Telephone #: (613) 954-8585
Fax #: (613) 990-1233
File #: 11635-10(glr)
s. 123, 141.1, 171, 221, 228, 240
I refer to XXXXX letter of March 21, 1994, addressed to Mr. Stan Farber, former Manager, Real Property Unit, Special Sectors Division, and to XXXXX E-mail message of January 4, 1996, concerning the above-referenced topic. Please accept my apologies for the delay in this response.
XXXXX outlined two situations in his letter and requested comments regarding his analysis. These situations and XXXXX XXXXX analyses are outlined below:
Situation 1
Transfers (of farmland) into joint tenancy with "related persons" but where the transferor is not operating a farm (i.e., parents have been renting it for cash or on a crop share basis).
In these circumstances, the parents may continue to receive the rental income from the property. The parents may have granted only a remainder interest to the children and retained a life interest. Alternatively, there may not be any limitation as to the children's interest as joints tenants and they may be supplying the farmland back to their parents by way of lease, licence or similar arrangement.
There may be a written agreement between the parents and children describing whether the children are leasing the land back to the parents. Typically, however, there is no such agreement (and perhaps not even a clear verbal understanding).
Where there is an agreement, it seems clear that the children would be considered to be in a commercial activity as they are making a supply of real property. As there is no "profit test" attached to such a supply, the consideration exchanged would be irrelevant (though one would have to consider the potential application of section 155 to the transaction). XXXXX understands that in the absence of an agreement, it is not implicit that one joint tenant is making a supply to the other.
However, even in the absence of a "lease, licence or similar arrangement" entered into between the parents and the children, XXXXX believes that the children could still be considered to be in a commercial activity. They may be acquiring farmland from their parents for future commercial use (albeit many years from now). This would also constitute commercial activity at the present time. An exception to this would be if the land were acquired for their personal use. If so, an exemption under section 10 of Part I of Schedule V may be available.
XXXXX XXXXX conclusion is that children receiving a supply of farmland (except for their personal use) as joint tenants with their parents will be considered to be in a commercial activity even in the absence of a supply back to their parents or some other party. Further, this would not constitute an avoidance transaction as described in section 274.
The date of the children's registration will determine which party reports the tax on the sale of the farmland to the children and when they are entitled to claim the input tax credit.
Situation 2
Outright sales of the farmland (i.e., where parents transfer land to their children, whether for fair market value or nil or nominal consideration - resulting in the children being the only persons on the title as joint tenants).
In these circumstances, the parents may continue to receive rent from third party tenant (or perhaps, the parents may be continuing to farm the land).
There may be an agreement whereby the children lease the farmland back to their parents who, in turn, lease it to the third party. In XXXXX view this would constitute a commercial activity of making a supply of real property, even where the children receive no consideration.
Where there is no known agreement between the parents and children, it is questionable whether the children are making a supply by way of lease to the parents or perhaps the circumstances are such that the parents are somehow serving as an "agent" of the children in collecting the rents on their behalf. This raises a question as to which party is responsible for collecting and remitting the tax on the rents to the third party tenant (i.e., who is making the supply to the third party tenant). However, it does not change the fact that the children are in a commercial activity, in that they are still making a supply of real property.
The value of the consideration and the party responsible for remitting the taxes on the supply to the third party tenant are all secondary (though still important) issues to the question of whether the children are in a commercial activity.
XXXXX conclusion is that the children are in a commercial activity and thus entitled to register and claim an input tax credit on the tax paid on the land. Further, this would not constitute an avoidance transaction as described in section 274.
The date of the children's registration will determine which party reports the tax on the sale of the farmland to the children and when they are entitled to claim the input tax credit.
I will now provide my comments on the above situations and analyses:
Comments re Situation 1
Subsection 123(1) of the Excise Tax Act (Act) states that "real property" includes every estate or interest in real property, whether legal or equitable. The supply of a remainder interest in the farmland by the parents to their children would, therefore, be considered to be a supply of real property. If this is the only interest that the children have received, they would not be in a position to lease the property back to their parents because the children cannot lease property they do not control. The parents have retained the life interest in the property. Therefore, it is only the parents that could lease the property.
In order for the children to be required to register or permitted to voluntarily register for Goods and Services Tax (GST) purposes, they must be either:
• making taxable supplies in Canada in the course of a commercial activity engaged in by the children in Canada (subsection 240(1) of the Act) - [mandatory registration]; or
• engaged in a commercial activity in Canada (paragraph 240(3)(a) of the Act) - [voluntary registration].
From the information provided, it appears that the children were neither engaged in a commercial activity nor making taxable supplies in Canada in the course of a commercial activity at the time of the supply of the remainder interest. Therefore, the children would not be required to register for GST purposes nor could they voluntarily register for GST purposes. As a result, subsection 221(1) of the Act requires the parents to collect Division II tax at 7% on the supply of the remainder interest to the children.
I have not provided comments on the remainder of the possible scenarios that XXXXX described in Situation 1 — the parents may have supplied more than a remainder interest, the children may be leasing the land back to their parents, there may or may not be a written agreement or a clear verbal understanding. These scenarios appear to be more of a "hypothetical" nature rather than based on actual facts. However, if you receive additional information or have a specific case for which you require assistance, my staff would be prepared to consider these possibilities further.
Comments re Situation 2
If the children had no commercial activity prior to the purchase of the farmland from their parents, they would not be required to register (subsection 240(1)). However, the children may be eligible to voluntarily register. Paragraph 141.1(3)(a) provides that to the extent that a person does anything (other than make a supply) in connection with the acquisition, establishment, disposition or termination of a commercial activity of the person, the person shall be deemed to have done that thing in the course of commercial activities of the person. As a result, the children would be eligible to voluntarily register under the provisions of paragraph 240(3)(a).
When the parents sell the farmland to their children, subsection 221(1) requires the parents to collect Division II tax at 7% on the supply unless the override provision of paragraph 221(2)(b) of the Act applies, i.e., the children are registered for GST purposes at the time the supply is made. If paragraph 221(2)(b) applies, the parents would not be required to collect Division II tax. However, the children would be required to self-assess the GST at 7% under the provisions of subsection 228(4) of the Act.
If the children are not registered at the time of the supply of the farmland, the parents would be required to collect tax at 7% on the supply. Should the children subsequently register, subsection 171(1) of the Act provides that the children may claim an input tax credit for the GST paid on the purchase of the farmland.
Whether it is the parents or the children who would be liable to collect and/or remit the tax in situations involving leases of farmland can only be determined based on the facts. For example, have the children leased the farmland to the parents and have the parents leased the farmland to a third party, or have the children leased the farmland directly to the third party? Also the registration status of the recipient of the supply is important . If you have a specific case on hand for which Headquarters' assistance is required, please let me know.
If you require further information, please contact Ms. Anny Roy at (613) 954-2560, Mr. Serge Bernier at (613) 952-9580, Mr. Lalith Kottachchi at (613) 952-9588 or Mr. François Paris at (613) 952-8812.
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations
Policy and Legislation Branch
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G. Ryhorchuk GAD #: 750(REG)
Imposition Team |
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