10 October 2002 GST/HST Ruling 34727 - Subdivision and Sale of Real Property

Dear XXXXX

This is in reply to your correspondence of XXXXX, concerning the application of the Goods and Services Tax ("GST") to a sale of real property to XXXXX. We apologize for the delay in our response.

All references are to the Excise Tax Act ("ETA") unless otherwise indicated.

Our understanding of the facts is as follows:

1. On XXXXX, purchased a XXXXX parcel of land ("Parcel A") as joint tenants.

2. Parcel A was severed into XXXXX parts between XXXXX, XXXXX of which were sold by the end of XXXXX[.]

3. In XXXXX, XXXXX transferred XXXXX interest in the remaining land ("Parcel B") to you. At that point, the land was registered in your name only.

4. In XXXXX you severed Parcel B into XXXXX lots and sold XXXXX of them. The property you retained was described as XXXXX ("Parcel C").

5. By deed XXXXX, you transferred undivided part-ownership interests in Parcel C to XXXXX, while retaining an ownership interest therein. The respective interests in Parcel C were held in joint tenancy.

6. In XXXXX Parcel C was severed into XXXXX parts. One of those parts (the "Lot") was sold for XXXXX are not related to you and are not registered for GST/HST purposes.

7. GST was not collected on the sale of the Lot as the agreement of purchase and sale was silent on the application of tax. However, you remitted GST of XXXXX in respect of the sale.

8. None of the land forming Parcels A, B or C had ever been supplied by any of you, XXXXX in the course of a business. Further, none of that land was capital property used primarily in a business carried on by any of you.

9. You are not a GST/HST registrant.

Ruling Requested

The sale of the Lot to XXXXX was exempt from the GST.

Rulings Given

Based on the facts as stated we rule that:

1. the sale of your interest in the Lot is taxable at 7%; and

2. the sale of the respective interests of XXXXX in the Lot are exempt from the GST.

These rulings are subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by these rulings provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the ETA or to our interpretative policy; and that you have fully described all necessary facts and transactions for which you requested a ruling.

Explanation

Sales of real property made in Canada are generally taxable pursuant to section 165 unless a specific provision applies to exempt them.

Pursuant to paragraph (b) of the definition of "real property" in subsection 123(1), legal and equitable interests in real property are considered as "real property". The respective interests of you, XXXXX in the Lot were therefore considered to be real property for GST purposes. Further, the transfer of those interests to XXXXX, being a transfer of ownership, met the definition of "sale" in subsection 123(1). Accordingly, the transfer of each interest in the Lot constituted a sale of real property.

Whether the real property in question is subject to the GST depends on the application of the exempting provisions contained in section 9 of Part I of Schedule V. As you may be aware, Section 9 of Part I of Schedule V exempts the sale of real property by an individual with certain exceptions.

The exception contained in paragraph 9(2)(c) of Part I of Schedule V provides that the supply of a part of a parcel of land by a person who is an individual will not be exempt if the parcel was severed or subdivided by the person. There are exceptions to this rule. Specifically, where a parcel of land is subdivided or severed into only two parts and the person did not previously subdivide or sever it from another parcel of land, paragraph 9(2)(c) does not apply.

In the present case, Parcel C constitutes the "parcel" for the purposes of paragraph (c) above, and the Lot represents the "part of a parcel" for purposes of the same provision. Since none of XXXXX had severed Parcel C more than once and had not severed it from another parcel prior to the sale to XXXXX, paragraph 9(2)(c) did not apply to exclude the sale of their interests from exemption. The sales of their interests in the Lot were therefore exempt from the GST.

However, in considering the sale of your interest in the Lot, the provisions of paragraph 9(2)(c) yield a different result. Although you severed Parcel C only once, you had severed it from another parcel, namely Parcel B. Accordingly, paragraph 9(2)(c) excluded the sale of your interest in the Lot from exemption; it was therefore taxable.

Additional Comments

You have expressed concern that the exclusionary provisions of paragraph 9(2)(c) should not apply to you in the above manner because the relevant severances took place prior to the implementation of the GST. As you are aware, paragraph 9(2)(c) became effective for supplies of real property made after April 23, 1996. In your opinion, the application of the GST to the sale of your interest in the Lot amounts to retroactive taxation.

Please note the difference between retroactive and retrospective legislation as summarized by Mr. Justice Lambert of the British Columbia Court of Appeal in Hornby Island Trust Committee et al. v. Stormwell et al., (1989) 53 D.L.R. (4th) 435:

A retroactive statute operates forward in time, starting from a point further back in time than the date of its enactment; so it changes the legal consequences of past events as if the law had been different than it really was at the time those events occurred. A retrospective statute operates forward in time, starting only from the date of its enactment; but from that time forward, it changes the legal consequences of past events.

As previously mentioned, paragraph 9(2)(c) applies to sales of real property made after April 23, 1996. It is retrospective in that a supply of a part of a parcel of land made after the announcement date may be excluded from the general exemption provided by subsection 9(2) depending on whether and to what extent the supplier had subdivided or severed the parcel in the past. Whether the parcel was subdivided before or after the announcement date is not relevant.

Lastly, from the information at our disposal, we understand that the interests held by XXXXX in the remaining portion of Parcel C were eventually transferred back to you such that you held sole ownership of this remaining portion. We further understand that you, as sole owner, subdivided the remaining portion and sold one of the resulting lots to XXXXX. Assuming that XXXXX were not related to you and were not registered for GST purposes, please note that you would have been required to collect GST equal to 7% of the consideration payable for this lot since paragraph 9(2)(c) would have applied to exclude it from exemption.

While we regret that our response could not be more favourable, it is the responsibility of the Canada Customs and Revenue Agency to administer the ETA as written.

Should you have any further questions or require clarification on the above or any other GST or Harmonized Sales Tax matter, please do not hesitate to contact me at (613) 952-8816.

Yours Truly

Paul Hawtin
Rulings Officer
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate