GSTHST Rulings and
Interpretations Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Avenue
Vanier, Ontario
XXXXX K1A 0L5
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Reg.: XXXXX
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March 27, 1998
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Subject:
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GSTHST INTERPRETATION
Acquisition of Real Property
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Dear XXXXX
Thank you for your letter of January 29, 1998 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations.
Interpretation Requested
1. Is a municipality required to collect the GST on land sold (7% of the selling price)?
2. Is a municipality required to pay the GST on land purchased (7% of the purchase price)?
3. When did this legislation become effective?
4. How are these transactions to be accounted for with respect to line 205 of form GST 34E Goods and Services Tax Harmonized Sales Tax Return?
Interpretation Given
1. The GST is a consumption tax. Most transactions made in Canada are subject to the GST at a rate of 7%, unless they are specifically exempted or zerorated (taxed at a rate of 0%) within the Excise Tax Act (the Act). When registered for GST purposes, a municipality is responsible for collecting and remitting the GST on its sales of goods and services that are taxable at 7%.
A municipality is included in the definition of a "public service body" in subsection 123(1) of the Act. The tax status of a supply of real property is determined based on the facts of the situation. Generally, most sales, leases and rentals of real property by public service bodies are exempt from the GST unless specifically excluded from exemption. Excluded from the exemption are:
A. sales of residential property;
B. real property that the organization is considered to have made a supply of as a result of a changeinuse of the property;
C. vacant land sold to an individual on which there was no structure used by the organization;
D. sales or leases of real property used primarily in a commercial activity;
E. shortterm accommodation where the rental agreement is one month or less;
F. the lease of real property (other than shortterm accommodation) made in the course of a business where continuous possession or use of the property is less than one month;
G. the licence of real property;
H. real property that a municipality elects to treat as taxable (see below);
I. parking spaces rented in the course of a business; and
J. supplies of real property that the public service body has seized or repossessed as a creditor pursuant to subsection 183(1) of the Act.
A municipality making taxable sales of real property will be required to collect the GST at a rate of 7% on the selling price of the property.
If registered for GST purposes, a municipality will be able to recover the GST payable on most business purchases to the extent that the municipality engages in commercial activities. An input tax credit (ITC) may be claimed to recover the GST paid or payable on goods acquired or imported for resale, on goods used as capital property and on any goods or services they acquire to import to use, consume, or supply a commercial activity.
Municipalities do not apportion the GST they paid on purchases of capital property. Capital property refers to real property, such as land and buildings, or personal property, such as large equipment and machinery. Registered municipalities can claim a full ITC for 100% of the GST they paid on the acquisitions of capital property or on improvements to capital property that they intend to use more than 50% of the time for commercial activities. If they do not use the capital property primarily in commercial activities, they cannot claim an ITC. If the municipality intends to use purchases of capital property primarily in exempt activities, it can apply for a 57.14% rebate for the GST it paid. A municipality cannot claim both an ITC and a rebate for the GST it paid on the same purchase of capital property. It has to claim one or the other, depending on the primary use of the capital property.
Municipalities can opt out of the primary use rules by electing, on a property by property basis, to have sales, leases and other supplies of real property, which would normally be exempt, treated as taxable. This election will override the general exemption for supplies of real property by municipalities. However, other specific exemptions will not be affected by this election. Election form GST 26, Real Property of a Public Service Body has to be filed within one month after the end of the municipality's reporting period when the election is to become effective.
This election applies to capital real property (and effective November 5, 1991, to real property that is inventory held for resale, or that is acquired by a municipality by way of lease, licence or similar arrangement for the purpose of subleasing the property). This election is not effective for residential real property, such as an apartment building, or for intramunicipal supplies which are otherwise exempt.
This election allows a municipality to claim ITCs for the GST it paid on the cost of the acquisition of real property, or on the cost of improvements to the real property, as well as on purchases related to the use or supply of that property in commercial activities.
If the use of real property in commercial activities increases, the municipality can claim an additional ITC on the basis of the percentage increase in commercial activities, which is adjusted if the municipality already claimed a GST rebate. Conversely, if the exempt use increases, the municipality will have to assess and remit the GST on the basis of the percentage increase in exempt activities.
The municipality may cancel this election by fling the notice GST 304, Notice to Revoke the Election by a Public Service Body to Have an Exempt Supply of Real Property Treated as a Taxable Supply.
For further information regarding the GST and municipalities, please see the enclosed GST Guide, Information for Municipalities.
2. Generally all sales of real property are considered to be made in the course of a commercial activity and are therefore taxable, unless specifically identified as an exempt supply within Schedule V to the Act. Exempt supplies of real property include:
A. the supply of a residential complex sold by a person who is not the builder, provided the vendor has not claimed ITCs in respect of the last acquisition of, or an improvement acquired or imported for, the complex;
a sale of land by an individual or personal trust except:
B. capital property used primarily in a business with a reasonable expectation of profit,
C. real property sold in the course of a business,
D. real property sold in the course of an adventure or concern in the nature of trade where an election has been filed to make the sale taxable,
E. the supply of a "part of a parcel" of land where the parcel was severed or subdivided by the individual, trust or settlor of the trust (subject to exceptions),
F. real property that is considered to have been supplied as a result of a change in the use of the property;
G. a sale of farmland where the supply is made to a related individual or former spouse and the property is intended for the personal use and enjoyment of that individual;
H. a sale of previously leased land where land that forms part of a residential complex is sold without the building that is situated on it;
I. the supply of land (or a residential building) made by way of lease, licence or similar arrangement to a person who in turn leases the property on an exempt basis;
J. the supply of land that is a residential trailer park, provided certain requirements are met;
K. the supply of a site in a residential trailer park made by way of lease, licence or similar arraignment for continuous possession or use of the site for at least one month;
L. a supply of land made by way of lease, licence or similar arrangement for continuous possession or use of the land for at least one month where a residential unit is, or is intended to be, affixed to the land and enjoyed as a place of residence;
M. a supply of land made by way of lease, licence or similar arrangement for continuous possession or use of the land for at least one month to an individual acquiring the land to construct a residential complex in the course of a commercial activity;
N. the sale of a parking space in a condominium complex, provided certain requirements are satisfied; and
O. the supply of a parking space made by lease, licence or similar arrangement where the lease is incidental to the lease of residential premise.
For further details on this subject, please see the enclosed GST Memorandum 3001: Real Property.
Pursuant to subsection 221(1) of the Act, every person who makes a taxable supply shall collect the GST at a rate of 7%, and pursuant to subsection 165(1) of the Act, every recipient of a taxable supply is required to pay the GST at a rate of 7% of the value of the consideration for the supply. Therefore, if the municipality purchases a taxable supply of real property, they will be required to pay the GST.
1. The GST came into effect January 1, 1991. Please note that technical amendments to the Act have since been passed which came into force on a variety of dates after January 1, 1991. If you have questions regarding a specific application of the legislation with further concerns in respect of the timing of a transaction, please contact us for further information.
1. The GST payable on the value of the real property is not always to be paid to the vendor. Subsection 221(2) of the Act provides that a supplier does not have to remit tax where the supplier is a nonresident, or the recipient is registered for GST purposes and the supply is not a residential complex being made to an individual, or the recipient is a prescribed recipient. Where subsection 221(2) of the Act applies, subsection 228(4) of the Act provides that the recipient shall pay the tax payable directly to the Receiver General in the prescribed manner. Effective January 1, 1997, registrants who are required to selfassess tax on a taxable purchase of real property and who are using or supplying the property primarily in the course of commercial activities will report the tax on their regular return, form GST 34E, for the reporting period in which the tax became payable. This tax payable amount will not be included in the net tax calculation, however, will be entered on line 205 of the return form.
For cases where tax was to be selfassessed and reported on returns due prior to January 1, 1997, and in the case of registrants who are not using or supplying the property more than 50% in the course of commercial activities, the purchaser must report the tax using form GST 60 Goods and Services Tax Return for Acquisition of Real Property. This form is submitted along with the purchasers regular return (GST 34E) in the period in which the property is purchased.
In addition, please note that on April 1, 1997, the provincial sales tax (PST) in three participating provinces, Nova Scotia. New Brunswick, and Newfoundland was unified with the GST to create the HST. The HST, at a rate of 15%, replaces both PST and GST on supplies that are made (or considered to be made) in the participating provinces and applies to the same base of goods and services as the GST. In the event that you provide goods or services in a participating province, please contact our office for further information regarding the HST application to supplies.
The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST Memoranda Series, do not bind the Department with respect to a particular situation.
For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST Memoranda Series.
Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9214.
Yours truly,
Doris Rist
A/Rulings Officer
Financial Institutions and Real Property
GSTHST Rulings and Interpretations
Encl.
Legislative References: ETA: ss165(1), 221(2), 228(4), 169(1), sched. VI, VVI, cases:IM0310A, HQR000079, GL96262, Memorandum 3001, Guide Information for Municipalities
NCS Subject Code(s) I 01, 01
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