11685-1, 11695-7-2, 11950-2
XXXXX XXXXX
Thank you for the E-Mail message dated April 8, 1994, concerning the tax treatment of residential condominium units (the "units") which were leased to individuals as their place of residence prior to being sold. We apologize for the delay in responding to your enquiry.
Statement of Facts and Assumptions:
Based on the information contained in the E-Mail, and the additional documentation which was provided, we understand that:
1. The registrant, XXXXX XXXXX), built a condominium complex in XXXXX, which was substantially completed in 1990.
2. The Partnership sold or leased some of the units before 1991 and, where applicable, claimed the Federal Sales Tax New Housing rebate pursuant to subsection 121(3) of the Excise Tax Act (the "Act") on the remaining units.
3. A number of the units which were not sold or leased in 1990, were put into a rental pool. The Partnership did not self-assess GST in respect of these units when the units were occupied by tenants as places of residence. We assume that, in each case, the tenants were not the subsequent purchasers under agreements of purchase and sale of the particular unit.
4. The Partnership eventually sold all of the units, including those that were leased.
5. The Documentation provided related to two separate transactions and in both cases the unit was leased before it was sold. According to the documentation in the first transaction:
(a) A termination of a rental agreement was signed by the tenants, XXXXX, and the Partnership in respect of unit XXXXX of the condominium complex in question.
(b) The Agreement of Purchase and Sale, dated November 2, 1992, in respect of unit XXXXX of the condominium complex in question, provided that the "vendor (the Partnership) is responsible for payment of any GST" and the purchaser (XXXXX was to take possession of the unit on December 4, 1992.
(c) The Statement of Adjustments prepared by the vendor's lawyer indicated that the Net GST was $XXXXX (the total GST less the new housing rebate).
(d) The purchaser had the new housing rebate credited directly by the vendor as part of the purchase price for the unit.
Second transaction:
(a) Unit XXXXX of the condominium complex in question was rented by the Partnership to XXXXX XXXXX on May 1, 1991, pursuant to an agreement dated April 12, 1991.
(b) The Agreement of Purchase and Sale, dated August 14, 1992, in respect of unit XXXXX of the condominium complex in question provided that "GST to be included in the purchase price" by the vendor (the Partnership) and gave possession of the unit to
(c) While the Statement of Adjustments did not mention GST, the closing documentation by the vendor's lawyer specified the amount of GST that was paid.
(d) The purchaser had the new housing rebate credited by the vendor as part of the purchase price of the unit.
It is assumed that all of the other transactions involving the sale of a condominium unit, which had been leased prior to being sold, were structured in a similar manner to the transactions noted above.
Interpretations Requested
You have asked for our views concerning the correct tax treatment in this situation?
Interpretations Given
Lease of the Units after 1990
Based on the information provided, the Partnership was required to self-supply pursuant to subparagraph 191(1)(b)(i) of the Act at the later of the substantial completion of the condominium unit and the occupation of the condominium unit by the tenant.
The supply of the unit by way of lease to the tenant would be exempt pursuant to section 6 of Part I of Schedule V to the Act provided the tenant occupied the unit for a period of at least one month.
Sale of the Units after 1990
When the Partnership subsequently sold a unit that was previously occupied by a tenant of which the Partnership was required to self-supply, the sale would be exempt, pursuant to section 4 of Part I of Schedule V to the Act. Therefore, the vendor should not have collected tax on these sales and the purchaser would not be entitled to a New Housing Rebate since a taxable supply was not made.
Where the purchaser paid tax in error (for example, in respect of an exempt supply), the purchaser may be entitled to a rebate pursuant to section 261 of the Act. Whether a purchaser paid tax in error on the exempt supply will depend on the specific facts of the transaction.
Where, for example, the Agreement of Purchase and Sale specifically said that GST was to be included in the purchase price or specifically stated the amount of GST payable, we would generally consider that the purchaser has paid tax in error if the supply was otherwise an exempt supply. Therefore, the purchaser in the second transaction would be entitled to a rebate for the tax paid in error. The amount of such rebate should be adjusted for the housing rebate that was also applied in error (since no housing rebate is available in the situation in question since the sale of the unit was an exempt supply and the rebate does not fall within sections 254.1 or 255).
If the Agreement of Purchase and Sale had specifically stated the amount of GST payable based on the wrong assumption that the supply was taxable at 7%, that is the amount the purchaser would be eligible to receive as a rebate if such amount was in fact paid (subject to any adjustment for the housing rebate that may have been applied in error) and claimed by the purchaser.
Generally, the purchaser would not be considered to have paid tax in error where the Agreement of Purchase and Sale provided that the vendor or purchaser was "responsible for payment of any GST", since no GST was payable. Where, however, there is further documentation between the vendor and purchaser that is linked to the contract and substantiates that GST was paid (e.g. the statement of adjustments), the purchaser would be considered to have paid the tax. Therefore, the purchaser in the first transaction would also be entitled to a rebate of tax paid in error, provided the Vendor's Statement of Adjustments was supplied to, and approved by, the purchaser and the purchaser in fact paid the tax and claimed the rebate.
Where there is no other documentation indicating that GST was in fact paid, the purchaser would similarly not be entitled to claim a rebate for tax paid in error if the agreement of purchase and sale did not mention GST or simply stated that:
(a) the purchase price included GST where applicable;
(b) the purchase price included all applicable taxes; or
(c) the purchase price included all taxes.
Where the purchaser is not entitled to a rebate of tax paid in error the amount remitted by the vendor as tax would be considered to be remitted in respect of the self-supply liability. Where, however, the purchaser is entitled to a rebate of tax paid in error, the vendor would have to remit the amount of tax collected in error as well as the total amount due under the self-supply provision. Whether or not the vendor would be entitled to recover this amount from the purchaser does not involve the Department.
Although the foregoing outlines our views of this matter, we understand that you have requested a legal opinion in respect of a similar situation involving the self-supply of the sale of a residential complex on leased land (subparagraph (191(1)(b)(ii) of the Act.) This legal opinion may have a bearing on our above-noted comments. We do note, however, that the subject matter of the legal opinion is somewhat different since it involved an amendment to the legislation which was not enacted until after the amendment was announced, while the self-supply provision in question was in the legislation from the time of its initial enactment and discussed in several Departmental publications prior to 1991.
Penalty and Interest
Whether the Partnership is entitled to relief from penalty and interest is at the discretion of the District Office. Generally, however, relief should not be granted only on the basis of the "complicated nature" of real estate transactions.
We hope that our comments will be of assistance to you. If you have any questions in respect of the above please contact Stanley Farber at (613) 954-3772.
Stanley Farber
Manager, Real Property
Tax Policy - Special Sectors
Policy and Legislation
c.c.: S. Farber
XXXXX
XXXXX
All Regional I&S Manager
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