24 July 2003 GST/HST Ruling 41660 - Services in Respect of Real Property

Dear XXXXX:

XXXXX you requested in your letter XXXXX (with attachments) that the case be referred to this Directorate for confirmation of the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transaction(s) described below.

XXXXX is a Canadian controlled private corporation registered for GST/HST purposes and operates under the trade name XXXXX. XXXXX is in the business of providing XXXXX valuation services, and feasibility studies XXXXX. Their customers are prospective buyers, developers, or financiers of hotels operating in Canada.

Copies of invoices and/or proposal agreements in connection with the following hotel locations were provided:

1. XXXXX, XXXXX.

2. XXXXX XXXXX hotel properties in various locations.

3. XXXXX[.]

4. XXXXX[.]

5. XXXXX[.]

In addition, copies of XXXXX actual appraisal reports supplied to clients by XXXXX were provided for our review: XXXXX. This ruling is, therefore, applicable only to the services provided by XXXXX and as reflected in these two reports.

All legislative references are to the Excise Tax Act ("ETA").

Statement of Facts

Our understanding of the facts, the transaction(s), and the purpose of the transaction(s) is as follows:

XXXXX

1. The XXXXX ("Appraisal Report") consists of XXXXX pages, plus addenda. The Appraisal Report was prepared for XXXXX in connection with financing of the existing and proposed subject properties, and is dated XXXXX.

Nature of the Assignment

2. The subject of the Appraisal Report is set out on page XXXXX as the appraisal of XXXXX XXXXX XXXXX XXXXX[.]

3. The objective of the appraisal as described in the Appraisal Report is XXXXX[.]

4. The XXXXX are situated on one parcel of land (±XXXXX acres). Given the distinct features of the XXXXX properties, each property was valued separately. The values of each were subsequently combined to arrive at a combined leasehold value of the entire property XXXXX XXXXX. The leasehold interest in the land alone, XXXXX XXXXX is valued at $XXXXX.

5. In arriving at an estimate of value for the subject properties, an inspection of the site and facilities was conducted. The proposed improvements and architectural plans were evaluated. The developer provided estimates of construction costs. The Appraisal Report assumes that the proposed improvements would be constructed in a timely and good workman-like manner.

6. Hotel market conditions in the area were analyzed, including the surrounding economic environment (economic and demographic trends), the market for transient accommodations, and existing and proposed competition in the area. Occupancy and average rate projections were derived and a projection of income and expenses, which provided the basis for the income capitalization approach, was forecasted for the subject properties.

7. The Appraisal Report sets out the property rights appraised as XXXXX XXXXX[.] Leasehold interest is defined in the Appraisal Report as XXXXX[.]

8. The fee simple interest in the subject site is owned by XXXXX. The leasehold interest in the property is owned by XXXXX, which holds an option to purchase the leased premises XXXXX.

9. The concept of XXXXX is addressed in the Appraisal Report. As noted therein, XXXXX XXXXX[.] The Appraisal Report concludes that the highest and best use of the subject site is for improvements with lodging facilities as analyzed in the Appraisal Report.

10. The Appraisal Report considers three approaches to value: cost, sales comparison and income capitalization. It is noted in the Appraisal Report that because lodging facilities are income-producing properties that are normally bought and sold on the basis of capitalization of their anticipated stabilized earning power, the greatest weight is given to the value indicated by the income capitalization approach. This is the approach that most closely reflects the rationale of a typical investor or buyer of a hotel property.

XXXXX

11. The XXXXX is to be situated on ±XXXXX acres of land on total site area of ±XXXXX acres, located at XXXXX. The improvements include XXXXX guestrooms, a restaurant, a lounge, indoor swimming pool and meeting space.

12. The Appraisal Report identifies the interest appraised as a leasehold interest (improvements). The market value conclusions are set out as follows:

XXXXX XXXXX XXXXX XXXXX[.] The property rights appraised for the XXXXX are the leasehold ownership of the improvements, including furniture, fixtures and equipment. The XXXXX is appraised as both vacant land and as a going concern (i.e., an open and operating facility).

XXXXX

13. The XXXXX is situated on ±XXXXX acres of land on total site area of ±XXXXX acres, located at XXXXX. The improvements include XXXXX renovated guestrooms and restaurant.

14. The Appraisal Report identifies the interest appraised as a leasehold interest (land and improvements). The market value conclusions are set out as follows:

XXXXX

The property rights appraised for the existing XXXXX, reflecting business value only (an open and operating facility), include the leasehold ownership of the new improvements and furniture, fixtures, and equipment.

XXXXX

15. XXXXX ("Letter of Value") consists of XXXXX pages. It is dated XXXXX and is prepared for XXXXX. The Letter of Value is described as XXXXX XXXXX[.]

16. The Letter of Value describes the subject of the appraisal as the leasehold interest in ±XXXXX acres of land with a XXXXX-room, XXXXX-building complex, full-service lodging facility.

17. The object of the appraisal is to establish the market value of the leasehold interest of the land and improvements, including furniture, fixtures and equipment.

18. After considering the highest and best use of the subject property, it is concluded that the highest and best use of the property is as improved with a hotel.

19. A site inspection of the property was carried out on XXXXX. Economic data and information on improved sales in the area, competitive occupancies, average room rates, operating expenses, construction costs, and capitalization and equity yield rates were collected and analyzed.

20. To determine the value of the property, the three approaches to value were considered: sales comparison, cost and income capitalization. The comparable sales approach indicates a range of value from XXXXX for the subject property, whereas the income approach indicates a value of XXXXX. In conclusion, the market value of the leasehold interest in the subject property at XXXXX.

Ruling Requested

Whether the services provided by XXXXX in connection with the XXXXX XXXXX XXXXX are taxable supplies under the ETA.

Ruling Given

Based on the facts set out above, we rule that the supply of services provided by XXXXX, as set out in the Appraisal Report and the Letter of Value, are taxable supplies which fall within the exclusion to the general zero-rating provision under section 23 of Part V of Schedule VI to the ETA by virtue of paragraph 23(b), "a service in respect of real property situated in Canada". As no other exempting or zero-rating provision applies, the supply of these services is taxable, calculated at the rate of 7% on the value of the consideration for the supply, under section 165 of the ETA.

Disclaimer

This ruling is 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 this ruling provided that none of the above issues is currently under objection or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

Section 23 of Part V of Schedule VI to the ETA zero-rates supplies of advisory, professional or consulting services made to non-residents. Paragraph 23(b) excludes the zero-rating of such services provided to a non-resident person where the service is in respect of real property situated in Canada.

For purposes of section 23 of Part V of Schedule VI to the ETA, GST/HST Memoranda Series, 4.5.3 Exports - Services and Intellectual Property, paragraph 41, sets out CCRA's interpretation of the terms "advisory", "consulting" and "professional". Given that XXXXX acknowledges that the services in question fall within the scope of advisory and consulting services for purposes of section 23 of Part V of Schedule VI to the ETA, the issue at hand is whether it is a service in respect of real property situated in Canada.

Whether the relationship between the service and the property is sufficiently direct for the service to be considered to be "in respect of" the property will depend on the particular circumstances of each case. GST/HST Policy Statement P-169R, Meaning of "in respect of real property situated in Canada" and "in respect of tangible personal property that is situated in Canada at the time the service is performed", for purposes of Schedule VI, Part V, Sections 7 and 23 to the Excise Tax Act, provides the following guidelines to assist in determining whether the connection between the service and the real property is sufficiently direct for the service to be "in respect of" real property:

1. Was the service designed, developed or undertaken to fulfill or serve a particular need or requirement arising from or relating to the property? This guideline involves determining the purpose or objective of the service.

2. Is the relationship between the purpose or objective of the service and the property reasonably direct?

Purpose or objective of service

The purpose or objective of the service may be determined by examining any contractual agreement between the parties, or any reports or documentation relating to the services in question. In this respect, a proposal agreement was provided as a sample of a typical proposal agreement for services. In addition, the actual Appraisal Report and Letter of Value prepared and supplied by XXXXX in respect of the subject properties referred to above XXXXX were provided for our review.

With respect to the Appraisal Report XXXXX and as set out above under the Statement of Facts, the XXXXX XXXXX XXXXX XXXXX XXXXX situated at XXXXX. The same report states that the objective of the appraisal is XXXXX XXXXX[.] With respect to the Letter of Value XXXXX the subject of the appraisal is the leasehold interest in ±XXXXX acres of land with a XXXXX-room, XXXXX-building complex, full-service lodging facility. The object of the appraisal is to establish the market value of the leasehold interest of the land and improvements, including furniture, fixtures and equipment.

The definition of "real property" in section 123 of the ETA includes, "... every estate or interest in real property, whether legal or equitable ..." A leasehold interest is an interest in real property, and as such, is considered to be real property for purposes of the ETA.

Relationship between purpose or objective of service and the real property

The relationship between the service and the real property must be more direct than indirect in order for the service and the property to be considered to be "in respect of" each other.

In accordance with these guidelines, a service and the real property would generally be regarded as being "in respect of" each other if the purpose of the service is to "appraise or value the property". As well, if the service is aimed at effecting or dealing with the transfer of ownership of, claims on or rights to the property, or determining title to the property, the service will generally be regarded as "in respect of" the property.

With respect to the Appraisal Report XXXXX, the object or purpose of the appraisal services provided by XXXXX is XXXXX[.] The Appraisal Report sets out various market values for the subject properties at different points in time, including market values for a fee simple interest as well as a leasehold interest in the properties.

With respect to the Letter of Value XXXXX the object or purpose of the services provided by XXXXX is to XXXXX

In essence, the services provided by XXXXX in respect of the subject properties are those of appraising or establishing the market value of specific real property located in Canada. A service of appraising or valuing property (real or tangible personal property) is stated on page three of Policy Statement P-169R, referred to above, to be a service in respect of the property. The methodology used in arriving at a market value for the subject properties does not in itself change the essential nature of the services provided by XXXXX, as reflected in the above-referred-to documentation, which is essentially to appraise or value the real property. As such, the services provided by XXXXX in respect of the subject properties are excluded from the general zero-rating provision of section 23 of Part V, Schedule VI to the ETA by virtue of the exclusion under paragraph 23(b).

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9212.

Yours truly,

Carmela Antonelli
Rulings Officer
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate