Rate Reduction in 2008.
Liability to report and remit GST
The final issue stemming from your query is the XXXXX' respective obligation to report and account for amounts collectible or collected as or on account of GST in their respective net tax calculation and to remit any positive amounts of net tax.
As explained above, the XXXXX, as joint tenants, are considered to have made a separate supply of the Lands for each lease interval under the Licence Agreement and under the Lease. Furthermore, for the reasons previously cited, Mr. XXXXX was required to collect GST in respect of these taxable supplies where new paragraph 162(2)(d) does not apply. Subsection 225(1) therefore required him to include amounts that became collectible by him and amounts he collected as or on account of tax in a particular reporting period, when determining his net tax for that reporting period.
Provided that Mrs. XXXXX was, in fact, a small supplier, Mrs. XXXXX was not required to collect GST in respect of these taxable supplies. Despite this, in light of the common-law principles of unity that apply in respect of real property that is held in joint tenancy, both Mr. and Mrs. XXXXX would be viewed as having collected amounts actually paid by CanCo as or on account of tax. Subsection 225(1) requires a person such as Mrs. XXXXX who collects amounts as or on account of tax to include the amounts collected in her net tax calculation. Further, subsection 222(1) deems Mrs. XXXXX to hold the amounts collected as or on account of tax in trust for the Crown until the amounts are remitted to the Receiver General or withdrawn as an input tax credit or net tax deduction under subsection 222(2).
Ordinarily, amounts collected by a non-registrant as or on account of tax are to be reported on GST/HST returns, each reflecting the amounts collected during a particular calendar month. A non-registrant is required to file its returns and remit the net tax by the end of the month following the month in which the tax was collected.
Where Mr. and Mrs. XXXXX are both required to account for amounts collected as or on account of tax, the accounting of the amount and the remittance of any resulting positive amount of net tax by one of the parties will discharge the liability of both parties. As such, where Mr. XXXXX reports the amounts of GST in respect of the taxable supplies to which paragraph 162(2)(d) does not apply in his GST returns and remits any resulting positive amounts of net tax, Mrs. XXXXX liability to remit the amounts collected as or on account of GST will be discharged.
Right of supplier to sue for tax remitted
As you may be aware, section 224 applies where a supplier (i) has made a taxable supply to a recipient; (ii) is required to collect tax from the recipient in respect of the supply; (iii) has properly disclosed the tax to the recipient; and (iv) has accounted for or remitted the tax to the Receiver General, but has not collected the tax from the recipient due to the recipient's refusal to pay the tax. Under these circumstances, section 224 gives the supplier the right to bring an action in a court of competent jurisdiction to recover the tax as though it were a debt due by the recipient to the supplier.
Additional Comments
Although not the subject of your initial enquiry, we would like to draw your attention to the fact that the common law principals addressed here apply equally to the XXXXX' lease of the Lands to XXXXX, and must be taken into consideration when determining the GST/HST implications of this activity and its impact on Mrs. XXXXX small supplier status.
We also wish to advise that new paragraph 162(2)(d) will not have an adverse effect on Mr. XXXXX entitlement to claim input tax credits (ITCs) for expenses related to the supplies made under the Licence Agreement or under the Lease.
Subsections 141.01(2) and (3) generally provide that inputs must be used or consumed in the course of making taxable supplies for consideration in order to claim ITCs. However, subsection 141.01(7) provides an exception to this rule. It stipulates, in part, that where a provision such as section 162 deems consideration for a supply not to be consideration for the supply, or a supply not to have been made, that "deeming shall not apply" for the purposes of any of subsections 141.01(1) to (4). In other words, subsection 141.01(7) ensures that, for purposes of claiming ITCs, the supplies made by the XXXXX under the Lease are considered supplies, and the consideration payable by CanCo is recognized as consideration. Mr. XXXXX therefore remains eligible to claim ITCs where all other statutory and documentary requirements have been satisfied.
With the exception of the rulings provided, 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, Excise and GST/HST Rulings and Interpretations Service, do not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at XXXXX. 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,
XXXXX
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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