2 October 1998 GST/HST Interpretation HQR0001063 - Sale of Real Property

Dear XXXXX

We are writing in reply to a memorandum dated January 23, 1998 from XXXXX of your office, concerning sales of lots by the above-noted partnerships to homebuilders (reference case XXXXX[).]

Statement of Facts

Our understanding of the facts, based on the documents submitted with the memorandum is as follows:

1. On June 30, 1989, XXXXX acquired a XXXXX XXXXX parcel of land in XXXXX is the managing partner of XXXXX which is a general partnership established pursuant to a partnership agreement dated June 30, 1989.

2. The intention was to develop the land for resale as residential lots with the potential for construction of some XXXXX homes.

3. XXXXX is a nominee corporation which holds title to the lands in trust for XXXXX[.]

4. Sales of lots are made to individuals acquiring the lots for the purposes of constructing a personal residence and to builders acquiring lots for the purpose of constructing a house and reselling the property.

5. When selling a lot to a builder, XXXXX enters into an agreement of purchase and sale with the builder. XXXXX retains title to the lot until such time as the builder sells the lot with a completed house to an ultimate purchaser. On closing of the sale of the completed home, XXXXX is paid the purchase price for the lot pursuant to its agreement with the builder out of the sale proceeds and title of the lot is transferred from XXXXX to the ultimate purchaser.

6. The sample purchase and sale agreement between XXXXX and a builder provides for possession to be given to the builder within XXXXX days of notice from XXXXX that a building permit can be obtained and roadways and curbwork adjacent to the lot have been completed. The particular agreement provided to us was entered into on June 9, 1993 and provided for a closing date of March 31, 1994 or such earlier date as the purchaser shall elect.

7. Under the agreement, the builder agreed to construct a residential dwelling on the lot and landscape the property in accordance with XXXXX for the development within XXXXX[.]

8. The lot is at the risk of the builder after the possession date and the builder is entitled to make improvements to the lot at its own cost. The builder is to pay interest on the purchase price of the lot at the rate of prime XXXXX from XXXXX [d]ays after the possession date until the closing date.

9. An auditor's memorandum to XXXXX also describes a scenario in which a builder acquiring a lot from XXXXX pursuant to an agreement similar to one described above assigns its interest in the lot to a purchaser who then retains the builder to construct a residence on the lot. The builder is paid for construction of the house by progress payments. On closing of the transaction XXXXX is paid the balance of the purchase price for the lot from the builder's sale proceeds and causes XXXXX to transfer title to the purchaser.

Interpretation Requested

You have inquired as to whether in these situations, a sale of the real property occurs between XXXXX and the builder or whether XXXXX is considered to be selling the completed house to the purchaser.

Interpretation Given

A sale of property is defined in subsection 123(1) of the Excise Tax Act, ("the Act") to include a transfer of ownership of the property and a transfer of possession of the property under an agreement to transfer ownership of the property. In the case at hand, it is our view that XXXXX is transferring possession of the property on the possession date pursuant to the purchase and sale agreement. For GST purposes, therefore, the sale of the lot by XXXXX to the builder is considered to occur at that time. Pursuant to subsection 168(5) of the Act, tax is payable on the supply on the earlier of this date and the closing date. A registered builder would be required to self-assess and remit GST applicable on the sale pursuant to subsections 221(2) and 228(4) of the Act at the time the builder receives possession under the agreement.

The builder is liable to collect GST from the ultimate purchaser of the newly constructed residential complex. The GST applicable on this sale is calculated on the full purchase price of the complex, that is land and building. Further, where the conditions for the GST/HST new housing rebate are satisfied, the builder may choose to pay or credit the rebate to an eligible purchaser.

With respect to the assignment scenario, it is unlikely that this different arrangement between the builder and the purchaser would affect the application of the GST to the transaction between XXXXX and the builder. Assuming the assignment occurs after the builder takes possession under its agreement with XXXXX, the sale from XXXXX to the builder still occurs and tax would apply as described above.

It is unlikely that we would consider the purchaser in the scenario to have possession of the lot on receiving an assignment of the builder's interest in the lot. This, however, is a question of fact which could only be determined based on a review of the particular arrangements between the builder and the purchaser. This could only be an issue in the event that the assignment occurred prior to the possession date under the agreement between the builder and XXXXX.

We trust that our comments are of assistance to you. Please do not hesitate to contact John Bain at (613) 954-3772 if we can be of further assistance on this issue

Yours truly,

Michael Warren
Rulings Officer
Real Property Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate