XXXXX
This is in response to your memorandum received in this office on September 19, 1994. At issue is the GST treatment of the resale of residential building lots by individuals who had intended to construct houses for use as their primary place of residence. Specifically, where individuals state that their secondary or alternative intention is to sell the lot, how does this affect the GST status of the resale? We apologize for the delay in responding.
Statement of Facts
You have provided us with two possible scenarios regarding individuals resupplying building lots and have asked us to comment thereon. Both scenarios have occurred in the 1994 calendar year, and as of yet, there is no indication from either of the individuals as to what the treatment of the revenue from the disposition of the lots will be for income tax purposes. Any interpretation or ruling, however, should be subject to the corresponding treatment for income tax purposes.
Case #1
1. An individual acquires a vacant lot with the primary intention of constructing their personal residence on the lot. The GST is paid on the purchase price of the lot.
2. The individual states that the secondary intention at the time of acquisition was to sell the lot for a profit (i.e. in the course of an adventure or concern in the nature of trade).
3. The primary intention is frustrated and the individual sells the building lot to a developer who is a GST registrant. The individual wishes to treat the sale as an adventure or concern in the nature of trade and thereby file an election under subparagraph 9(b)(ii) of Part I of Schedule V to the Excise Tax Act (the "Act") to make the supply taxable. By filing the election and making the sale taxable, subsection 221(2) of the Act will require the GST registered developer to self-assess the GST payable on the appropriate GST return (GST 60). The individual would then be entitled to file a rebate claim pursuant to section 257 of the Act to recover the GST paid on the acquisition of the lot.
Case #2
1. An individual acquires a vacant lot with the primary intention of constructing their personal residence on the lot. The GST is paid on the purchase price of the lot.
2. The secondary intention is to construct the house and lease it to third parties.
3. Both intentions are frustrated and the person sells the lot to a developer who is a GST registrant. The individual wishes to treat the sale as an adventure or concern in the nature of trade and thereby file an election making the supply taxable in accordance with subparagraph 9(b)(ii) of Part I of Schedule V to the Act. By filing the election and making the sale taxable, subsection 221(2) of the Act will require the GST registered developer to self-assess the GST payable on the appropriate GST return (GST 60). The individual would then be entitled to file a rebate claim pursuant to section 257 of the Act to recover the GST paid on the acquisition of the lot.
Interpretation Requested
Are the individuals, in both cases presented above, correct in treating the sales of the vacant lots as being made in the course of an adventure or concern in the nature of trade based on their stated secondary or alternate intentions at the time they acquired the lots?
Interpretation Given
In both scenarios, based on the facts submitted and subject to similar treatment for income tax purposes, it does not appear that either of the individuals will be able to treat the sales of the vacant lots as being made in the course of an adventure or concern in the nature of trade. As a result, the individuals are precluded from filing an election pursuant to subparagraph 9(b)(ii) of Part I of Schedule V to the Act to make the supply taxable and from claiming a rebate of the GST paid on the acquisition and/or any improvements to the property by virtue of section 257 of the Act. The sale of both lots to the developers (or any other person for that matter) is exempt from GST pursuant to section 9 of Part I of Schedule V to the Act.
Analysis
As discussed in Policy Statement P-059, when determining whether a particular supply of real property is subject to GST or exempt, the supplier's whole course of conduct in dealing with the property, the activities undertaken relating to the sale and the characterization of the transaction for income tax purposes should be considered in light of the particular facts of the transaction. In both of the cases, the individuals purchased the vacant lots with the primary intention of building houses for use as their primary places of residence. However, both individuals failed to realize their primary intentions. Ultimately, neither individual constructed a house and each sold their lot to a GST registered developer thereby realizing their secondary or alternate intentions. Thus, the issue becomes whether, by virtue of the individuals' stated alternate intentions (secondary or otherwise), such sales may be considered to have been made in the course of an adventure or concern in the nature of trade.
It should be recognized that intention to sell real property is almost invariably present even when a true investment has been acquired if circumstances should arise that would make it financially more beneficial to sell the investment than to continue to hold it. However, this intention (stated or otherwise) by itself is not sufficient to establish that the sale was made in the course of a business or an adventure or concern in the nature of trade. Their must exist a clear intention to sell the land in question for a profit and such intention must have been a motivating factor in the purchase. Simply being willing to sell at all times for a profit is not the same as having a secondary intention to sell for a profit at the time of purchase. In Crystal Glass Canada Limited v. The Queen 1989, C.T.C. 330, the Federal Court of Appeal stated that, "... secondary intention requires not only the thought of sale at a profit but that the prospect of such sale be an operating motivation in the acquisition of the capital property ...".
In the case of XXXXX a husband and wife purchased property on which they intended to develop a motel. Apart from home purchases, they had no prior real estate history and no prior business or loan history. They were prevented from going forward with their project only because of the high costs of servicing the land, which was a problem to which they devoted some three years of effort (albeit unsuccessfully) to solving. The husband and wife sold the property at a profit and the Department held that the revenue from such disposition was income while the husband and wife contended that the revenue was a capital gain. The Court concluded the following:
... From the evidence, there are a few factors to indicate there was a secondary intention to market the property in the event of the first intention failing. Mr. XXXXX never discussed an alternative intention with his family or friends. ... The conduct of the taxpayers prior to, at, and immediately after the acquisition period does not indicate an operative motivating secondary intent to sell the land if the motel project failed. ...
Accordingly, the Court held that the revenue was a capital gain.
Generally, where the primary intention is clearly identifiable, there must exist strong evidence to suggest a contrary secondary intention. Where an individual purchases a vacant lot with the expressed intention to construct a primary place of residence for the individual, the individual does not normally have an operating motivation to re-sell the property in the course of a business or an adventure or concern in the nature of trade as a reason for initially acquiring the property. Therefore, unless there is strong evidence to suggest otherwise (i.e. frequency of such actions, transactions similar to those of individual's regular or previous business, the nature of the property, the taxpayer's conduct and actions while holding the property, etc.), it is unlikely such property would be considered anything other than capital property of the individual.
Where, however, there is evidence to suggest that the property is other than capital property, secondary or alternate intention may be viewed as corroborative evidence that the sale was made in the course of a business or an adventure or concern in the nature of trade. In the case of Regal Heights Ltd. v. M.N.R. 1960, C.T.C. 384 (SCC), a partnership purchased land and planned to construct a shopping centre. After considerable study, and overtures to prospective tenants, it was learned that another shopping centre was to be constructed nearby. As the project now seemed impractical, the land was sold at a substantial profit. The Supreme Court of Canada found that the promoters had the intention of putting the land to one use, but if this was frustrated, were hopeful of putting it to another use for profit. The Court stated:
... Their venture was entirely speculative. If it failed, the property was a valuable property, as is proved from the proceeds of the sales they made. There is ample evidence to support the finding of the learned trial judge that this was an undertaking or venture in the nature of trade, a speculation in vacant land. These promoters were hopeful of putting the land to use but that hope was not realized. They then sold at a substantial profit and that profit, in my opinion, is income and subject to taxation. ...
The primary intention of the promoters in such case was to use the land in the course of a business or an adventure or concern in the nature of trade. However, in addition, it was established or inferred by the Court that the supplier's secondary or alternate intention was to sell the land at the first suitable opportunity and such a sale would be in and of itself in the course of a business or an adventure or concern in the nature of trade.
In our view, the sales of the vacant lots by the individuals would not be considered to be made in the course of a business or an adventure or concern in the nature of trade but rather on account of capital. Where a person purchases a vacant lot to construct a primary place of residence, a subsequent resale of the lot by the individual would not be characterized as being made in the course of a business or an adventure or concern in the nature of trade unless their existed strong evidence to the contrary. No such evidence (i.e. listing the property immediately for sale after the initial acquisition, the nature of the property, the past or present activities of the individuals, etc.) at the time of acquisition has been presented for our review.
The effect of concluding that such supplies are not made in the course of an adventure or concern in the nature of trade, but are on account of capital, precludes any election to change the tax status on the sale of the property from GST exempt to taxable under subparagraph 9(b)(ii) of Part I of Schedule V to the Act. Accordingly, the sales of the lots will be exempt from GST regardless of the subsequent purchaser's status for purposes of the Act. Further, no rebate of the GST paid on the initial acquisitions of the lots by the individuals will be available under section 257 of the Act.
We would suggest that the corresponding treatment for income tax purposes be verified. In this regard, discussions with Taxation surrounding the specific transaction and the proper income tax treatment should be considered. It should be noted that where individuals dispose of property in the course of a business or an adventure or concern in the nature of trade, the revenue from the disposition of the property would be treated as business income for income tax purposes as opposed to a capital gain. There is no different treatment between a business and an adventure or concern in the nature of trade for income tax purposes since a business is defined in the Income Tax Act as including an adventure or concern in the nature of trade. For GST purposes, however, unlike sales made in the course of a business, the sale of a vacant lot made in the course of an adventure or concern in the nature of trade is exempt unless an election is filed pursuant to subparagraph 9(b)(ii) of Part I of Schedule V to the Act or one of the other exclusions to section 9 applies. As discussed above, this election may only be filed if the sale is in fact made in the course of an adventure or concern in the nature of trade.
It is noted that where the sale of the vacant lot by the initial purchaser to a developer is GST exempt, a future sale of the lot by the developer will be subject to GST. A GST new housing rebate may be available to the subsequent purchaser if the land forms part of a qualifying residential complex and the other rebate criteria are satisfied. However, the original owner of the land and the developer will not be entitled to a rebate or input tax credit (notional or otherwise) in respect of their acquisition of the land. This situation has been brought to the attention of the Department of Finance for their consideration. We will keep you advised of any legislative changes in this area.
If you have further questions regarding this letter, please do not hesitate to contact John Bain at (613) 954-8852.
Stan Farber
Manager - Tax Policy
Real Property
GST - Policy and Legislation
| c.c.: |
Stan Farber
John Bain
All Regional I&S Managers
XXXXX |
11830-8, 11870-5
c.n. 849(JB)
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