3 July 2002 GST/HST Interpretation 34735 - Sale of Real Property to

Dear XXXXX:

Thank you for your letters of XXXXX and XXXXX (with attachments), concerning the application of the Harmonized Sales Tax (HST) to proposed transactions involving the XXXXX. We regret the delay in our reply.

Since the transactions in question have not transpired, since you are contemplating two different possibilities, and since the conditions for an advance ruling are not present, our reply is in the format of an "interpretation letter" rather than a ruling.

All legislative references below are to the Excise Tax Act.

Background

Our understanding of the background facts concerning the transaction is as follows.

1. First, to summarize the situation, the XXXXX (the Association) was using a building (the Former Building) that they had built on land leased to it from the Government of XXXXX (the Province). The Former Building and its conjoined land will be referred to as the "Former Property." Under that lease agreement, the Province had the right to reclaim this property under the condition that it provide a similar, alternative facility (the "New Property") to the Association. The Province has exercised this right, and the New Building, occupied by the Association since XXXXX, is also located on Crown land.

2. The Province proposes to transfer title to the New Property to the Association for $XXXXX. Alternatively, the Province may again lease it to the Association on a long-term basis for nominal consideration (e.g. XXXXX per annum). Further facts from the documents submitted are outlined as follows.

3. The Association is a not-for-profit organization incorporated without share capital under XXXXX legislation, and is a "non-profit organization["] (As defined in the definitions under subsection 123(1).)" for GST/HST purposes. It is not registered for the GST/HST.

4. The Association operates at arms-length with the Province.

5. The Association provides its facility to XXXXX for use as an activity center and social meeting place. It also intends to rent the New Building to outside groups, but will remain an unregistered small supplier.

6. On XXXXX, the Association (Lessee) entered into an written agreement with the Province (Lessor), the terms of which are summarized as follows:

i. The Agreement describes the parcel of land on XXXXX, that is the subject of the lease. The term of the lease is XXXXX years, and the Lessee is required to pay XXXXX per year as the "XXXXX"[.]

ii. The Lessee is XXXXX[.]

iii. "XXXXX" This is followed by terms whereby the Lessee agrees not to sublet or assign etc. the parcel, or make alterations to the XXXXX, without the consent of the Lessor; to fully insure the XXXXX and restore it if damaged by fire, and other terms related to the maintenance of the XXXXX.

iv. "... XXXXX[".]

v. If the Lessee defaults in the performance of any of the provisions of the lease, then the "XXXXX[".]

vi. If the lessee fails "XXXXX[".]

vii. If "XXXXX[".]

viii. There is no specific reference to ownership of the Former Building in this agreement. There is also no reference as to whether the building would revert to the Province at the end of the lease term. There is also no reference to the prospective terms of any agreement concerning the New Building, other than the reference described under vii(a) above.

7. The Province granted (The funding is described as a "grant" although there might be a question as to whether it would meet the description of a "grant" (as opposed to consideration for a supply) under our administrative policy. In any case, the payment was made long before the advent of the GST and so is not an issue.) $XXXXX per year for XXXXX years, commencing in XXXXX to the Association to help offset construction costs of the Former Building. The amount was committed under the Province's XXXXX Program. These were the only amounts paid by the Province. Public and business donations of at least XXXXX were also received to assist in construction.

8. The limited information that you have available indicates that the Former Building cost approximately XXXXX to construct. For the period XXXXX the Association insured the building for a value of XXXXX. There is no other information submitted concerning its fair market value at any time.

9. In XXXXX, the construction of the New Building on XXXXX, was completed and the Association relocated to it on or about XXXXX XXXXX. The construction costs of the New Building, which were incurred by the Province, totalled approximately XXXXX[.] Its fair market value is unknown, although for XXXXX the City of XXXXX has assessed it in the amount of XXXXX for municipal tax purposes.

10. The governing documents of the Association provide that in the event that the Association dissolves, its remaining property will be conveyed to another non-profit organization.

11. The Province submits that the building "swap" was a matter of "XXXXX" resulting from its obligation under the lease agreement. Although the "XXXXX"[.]

12. As noted in your letter of XXXXX, the Province may, in XXXXX (This transaction may occur in another year, but for ease of reference we will, in this reply, refer to it as the proposed sale or lease in XXXXX), transfer the fee simple title to the New Property to the Association for nominal consideration (i.e., transfer by sale) in order to remove the property from the Government's inventory and hence the necessity to insure it under (the Province's) general policy.

13. Alternatively, the Province may, in XXXXX, supply the New Property by way of a long-term lease with the Association similar to the expired one described above (i.e., for nominal consideration such as XXXXX per annum).

14. In the interim (i.e., the period between the date the Association moved into the Replacement Property in XXXXX and the date of the sale or long term lease agreement in XXXXX), the Association is permitted to occupy and use the Replacement Property for its activities. We will refer to this arrangement as the "Interim Lease."

Interpretation Requested

You have requested our opinion concerning the tax implications of (a) the proposed sale or (b) the proposed long-term lease by the Province of the New Property to the Association.

Interpretations Given

(a) Proposed Sale:

Based on our limited understanding of how the sale agreement would be written, and based on the other background facts as they appear above, it is our opinion that:

(i) the proposed sale by the Province of the New Property in XXXXX would be a taxable supply of real property, since there is no apparent exemption that would apply;

(ii) the supply by the Province of the Interim Lease (as described in Fact #14 above) would also be a taxable supply;

(iii) the value of the consideration payable by the Association for its acquisition of the New Property would be the fair market value of that which the Association provides to the Province in XXXXX (i.e., early termination of the XXXXX lease), in addition to the "nominal" amount referred to under paragraph #12 above. That is:

-    the value of the consideration for the Interim Lease would be a portion of the fair market value of that which the Association provides to the Province in XXXXX. It would be upon this amount that tax would be payable by the Association in XXXXX;

-    the value of the consideration for the XXXXX sale would be the remaining portion of the fair market value of that which the Association provides to the Province in XXXXX, plus the nominal amount payable by the Association upon the sale. It would be upon this amount that tax would be payable by the Association in XXXXX;

-    in determining which portion of the consideration paid in XXXXX applies to the supply of the Interim Lease in XXXXX, and which portion applies to the proposed sale in XXXXX, an apportionment should be made on a reasonable basis. While we are unable to comment on what the specific apportionment might be, it is evident that a significant portion of the consideration would apply to the sale.

(b) Proposed Lease

Again, based on our limited understanding of how the lease agreement would be written, and based on the other background facts as they appear above, it is our view that:

(i) the proposed long-term lease to be supplied by the Province in XXXXX would be a taxable supply of real property, since there is no apparent exemption that would apply.

(ii) the supply by the Province of the Interim Lease would also be a taxable supply;

(iii) the value of the consideration payable by the Association for the lease of the New Property would be the fair market value of that which the Association provides to the Province upon the relinquishing of the Former Property in XXXXX (i.e., early termination of the XXXXX lease), in addition to the "nominal" amounts (annual rents) referred to under paragraph #13 above. That is;

-    the value of the consideration for the Interim Lease would be a portion of the fair market value of that which the Association provides to the Province in XXXXX. Tax upon this amount would be payable by the Association in XXXXX.

-    the value of the consideration for the XXXXX long-term lease would be the remaining portion of the fair market value of that which the Association provides the Province in XXXXX. Tax on this amount would be payable by the Association in XXXXX (This differs from the treatment where the supply in XXXXX is by way of sale. As described above, where the supply is by way of sale, the tax on this supply becomes payable in XXXXX, rather than XXXXX. See further comments under the heading "Explanation" below.). Tax would also be payable by the Association on the annual nominal amounts of rent payable by it.

Note Concerning the Value of the Consideration for the Sale or Long Term Lease:

As indicated above, the fair market value of "that which the Association provides to the Province" upon the relinquishing of the Former Property constitutes, in part, the value of the consideration for the sale or long-term lease of the New Property.

To elaborate, in XXXXX, the Association provides the Province the early termination of the XXXXX Lease with the result that the Former Property, including the building constructed by the Association, reverts to the Province much earlier than it otherwise would have. In return, the Province promises to supply the New Property by lease or sale.

Please note that we are not able to comment specifically on what the fair market value of that consideration (the value of terminating the XXXXX lease) might be. That is, it is not within our purview or expertise to make determinations of fair market value. However, we will mention that it appears that this value would be affected by the market environment at the time of valuation (e.g., similar properties and rights as well as other factors referred to in Policy Statement P[-]165R, Fair Market Value for Purposes of Part IX of the Excise Tax Act. (As mentioned in the policy statement, there are many factors or characteristics of a property that may affect its value, such as location, services, age of the property, size of the property and picturesque views. Other factors may be of a legal nature, such as zoning.) A copy of this policy statement is enclosed).

Explanation

Pursuant to subsection 165(2), "every recipient of a taxable supply made in a participating province shall pay ... tax in respect of the supply calculated ... on the value of the consideration for the supply." Pursuant to subsection 153(1), the "value of the consideration is ... deemed to be equal to (a) where the consideration ... is expressed in money, the amount of the money; and (b) where the consideration ... is other than money, the fair market value of the consideration at the time the supply is made."

Based on the above provisions, the consideration for a supply would not necessarily be only the amount of money payable for a supply, but would also be property or services, if any, that form the consideration for the supply. This corresponds to the concept of "valuable consideration" at common law (A frequently cited definition of "consideration" at common law is from Lush J. in Currie v. Misa (1875) L.R. 10 Exch. 153 at p. 162 (affd. 1 App. Cas. 554 H.L.): "A valuable consideration, in the sense of the law, may consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other.").

Accordingly, with regard to the present situation, the consideration payable by the Association in return for the proposed sale or lease of the New Property would be the consideration that arises under its agreements with the Province, including the consideration that is set out in the XXXXX agreement that would arise upon the building exchange.

Stated differently, in agreeing to the XXXXX exchange, the Association expected to receive, and the Province promised to give, more than just the Interim Lease of the New Property. Rather, the Association anticipated, and the Province promised, a replacement property under terms at least comparable to those pertaining to the Former Property. Accordingly, that which the Association supplied as consideration in XXXXX (termination of the lease, relinquishing its interest in the Former Property) was provided not only as consideration for the interim use of New Property, but also as consideration for the proposed long-term lease or sale of the property in XXXXX.

As indicated under interpretations (a) and (b) above, the timing of the Association's possible tax liabilities would differ depending on whether the supply by the Province of the New Property is by way of sale or lease.

If the supply is by way of sale, subsection 168(5) applies. In summary, this subsection provides that tax in respect of a taxable supply of real property by way of sale is "payable ... on the earlier of the day ownership of the property is transferred to the recipient and the day possession of the property is transferred to the recipient under the agreement for the supply." Although the Association takes possession of the property in XXXXX, this is not "possession...under the agreement (for sale)." Therefore, since the ownership, as well as "possession under the (sale) agreement", both take place in XXXXX, the tax on the consideration for the XXXXX sale is payable in XXXXX, notwithstanding that the consideration (other than the nominal amount described under paragraph #12 above) was paid in XXXXX. Part of the consideration paid by the Association in XXXXX would be for the Interim Lease. The tax on this portion of the consideration would be payable in XXXXX following the general rules of when tax is payable under subsection 168(1). This provision is described in more detail below.

If the supply by the Province in XXXXX is by way of long-term lease, the general rule of subsection 168(1) applies. This subsection provides that tax is "payable by the recipient on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due." In the present situation, then, the tax on the consideration paid by the Association in XXXXX is subject to tax in that year, notwithstanding that the consideration is, in part, for the supply of the long-term lease made in XXXXX (the remainder being consideration for the Interim Lease).

We trust that the above provides the information you requested. We should also add, as we briefly discussed with you, that there could also be tax implications for the Province with respect to these transactions. As we mentioned in our recent telephone conversation, we would be pleased to issue you a ruling or interpretation on this matter if you were to request it in writing.

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/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9587.

Yours truly,

Michael Place
Real Property Unit
Financial Institutions & Real Property Division
Excise and GST/HST Rulings Directorate

Encl. (1)