11650-3 (pl)
Sections 126, 169, 172, 176, 191, 254 & 257, s.s. 123(1)
Fax: (613) 990-1233
Re: XXXXX
Dear Mr. XXXXX
This is in reply to your letter dated October 19, 1995, from XXXXX of your office in which you request a GST interpretation of sections 169, 172, 176, 191, 254 and 257 of the Excise Tax Act (the "ETA") in reference to the appropriation of property by XXXXX (the "corporation") to individuals related to the corporation. Please excuse the delay in replying.
Statement of Facts:
Our understanding of the relevant facts presented by XXXXX are as follows:
• the corporation is a GST registrant;
• the directors of the corporation are XXXXX and the shareholders are their wives, XXXXX respectively;
• the corporation was contracted by XXXXX to construct a new house on a lot located on XXXXX (the "lot");
• an existing house (the "property") was located on the lot which, pursuant to paragraph (1)(a) of the signed contract agreement dated January 15, 1994, between the XXXXX and the corporation (the "agreement"), the XXXXX requested, inter alia, the property be removed from the lot;
• rather than demolish the property, the corporation agreed to sell the property to XXXXX (the "parents" of the corporation's directors) for no consideration. The parents agreed to acquire and move the property to another lot as well as to pay for the moving costs (XXXXX[)]. The parents believed that the moving costs incurred were equal to the fair market value of the property at the time of its acquisition (approximately XXXXX[)]. Although not stated in your letter, we assume that the corporation did not perform the task of moving the property to the other lot but hired a non-related third party to do so;
• the parents intention at the time of acquisition of the property was either to sell or rent the property once affixed to the lot. Once moved to the other lot, the renovations to the property (i.e., new foundation and painting) were completed and the property was listed for sale. It has not been determined whether the parents are registered for the GST;
• further to your review of subsection 126(2) of the ETA and your understanding of subsections 251(2) to (6) of the Income Tax Act, it is your opinion that the parents are considered related to the shareholders of the corporation
• it is also your opinion that, pursuant to the agreement, the corporation is supplying the property to the parents and not the XXXXX based on the fact that the XXXXX do not specify how to remove the property from the lot.
Your questions are:
1. whether the supply of the property to the parents is considered to be an appropriation by the corporation pursuant to section 172 of the ETA, or whether the ETA provision will not apply since the amount paid by the parents for the moving costs can be considered to be an amount paid for the house (equal to its fair market value);
2. whether the corporation is entitled to a notional input tax credit ("NITC") under section 176 of the ETA on the acquisition of the property from the XXXXX[.]
3. whether the corporation is entitled to an input tax credit ("ITC") on the moving costs which were paid by the parents in lieu of consideration for the house;
4. whether the parents, if registered, would be allowed ITCs in respect of the tax paid in constructing the new house or, if they are not registered for the GST, whether the rebate under section 257 of the ETA (if any) would include the GST paid on the acquisition of the land and improvements thereto. [this question assumes that the house is considered newly constructed based on the fact that the property was moved to a new lot, affixed to that lot, and renovations were completed. It also assumes that the parents are considered to be builder(s) pursuant to its definition under subsection 123(1) of the ETA since the parents constructed a residential complex in the course of a business or as an adventure or concern in the nature of trade]; and,
5. whether the purchaser of the new house from the parents would be entitled to the GST New Housing Rebate under section 254 of the ETA since the parents are required to collect GST on the taxable sale of the new house;
The Department's Position
Question 1: Appropriation of Property to the Parents by the Corporation
Pursuant to subsection 172(2) of the ETA, where a registrant who is a corporation, partnership, trust, charity or non-profit organization, appropriates any property (other than capital property) that was acquired, manufactured or produced, or any service acquired or performed in the course of the registrant's commercial activities to or for the benefit of a shareholder, partner, beneficiary or member of a corporation, trust, charity or non-profit organization or any related individual to the shareholder, partner, beneficiary or member, the registrant is deemed to have made a supply of the property or service for consideration equal to the fair market value at that time of the property or service and, to have collected tax in respect of the supply except where the supply is an exempt supply.
Having said this and referring to the aforementioned facts, the Department considers the property to have been appropriated by the corporation to the parents. As a result, subsection 172(2) of the ETA applies deeming the corporation to have made a supply at fair market value and to have collected tax on that supply. This interpretation is based on the following remarks:
• we agree with your statement that the parents are related by marriage to the shareholders of the corporation thereby satisfying the conditions required under subsection 126(2) of the ETA for related persons;
• as noted in your letter, where a used house is moved to a new site (as in the case at hand), the house, when detached, ceases to be real property and becomes used tangible personal property ("UTPP"). For your information, we have confirmed with the Real Property Unit that the property acquired by the parents is indeed UTPP and not real property;
• since the term acquired mentioned in subsection 172(2) of the ETA is not defined in that Act, the word must be interpreted in its broadest sense. Black's Law Dictionary, Sixth Edition, defines the word acquire as:
"To gain by any means, usually by one's own exertions; to get as one's own; to obtain by search, endeavor, investment, practice, or purchase; receive or gain in whatever manner; come to have..."
It is therefore apparent that the property received by the parents from the corporation does satisfy the definition of acquire for ETA purposes;
• the property would not be considered for ETA purposes to be capital property of the corporation considering the commercial activity of the corporation (i.e., homes and commercial construction); and,
• we do not consider the amount paid by the parents for moving the property to be in lieu of consideration for the house since they are two separate supplies, i.e., the supply of the property for nil consideration and the supply of the service of moving the property for XXXXX[.]
Question 2: NITC Entitlement to the Corporation on the Property Acquisition
Subsection 176(1)(a) of the ETA provides that a registrant who acquires UTPP after 1993 is entitled to a NITC equal to the tax fraction of the consideration paid for the supply of the UTPP if no tax is payable, and the UTPP is supplied in Canada by way of sale for the purpose of consumption, use or supply in the course of the registrant's commercial activities. Accordingly, the provision will allow the registrant to claim an NITC equal to 7/107ths of the consideration.
A review of the facts of the case have determined that the corporation would not be entitled to an NITC on the acquisition of the property for the following reasons:
• although the corporation did acquire the property (referring to its dictionary meaning discussed above), the corporation fails to satisfy the condition that the supply of the UTPP to the corporation must be by way of sale. There is no indication in the agreement that the XXXXX agreed to sell and that the corporation agreed to buy the property for consideration. The agreement only specifies that the property is to be removed from the lot by the corporation;
• notwithstanding this argument, if the corporation was entitled to an NITC, the credit would be equal to nil since the calculation is based on the consideration paid by the corporation (i.e., 7/107th of nil consideration) and not on the fair market value of the property at the time of acquisition.
Question 3: ITC Entitlement to the Corporation on the Moving Costs
Section 169 of the ETA provides that, in order for a person to be eligible to claim an ITC for the tax payable in respect of property or a service, the following conditions must be met:
1. the property or service must be supplied to or imported by the person;
2. the person must be a GST registrant during the reporting period in which the supply or importation is made;
3. tax must be payable by the person in respect of the supply or importation, or be paid by the person prior to its becoming payable;
4. the property or service must be acquired or imported by the person for the purpose of consumption, use or supply in the course of commercial activities of the person;
5. the person must have obtained sufficient documentary evidence to establish the eligibility for the input tax credit before the claim is made.
Having said this, as long as the corporation satisfies all the above-mentioned criteria, they will be entitled to an ITC on the GST paid on the moving costs. For your information, please note that to satisfy the first condition mentioned above, the corporation must have been the recipient of the supply. In other words, an ITC claim may only be made by the person to whom the supply was made or who imported the supply. Subsection 123(1) of the ETA defines recipient to be the person who is liable to pay the consideration under any agreement for the supply and, where there is no agreement, the person who is otherwise liable to pay the consideration. Therefore, it should not be assumed that the person who actually pays for the supply is in fact the recipient of the supply. In the case at hand, there is not sufficient information provided to ascertain whether the corporation was the recipient of the moving service.
(Please note that the answers below to questions 4 and 5 were submitted by the Real Property Unit for our inclusion in this letter.)
Question 4: ITC or Rebate Entitlement to the Parents on the Construction of the New House
As stated the facts above, the parents intention at the time of acquisition of the property was to affix it to a vacant lot and either sell or rent the property. As such, the parents are constructing a residential complex and would be considered builder(s) as defined under subsection 123(1) of the ETA. They are not excluded from this definition by virtue of paragraph (f) as they did not construct the residential complex otherwise than in the course of a business, or adventure or concern in the nature of trade.
Whether the parents decide to supply the complex by way of sale or by lease, licence or similar arrangement, they will be involved in a commercial activity as defined under subsection 123(1) of the ETA. More specifically, if the parents sell the complex, they will be making a taxable supply by way of sale as no exempting provision under Part I of Schedule V to the ETA would apply. If the parents decide to rent the complex, they will be required to self-supply under subsection 191(1) of the ETA which causes them to make a deemed taxable supply by way of sale. Therefore, regardless of whether the house is sold or rented, the house is considered to have been constructed in the course of the parents' commercial activity.
Although the parents have constructed a residential complex in the course of commercial activity, they are not required, pursuant to paragraph 240(1)(b) of the ETA, to register for GST purposes if they are not in the business of making supplies of real property by way of sale. In the situation above, the parents do not appear to be in this type of business.
However, where a person is involved in commercial activity, which includes the making of any supply of real property other than an exempt supply, the person may choose to register pursuant to subsection 240(3) of the ETA. Where the parents in fact choose to register, they will be entitled to claim ITCs in respect of the GST paid on the construction costs of the complex. These ITCs will be available to the parents on expenses incurred with respect to the construction of the house up to the point of sale or deemed sale (i.e. self-supply). Conversely, where the parents choose not to register, section 257 of the ETA will allow a rebate of the GST paid on the acquisition of the land and any improvements made thereto. This rebate is available at the time the sale or deemed sale occurs.
Question 5: GST New Housing Rebate Entitlement to the Purchaser of the New House
Where the parents make a supply by way of sale of the house, the supply will be subject to GST as no exempting provision will apply (remember that the parents are considered to be builder(s) for GST purposes). Accordingly, where an individual purchases the house from the parents and satisfies the conditions under section 254 of the ETA, that individual will be entitled to a GST new housing rebate equal to a percentage of the GST paid to the parents on the house purchase.
Conversely, where the parents are required to self-supply (i.e., they rent the house to an individual for use as a place of residence and are deemed to have made a taxable supply by way of sale), no person is eligible for a GST new housing rebate.
If you require further information, please contact Michael Matthews, A/Manager, ITC and Co-ordination Unit at (613) 952-8806, or Paul Lafond, Policy Officer, at (613) 954-9700.
Yours truly,
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations
GAD #: 1512 (REG)
| c.c.: |
M. Matthews
J. Bain, Real Property Unit
P. Lafond |
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