Dear XXXXX
I am writing in response to your letter of July 28, 1995, in which you request an interpretation concerning the above-noted issue. Thank you for your patience in awaiting our reply.
Background
Your request concerns the application of section 191 of the Excise Tax Act (the "ETA") to the following hypothetical, yet typical, situation. A person "Landco" is the legal owner of vacant land which is leased on a long term basis to "Bco". Bco XXXXX constructs a residential complex and upon substantial completion, supplies long term residential rents to individual tenants. Bco XXXXX is a for-profit business providing market rents. Upon expiration of the lease, the complex will revert to Landco; Bco will have then have no interest in the property. On the basis of these facts, Bco has a leasehold interest in both the land and the building (i.e., the "complex").
Interpretation Requested
It may be assumed from the facts that Bco is a "builder" subject to the self supply provisions of section 191. You have requested an interpretation of how subsection 191(1) and 191(3) of the ETA will apply to the above situation.
Specifically, you have requested an interpretation that, at the time of substantially completion of the complex, Bco is required to self supply based on the value of its leasehold interest in the property, and Landco should self supply based on the value of its freehold interest in the property.
Interpretation Given
Our interpretation of how subsections 191(1) and 191(3) apply differs from that outlined in your request. That is, it has been our policy in the circumstances you describe that there is but one builder, Bco, and that Bco is required to self supply based on the fair market value of the complex itself, and not just on Bco's leasehold interest in it. That is, the value to be ascertained must be representative of the price that a willing buyer on the open market would pay (the "fair market value") for a freehold interest in the complex, given that the freehold is subject to Bco's leasehold interest, with a reversion of the property at the end of the lease, in fee, to the buyer.
Comments and Analysis
As outlined in the "Consolidated Explanatory Notes" to the ETA describing section 191, the purpose of this self supply provision is "to ensure that GST applies to newly constructed or substantially renovated premises once they are ... (first) occupied as places of residence before being sold, since the subsequent sales of those residences will generally be exempt as used housing. ... As a result, the builder is required to account for the GST on the fair market value of the complex."
The definition of "residential complex" includes not only the residential unit(s) constructed, but also the land that is "contiguous to the building that is necessary for the use and enjoyment of the building as a place of residence. ..."
"Fair market value" has been defined as "the highest price which a property will bring if exposed for sale in the open market allowing a reasonable time to find a purchaser who buys with full knowledge of possible uses...."
On the basis of these definitions, the reference to "fair market value of the complex" under section 191 is to the potential market price that the residential building and contiguous land would bring if offered for sale on the open market. The terms of section 191, do not indicate that it is only the interest of the leasehold builder that must be valued.
Subsection 190(3) is a related provision that supports this interpretation. Suppose Bco holds a leasehold interest in Landco's vacant land, and Bco sublets the land to M, and M will construct a personal residence for its own use.
Ss. 190(3) provides that Bco must self supply based on the "fair market value of the land" and not just on its "interest" in the land. Again, this appears to conform with the intent of the ETA to assess tax once on the fair market value of the land when first used for exempt residential purposes, even where the builder assessed is a leaseholder of the land.
We have reviewed your submissions that both Landco and Bco would meet the definition of "builder" and that each would be subject to self supply on their respective interests in the residential complex. However, we are unable to agree with this suggested treatment for the following reasons.
First, in our view it is unlikely that Landco could meet the definition of "builder" as set out in subsection 123(1). You have indicated that Landco meets this definition on the basis that Landco has "acquired an interest in the complex at a time when...the complex is under construction ...", as provided under (b) of the definition. It is our view that (b) describes situations where a person has purchased a complex while it is under construction or renovation. On this basis, we would not view Landco as acquiring an interest while the complex was under construction or substantial renovation.
Further, even if Landco meets the definition of a "builder", we would not view Landco to have given "possession of the complex to a particular person under a lease, licence or similar arrangement entered into for the purpose of its occupancy by an individual as a place of residence" as required under subparagraphs 191(1)(b)(i) and 191(3)(b)(i). Accordingly, Landco would not be subject to these self supply provisions. For the same reasons, we would not regard Landco as being subject to the provisions of subsection 191(10), also referenced in your letter.
We have also taken into consideration the Supreme Court cases that you have cited. One difficulty we have in interpreting these cases is that they appear somewhat out of context. That is, they are not related to the application of the GST within the context and intent of the ETA.
In any case, we do not believe that our policy would be contrary to the finding in these cases that the fair market value of the shares at issue must take into account the restrictions attached to them. Applying this same principle to the present situation, we would regard the fair market value of the residential complex (the self supply value) to take into account Bco's leasehold interest. That is, as previously indicated, the value to be ascertained would represent the market value of the freehold interest in the complex, given that the freehold is subject to Bco's leasehold interest, with a reversion in fee to the buyer. We agree with your view that our Policy Statement P-165 may not be clear about how leasehold interests are to be treated in arriving at the fair market value of subsidized housing. We are reviewing the statement and possibly may revise it to more clearly describe our administrative policy, as set out above. The issue brought forward in your letter does not, of course, involve subsidized housing.
While we appreciate your concerns, we consider that our present administrative policy is in accordance with the terms of section 191 and the intended tax policy result, as discussed above. I regret that our reply could not be more favourable; however, I will forward a copy of your letter and this reply to officials of the Department of Finance so that they will be aware of your submissions and concerns.
The foregoing comments represent our general views with respect to the subject matter of your letter. Unannounced, proposed or future amendments to the legislation may result in changes to our interpretation. These comments are not rulings and do not bind the Department with respect to a particular situation.
If you require further information or have other questions concerning this issue, please contact John Bain at (613) 954 8852 or Michael Place at (613) 954 7936.
Yours truly,
J.A. Venne
Director
Special Sectors
GST Rulings and Interpretations
| c.c.: |
J. Bain
M. Place
F. Schwartz (Dept. of Finance) |
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