31 March 2000 GST/HST Interpretation 7707/HQR0001313 - Sale of Real Property by

Thank you for your correspondence of July 15, 1997 and documents sent subsequent to that date, concerning the application of the GST to the above captioned matter. This subject arose as a result of an audit of the books and records of XXXXX for Canada Customs and Revenue Agency (CCRA), requested the assistance of XXXXX and this request was forwarded to us for our response. Please accept our apology for the delay in responding to this query.

All legislative references are to the Excise Tax Act (the Act) unless otherwise noted.

Our understanding of the situation is as follows:

1. XXXXX carried out farming activities on the real property and are registered for the Goods and Services Tax (GST).

3. You have indicated that the XXXXX operated the farm in partnership.

4. XXXXX reported farm losses on their income tax returns. From XXXXX the losses were restricted farm losses pursuant to section 31 of the Income Tax Act.

5. On XXXXX entered into an agreement with a non-registrant for the sale of the real property in question which consisted of the home and approximately XXXXX of land (the Property).

6. The XXXXX counsel has indicated that at the time of disposing the Property, XXXXX (the Municipality) in which the Property is located, followed a general municipal plan that restricted the subdivision of a previously unsubdivided quarter-section. Counsel also indicated that the Municipality consistently refused requests for any subdivision of previously subdivided quarter-sections.

7. XXXXX counsel contends that the Property was not classified as a previously unsubdivided quarter-section by the Municipality (i.e., at some point the quarter section had been previously subdivided).

8. Counsel further submits that the XXXXX did not claim input tax credits in respect of the acquisition of or any improvement made to the Property.

Issue

You are enquiring as to the tax status of the supply of the Property for GST purposes.

Response

Land That Is Reasonably Necessary For The Use And Enjoyment Of A Residential Complex As A Place Of Residence For Individuals

Under Policy Statement P-069, "The Amount Of Land Subjacent And Immediately Contiguous To A Residential Complex Which Is Reasonably Necessary For Its Use And Enjoyment As A Place of Residence For Individuals", a legally imposed minimum lot size, for residential use, exceeding 1/2 hectare that was in effect on the date the property was acquired by the taxpayer, is generally considered to be the minimum amount of land reasonably necessary for the use and enjoyment of the residential building as a residence throughout the period that the property is continuously owned by the taxpayer after that acquisition date. However, where a portion of that land is used in commercial activities, such portion is usually not considered to be reasonably necessary for the use and enjoyment of the building as a residence.

There is no indication that a residential land use restriction existed at any time during the XXXXX ownership of the Property, and in any event, the XXXXX used the Property in farming activities before it was sold.

The XXXXX counsel asserts that the Municipality followed a general municipal plan that restricts the subdivision of the Property. It is not free from doubt whether this is equivalent to a law or regulation imposing a severance or subdivision restriction with respect to residential lots in a particular area. Regardless of the foregoing, where any portion of the land is used for commercial activities, such a portion is usually not considered to be reasonably necessary for the use and enjoyment of the building as a residence. This view is not inconsistent with IT-Bulletin, IT-120R5 "Principal Residence", issued on November 30, 1999, which states that "where any portion of land in excess of one-half hectare is not used for residential purposes but rather for income-producing purposes, such portion is usually not considered to be necessary for the use and enjoyment of the housing unit as a residence."

The XXXXX reporting of farm losses on their income tax returns suggests that, for income tax purposes, the XXXXX considered that they used the Property for income producing purposes in a business with a reasonable expectation of profit (REOP). By way of a general comment, it would appear that no deduction is allowed under the XXXXX[.] As such, there is an administrative presumption that the land in excess of 1/2 hectare does not form part of the residential complex for purposes of section 191 as well as for purposes of various exemptions in Part I of Schedule V. It should be noted that if the size or character of the house together with its location on the Parcel make such excess land essential to its use and enjoyment as a residence, that excess land may form part of the residential complex. Alternatively, if the location of the house requires such excess land in order to provide access to and from public roads, such excess land may form part of the residential complex.

The Application Of Subsection 136(2) To The Supply Of The Property

Subsection 136(2) provides, in part, that where a supply of real property includes a residential complex and other real property which is not part of a residential complex, the supply of the complex is deemed to be a separate supply from that of the other real property and neither supply is incidental to the other.

The sale of the Property will be subject to the provisions of subsection 136(2). The sale of the residential complex by the XXXXX will be exempt under section 2 of Part I of Schedule V provided they have not claimed input tax credits in respect of their last acquisition of the complex or any improvements made thereto.

The sale of the remainder of the Property (i.e. the non-residential complex portion) will depend on whether the remainder of the Property was property on account of a partnership or whether the remainder of the Property was property of the XXXXX as individuals.

Where the remainder of the Property was on account of a partnership, then the sale of the remainder of the Property will be a taxable supply under section 165 as none of the exempting provisions under Part I of Schedule V would apply.

Where the remainder of the Property was sold by the XXXXX as property owned by them as individuals and not on account of a partnership, then the sale of the remainder of the Property will be exempt under section 9 of Part I of Schedule V unless one of the exclusions therein applies.

The provisions of paragraphs 9(2)(a) or (c) of Part I of Schedule V may exclude the sale of the remainder of the Property by the XXXXX from exemption.

Paragraph 9(2)(a)

Paragraph 9(2)(a) would exclude the sale of the remainder of the Property from exemption if, immediately before the supply, the property was capital property of the XXXXX used primarily in a business of the XXXXX carried on XXXXX[.] It would appear that the XXXXX were using the land primarily in a farming business and the property would constitute capital property. If the farming business had a XXXXX the sale of the land would be excluded from exemption.

You indicated that the XXXXX reported farm losses and restricted farm losses for income tax purposes for several years prior to the sale. Policy Statement P-176R, "Application Of Profit Test To Carrying On A Business", provides guidelines for determining whether a reasonable expectation of profit exists for an individual with respect to a given business. No one factor listed in the policy is more important than another factor and no one factor determines whether an activity is carried on XXXXX[.] All relevant criteria should be considered in making a determination.

If the XXXXX had XXXXX from the farming business, the sale of the land would be excluded from exemption by paragraph 9(2)(a). Conversely, if the XXXXX did not have a XXXXX from the business and none of the other exclusions in section 9 apply, the sale of the land is exempt. However, if that is the case, a determination would also have to be made as to whether the XXXXX were properly registered for the GST/HST. Further, there may be income tax implications for deductions claimed by the XXXXX if the farming business did not have a XXXXX.

Paragraph 9(2)(c)

Paragraph 9(2)(c) provides that the sale of a part of a parcel of land by an individual is not exempt where the parcel was severed or subdivided by the individual. However, paragraph 9(2)(c) does not apply where the parcel of land was subdivided or severed into only two parts, and the individual did not previously subdivide or sever it from another parcel of land. Paragraph 9(2)(c) will also not apply in the case of a subdivision or severance where the purchaser is related to or is a former spouse of the individual, and is acquiring the land for his or her personal use and enjoyment. Where a part of a parcel of land is sold to a person who has the right to acquire the land by expropriation, that part and the remainder of the parcel will not be considered to have been severed or subdivided from each other by the individual. There is insufficient information available to determine whether paragraph 9(2)(c) applies.

If you require further information, or have any questions regarding this matter, please contact me (613) 954-3772 or Hugh Dorward at (613) 954-4393.

Yours truly,

Costa Dimitrakopoulos
A/Manager
Real Property Unit
Financial Institutions and Real Property Division