Dear XXXXX:
As you recently requested, we are providing the following comments concerning the application section 191 of the Excise Tax Act on XXXXX ("the Society"). In particular, we will provide our interpretation of the meaning of "lease, licence or similar arrangement" as it is used in subsection 191(3)(b)(i).
Summary of Facts
The Society is an NPO that holds title to a multi-unit residential complex. In 1995, it was assessed under the self supply rule in sp. 191(3)(b)(i). The Society has filed a N.of Objection, contending that this provision does not apply since the units are not occupied under a "lease, licence or similar arrangement."
The units are occupied in the following manner. Each occupant is a member of the Society. Prior to construction, each member makes a loan to the Society ( XXXXX which capital is used by the Society to purchase land and build the complex. Pursuant to the Loan Agreement, the member acquires the right to occupy a specific unit. Other relative terms of the agreement are as follows:
• the member has right of occupancy until the member dies, or until the member demands and receives repayment of the loan, or until the society terminates occupancy based on the member's breach of the terms (housing charges, regulations, rules of conduct etc set out in the agreement)
• the agreement does not refer to the terms "lease, licence or similar arrangement"
Members' Covenants
• that occupancy "does not create any interest in Land, legal or equitable and in particular, does not create a charge against either the Unit or the Common Property in favour of the Member."
• to pay monthly "housing charges" to the Society which is set annually by the Society's Board of Directors
• to use the unit exclusively as a private residence for a member who is a senior citizen...
• that the right to use the unit and to occupy the unit is personal to the member, and that such right cannot be assigned ... cannot be leased, rented or otherwise occupied by any party for gain...cannot be occupied by any party other than the member without express written consent of the Society...
• Other covenants: to abide by "good neighbour" provisions, not to make alterations to the unit without consent of the Board; to keep the interior in good condition and repair
• to permit the Society or its agents entry at reasonable times on notice for the purpose of inspecting, repairing etc.
• not to assign any interest of the member in this agreement except with the prior written consent of the Board
• not to sublet the unit or any portion thereof except with the prior written consent of the Board Society's Covenants
• that the member may quietly have, hold and enjoy the unit pay utilities
• maintain common areas, repair foundations & exteriors of the units ensure fees levied equally disbursed properly on account of services enforce rules & regulations
Lease, Licence or Similar Arrangement
The submission from XXXXX is that the self supply rules of subpara 191(3)(b)(i) do not apply since the occupancy at issue is not a "lease, licence or similar arrangement." We have taken into account their submissions, as well as those you have outlined in your memorandum to XXXXX Appeals of January 4, 1996, and have the following comments and recommendations.
To summarize your description, a "lease" at common law is an agreement which gives rise to a lessor-tenant relationship with respect to exclusive possession of tenements for a definite period of time, usually in consideration of rent.
A "licence" is in the nature of a right or privilege to enter upon and use the grantor's land in a certain manner or for a specified purpose. It is a personal right between the licensor and licensee and does not create any estate in the land.
We generally sgree with your well structured analysis except, perhaps, with your conclussion that the agreement in question is a "similar arrangement" to a lease or license.
We concur that the agreement is not a lease. It is well established that when a tenant enters into a lease with a landlor, there is a privity of estate. Privity of estate means that a leaseholder is able to pursue a cause of action that is real in nature, rather than personal. Real actions, but not personal actions, permit a recovery of the property itself (e.g. in a leasehold, the remainder of the term), and to seek damages against third parties. Personal actions, on the other hand, are restricted to an action of gamages against the owner.
Accordingly, while the agreement in question has many earmarkings of a leasehold, it is apparent that it is not a leasehold since the occupants, in the agreement, have bargained away their privity of estate. Under the "Summary of Facts" above, we have highlighted the terms of the agreement where this is evident.
Since the rights of the occupants are personal, rather than real in nature, it is our view that the agreement is one for a license to use real property, based on the definition of "license" above. To reiterate the principal, the essential differance between a license to use property and a leasehold are the intentions of the parties with respect to the interests of the lessee or licencee (the "occupier"). If the intentions is that the occupier will receive no leasehold estate, as described above, then the occupancycannot be ny way of lease, and will generally be a licence.
In the situation at hand, the occupier enjoys "exclusivity of possession" which is generally, but not necessarily, a characteristic of a leasehold. Again, resolving this issue turns on the intentions of the parties; "If it is only intended that the occupier should have a personal privilege with no interest in the land, the occupier is merely a licensee notwithstanding that he has had exclusive possession and has had it for many years." Further, it is apparent that this common law principle regarding exclusive possession is followed in XXXXX[.]
"However, exclusivity of possession has not been regarded by the courts as the only criterion (of leasehold). Intention of the parties is often referred to as the paramount factor. In R. v. Boos (1978); 7 B.C.L.R. 155 (Co.Ct.) Spencer J., observed "a tenancy must involve the grant of exclusive possession of the premises to the tenant but ... even with exclusive possession a tenancy need not necessarily exist. Once must look to the intention of the parties."
If, as you suggested, the agreement represented a "similar arrangement" to a lease or licence, it would be necessary to define the arrangement. At law, the categories of estates and other rights to real property include
• freeholds (fee simple, fee tail, life estates),
• leaseholds, and
• rights that are not estates in property (easements, licences, profits à prendre, restrictive covenants and particular rights such as those pertaining to water, minerals, air space etc.).
Other than "licence", it is unlikely that the occupancy in this situation could be categorized as any other estate or right in real property.
For the same reason as above, we do not agree with XXXXX XXXXX submission that the agreement represents neither a lease, licence nor similar arrangement. That is, it is our view that the agreement is in the nature of a licence and, further, it cannot be said to be characterized by any of the other estates or interests in real property. The submission in their letter that the Loan Agreement is not a licence, "because it confers exclusive possession on the member" is, as noted above, clearly not a principle that is followed in the courts of XXXXX, nor, generally, at common law.
As you are aware, subsection 191(3) applies to a "lease, licence or similar arrangement". Accordingly, if occupancy falls under one of these categories, the tax treatment will be similar under this provision. Nevertheless, we appreciate that for purposes of responding to a Notice of Objection or Appeal, it is necessary to specifically define the nature of the occupancy. As outlined above, it is our recommendation that the occupancy, based on the Loan Agreement , is in the nature of a licence.
If you have any questions concerning our comments, please contact Michael Place at (613) 954 7936.
Yours truly,
J.A. Venne
Director
Special Sectors GST Rulings and Interpretations
| c.c.: |
E. Weisbloom (H.Q. Appeals)
M. Place |
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