25 September 2000 GST/HST Interpretation 13433 - Calculation of New Housing Rebate Under Section Excise Tax Act ("the Act"), Section 254.1

We write in response to a memorandum from XXXXX, Technical Interpretation Services, XXXXX Region, dated XXXXX, referring the above issue to us for direct response to you. The memorandum relates to GST new housing rebate claims filed, or to be filed, by one or more of the above registrants (collectively referred to below as "the developer") on behalf of "purchasers" of strata lots in a leasehold strata plan deposited under the XXXXX In preparing our response, we have reviewed the following documents provided on behalf of the developer:

1. Letter from XXXXX.

2. Letter from XXXXX.

3. XXXXX.

4. Offer to Lease between XXXXX.

5. Sales schedules for XXXXX.

6. XXXXX re transfer of Leasehold XXXXX to XXXXX.

7. Ground Lease between the XXXXX.

8. Documents respecting transaction re XXXXX:

(a) contract of purchase and sale,

(b) statement of adjustments, and

(c) vendor's solicitors' closing correspondence.

9. Application for GST new housing rebate.

It is understood that the documents listed under items numbered 3 through 9 inclusive were provided as representative examples of a number of identical transactions.

Based on the above, we understand the relevant circumstances to be as follows:

1. The developer is in the business of real estate development.

2. The developer acquires land from XXXXX ("the landowner") by way of a prepaid Ground Lease. The developer, with the landowner's consent, converts the Ground Lease into individual strata lot leases in the developer's name by depositing in theXXXXX Land Title Office a leasehold strata plan pursuant to XXXXX. Each of the individual strata lot leases incorporates the terms of a Model Strata Lot Lease which runs for a period of XXXXX years.

3. The basic rent under the sample Ground Lease provided is XXXXX.

4. XXXXX of the Model Strata Lot Lease provides for the basic rent of the strata lot lease as follows:

"XXXXX"

5. The developer builds a condominium complex on the leased land. The sample completed complex is a XXXXX storey building consisting of XXXXX leasehold strata lots.

6. The individual strata lots are supplied by the developer under a "Contract for Purchase and Sale" between the developer and a "purchaser" ("the contract").

7. The "purchase price" under the contract is stated as a single amount and is not allocated between the building and land components of the strata lot.

8. Among others, the contract has the following terms and conditions:

1. "XXXXX"

2. "XXXXX"

3. "XXXXX"

4. "XXXXX"

9. As part of the supply of the strata lot, the developer assigns its interest in the individual strata lot lease to the "purchaser".

10. Under XXXXX, the landlord is not entitled to re-enter, take possession or otherwise cause the strata lot lease to be terminated if the lessee defaults on his or her obligations under the terms of the lease, but may apply for an order for sale of the lessee's leasehold interest in the strata lot.

11. At the end of the XXXXX-year lease period, the landlord is required by XXXXX to purchase the lessee's interest in the strata lot at a purchase price calculated on the basis set out in the strata lot lease or, failing that, a purchase price equal to the fair market value of the lessee's interest in the strata lot evaluated as if the strata lot lease had not expired. XXXXX the Model Strata Lot Lease provides that the fair market value of the lessee's interest in the strata lot is to be determined on the basis that the lessee's interest consists of the improvements on the land, with no value being attributable to the land itself.

12. The developer has filed GST new housing rebate applications on behalf of a number of "purchasers". Each application is a "Type 1B" (homes on leased land), and in each case the full "purchase" price has been allocated to the building.

Issue

The developer's solicitors have requested the following:

"We ask you to confirm that, for purposes of the residential condominium units that have been or are being built by [the developer] on land leased from [the landowner], the amount of the GST rebate arising on the sale of such units, as calculated pursuant to paragraph 254.1(2)(h) or (i) of the Act, should be calculated upon the total price paid under the terms of the [contract] between the purchaser and [the developer]."

Response

It is our view that the total "purchase price" under the contract should be allocated between the two elements of the supply: the sale of the building and the assignment of the leasehold interest. This should be done based on the relative values of the non-land components of the strata lot and the interest in the land, determined using standard appraisal principles. The amount allocated to a particular element would be the consideration for that element. The consideration for the sale of the building would be the amount used to calculate the rebate under paragraph 254.1(2)(h) or (i) of the Act.

Analysis

It was on the basis of facts similar to the above circumstances that the court XXXXX determined that the supply in question was a single transaction consisting of two elements: the assignment of the leasehold interest in the land and the sale of a building. The result was that the vendor was subject to a taxable self-supply under subsection 191(1)(b)(ii) of the Act. The court also found that the assignment of the lease was exempt under paragraph 7(c) of Part I of Schedule V to the Act and that, because of the self-supply, the sale of the building was exempt under paragraph 4(b) of that Part.

Although not stated in the court's decision, one consequence was that the purchaser had passed the first eligibility threshold for a new housing rebate under section 254.1 of the Act (i.e. paragraph 254.1(2)(a): the builder of a residential condominium unit had made a supply by way of an assignment of a long-term lease of the land attributable to the unit and an exempt supply by way of sale of the part of the building in which the residential unit is situated) and the fourth (i.e. paragraph 254.1(2)(d): the builder had self-supplied under subsection 191(1)). Assuming the other criteria are met, the purchaser was entitled to a rebate in an amount calculated under either paragraph 254.1(2)(h) or (i). This amount is the lesser of $8,750 and 2.34% of "the total ... of all amounts each of which is the consideration payable by the particular individual to the builder for the supply by way of sale to the particular individual of the building or part of a building referred to in paragraph (a) or of any other structure that forms part of the complex, other than consideration that can reasonably be regarded as rent for the supplies of the land attributable to the complex or as consideration for the supply of an option to purchase that land" (reduced where the fair market value of the complex exceeds $374,500).

The question, then, is: where there is a contract of purchase and sale for a strata lot that is a single supply of two elements (i.e. sale of part of a building and assignment of a lease of land), and the contract states a single unallocated consideration, what is "the consideration payable ... for the supply by way of sale . . . of ... part of a building" and what is "consideration that can reasonably be regarded as rent for the supplies of the land"?

The developer's representatives suggest that, once it is determined that there is a single supply, Policy P-077R requires that the consideration for that supply be treated as being entirely for the "dominant element". However, Policy P-077R does not say that. The policy statement observes that the various element of a single supply "are often, but not necessarily, provided for a single amount" (emphasis added). The intent of the policy is merely to ensure that the constituent elements of a single supply have the same tax status, regardless of whether a separate amount is charged for each element. Therefore, we should not be precluded from allocating the consideration between the elements based on their proportionate values.

In addition, the statement in the contract that "XXXXX" is an agreement by the parties that the consideration includes payment for at least one attribute of the leasehold interest, the prepayment of the rent. Under the Model Strata Lot Lease the basic rent for each strata lot is determined by dividing the basic rent for the ground lease by the number of strata lots. On that basis, for each of the XXXXX strata lots in one of the sample leasehold strata plans the prepayment of rent alone has a present value of XXXXX (i.e. the basic rent for the ground lease of XXXXX for XXXXX divided by the number of strata lots). In that leasehold strata plan, this amount ranges from approximately XXXXX % of the purchase price of a strata lot to XXXXX %.

The conclusion that can be drawn is that in the "purchase and sale" of a strata lot, the developer is clearly selling and the purchaser is clearly acquiring a leasehold interest as something of value, and that that value is at minimum a not insubstantial portion of the total purchase price.

The developer's representative argues that the expression "building or a part of a building referred to in paragraph (a) or any other structure that forms part of the complex" in paragraph 254.1(2)(h) is intended to include "land components" and that otherwise no specific exclusion would be required for rent or options. This runs counter to the definition of "residential complex" in subsection 123(1), which speaks of the building and land portions as distinct elements, and to paragraph 254.1(2)(a) itself, which speaks separately of the supplies of those elements. The reattribution of the consideration in paragraph 254.1(2)(h) is intended to deal with situations where a disproportionate amount of the consideration has been allocated to the building by the parties, and not to redistribute the consideration for the land components between the building and the rent.

The issue then becomes one of determining, using standard appraisal principles, the relative values of the non-land elements of the supply and of the interest in the land. This would be done before we even look at paragraph 254.1(2)(h) - it is not a question of excluding part of the consideration from the supply of the part of the building, but rather of having already determined the part of the consideration that should be allocated to each element.

Should you require further information, or have any questions on this matter, please do not hesitate to contact me at (613) 954-3772 or Michael Wolff at (613) 952-9212.

Costa Dimitrakopoulos
Manager, Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate