5 October 1998 GST/HST Interpretation HQR0001153 - Application of the GST/HST to the Purchase of a House

GST/HST Rulings and Interpretations
 Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
XXXXX                                                                                 K1A 0L5

Dear XXXXX

Thank you for your letter of April 23, 1998 (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) in the following circumstances.

Facts

1. An individual ("the purchaser") enters into a contract ("the Purchase Agreement") with person (ABC Ltd.) for the construction of a house on land in XXXXX owned by ABC Ltd.

2. The total purchase price is stated to include GST less the new housing rebate.

3. The Purchase Agreement requires the purchaser to make progress payments, with the balance due on the earlier of completion or occupancy of the house.

4. The Purchase Agreement provides for the transfer of title to the land prior to the transfer of possession in order to facilitate mortgage financing of the progress payments. If title is so transferred, XXXXX will be entitled to register an unpaid vendor's lien caveat against the land as security for payment of the total price.

5. Upon entering into the Purchase Agreement, the purchaser purportedly assigned the GST new housing rebate to x ABC Ltd..

6. XXXXX[.]

7. Under the XXXXX and the Purchase Agreement, the builder performance indemnity coverage includes the following rights and obligations:

a) In the event of a default by XXXXX of its performance obligations under the Purchase Agreement XXXXX will:

i) settle as agent of the purchaser any claims of any sub-trades and suppliers (to the extent required of an owner under the XXXXX to clear the title to the land of any builder's liens filed against the home being constructed under the Purchase Agreement, and

ii) complete the construction of the home in accordance with the Purchase Agreement, subject to any reasonable changes as might be required by the XXXXX[;]

b) In the event of such default, the purchaser will:

i) continue to pay, to XXXXX all purchase moneys that come due under the Purchase Agreement, and

ii) subrogate their rights in law against the XXXXX in respect of the Purchase Agreement in favour of XXXXX[.]

8. XXXXX provides that, in the event of a default by XXXXX in any of its covenants under the XXXXX, XXXXX may take possession and manage any or all or any part or parts of the property and business of XXXXX, any debts incurred in so doing being entitled to the security provided by the XXXXX.

9. XXXXX also provides for enrolment fees, administration fees and an indemnification by XXXXX for XXXXX costs. Any debts or obligations to XXXXX are a charge against XXXXX property.

10. XXXXX defaults under one of the conditions of the builder performance indemnity coverage. The default occurs prior to completion or occupancy. As a result of the default, XXXXX hires the subtrades necessary to finish the construction of the house.

11. At the time of default, XXXXX has collected mortgage draws under the terms of payment of the Purchase Agreement.

Interpretation Requested

1. Who is responsible for remitting tax on the sale of the house to the purchaser?

2. Can the new housing rebate to which the individual is entitled be assigned to either XXXXX or XXXXX under the provisions of subsection 254(4) of the Excise Tax Act ("the Act")?

3. Is XXXXX or XXXXX eligible for ITCs with respect to the GST paid to the subtrades after XXXXX defaults on the Purchase Agreement?

Interpretation Given

Based on the information provided, our interpretation is as follows:

1. The responsibility for remitting tax on the sale of the house to the purchaser depends on whether there is an agency relationship between XXXXX[.] If XXXXX is acting as the agent of XXXXX, then XXXXX is responsible for remitting the tax under subsection 225(1) of the Act. If XXXXX is not acting as the agent of XXXXX then XXXXX is required by subsection 225(1) to remit the tax collected as part of its own net tax remittance.

2. The new housing rebate cannot be legally assigned under section 254 of the Act, or otherwise, to either XXXXX the amount of the rebate can, however, be included in the consideration for the sale and the GST collectible and new housing rebate calculated thereon.

3. XXXXX is eligible to claim ITCs with respect to the GST paid to the subtrades after the default, to the extent that XXXXX is acting as the agent of XXXXX[.] If XXXXX is not acting as the agent of XXXXX then XXXXX will be eligible to claim ITCs with respect to GST paid or payable to the subtrades after the default on purchases acquired by XXXXX in the course of fulfilling its obligations under the warranty program.

Analysis

As indicated in your letter, under Policy Number P-083 the transaction contemplated by the Purchase Agreement would be considered to be the single supply of a residential complex by way of sale. This result is based on the assumption that the parties intended that the purchaser would acquire a completed house from XXXXX the supplier of both the land and building. An additional factor is that XXXXX maintains an interest in the real property in the nature of a vendor's lien until the purchaser takes possession of the house, and that the Purchase Agreement provides the substance for this determination. As stated in the Policy, this position applies only with respect to such transactions occurring in XXXXX[.]

On the basis of the Policy, GST would generally be payable when possession of the complex is transferred to the purchaser. GST would be remittable based on the earlier of when GST is paid or payable (i.e. the final payment in the given circumstances might be paid at the time construction is complete, if that is earlier than the date of possession). All other conditions being met, the purchaser would be eligible for a new housing rebate under section 254, which could be paid or credited in accordance with the requirements of subsections 254(4) and 254(5).

In order to determine who is responsible for remitting the GST and who is able to deal with the new housing rebate and ITCs in such a sale when the builder has defaulted as in the given scenario, it is necessary to determine the nature of the relationship between XXXXX and XXXXX[.] It would appear that, in taking over XXXXX position with respect to completing the construction contract, XXXXX is acting as XXXXX agent. Whether this is actually the case is a question of fact to be resolved by XXXXX or XXXXX should either require a ruling.

Issue 1

As the GST is payable at the time of possession, it is assumed that it will be paid with the final payment under the purchase agreement and therefore collected by XXXXX. As noted in Policy Number P-131 ("Remittance of tax by a third party"), where GST has been collected by a third party instead of the original supplier, and the third party is an agent of the supplier, then it is the principal, i.e. the supplier, XXXXX, who will be required to remit the GST collected, as well as account for the GST in its net tax calculation. However, subsection 225(1) requires such a third party who is not the agent of the supplier to include those tax amounts in its own net tax. Accordingly, XXXXX would be liable to remit the GST it collects; under Policy Number P-131, XXXXX would not be required to account for and remit the tax.

It should be noted, on the other hand, that if some or all of the tax payable is not collected by XXXXX it is the responsibility of XXXXX to account for the GST collectible in determining its net tax for the relevant reporting period.

Issue 2

With respect to the GST new housing rebate, strictly speaking, rebates under section 254 of the Act cannot be "assigned" at all, as they are not prescribed as "assignable" by the Assignment of Crown Debts Regulations (SOR/91-35). However, as noted in GST/HST Memoranda Series Section 19.3.1.1, "the builder and purchaser [may] agree to use the new housing rebate as part of the value of consideration". The GST collectible and rebate credited to the purchaser under subsection 254(4) are calculated based on the rebate-included consideration. The rebate is part of the consideration collected by XXXXX whether as agent of XXXXX or not. There is accordingly no reason for the purchaser to "re-assign" the rebate, even if that were legally possible. Indeed, given that the parties to the original agreement have not changed, to do so would be meaningless.

Whether the rebate, or any part of the consideration, is to be allocated to XXXXX or XXXXX is determined by the interpretation of the agreement between XXXXX and XXXXX which is a matter of contract law beyond the purview of the Department.

Issue 3

On the issue of ITCs for the GST paid to the subtrades, any supply received by XXXXX as an agent is received on behalf of XXXXX. It would therefore be XXXXX that is entitled to the ITCs.

Any reimbursement of GST paid on behalf of XXXXX will have to be sought by XXXXX from XXXXX under the terms of the XXXXX Agreement. Again, this is a matter of contract law beyond the purview of the Department.

However, if XXXXX is not acting as agent fo[r] XXXXX, then the acquisition of the property and services supplied by the subtrades is made by XXXXX for consumption, use or supply in the course of its own activities. In this context, it is necessary to determine the nature of the supply made by XXXXX to XXXXX under the XXXXX Agreement.

Insofar as the completion of the residential complex is concerned XXXXX is fulfilling its undertaking to XXXXX under the warranty program to "honour the terms of its ... builder performance indemnities" [p. 2, para. 5(c)]. The supply of the warranty program, including the fulfilment of XXXXX obligations under it, would be taxable.

Accordingly, if in completing the construction of the residential complex XXXXX is not acting as XXXXX agent but is simply fulfilling its obligations under the warranty program, then any supplies it purchases in the course of so doing are acquired for consumption use or supply in the course of its commercial activity. XXXXX would therefore be entitled to claim ITCs on these supplies.

In view of the above analysis, you may wish to revisit the interpretation issued by your office in case number XXXXX[.]

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-3413.

Yours truly,

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

Legislative References:           Excise Tax Act, subsection 123(1) insurance policy
Excise Tax Act, section 254
Assignment of Crown Debts Regulations
Excise Tax Act, section 225