Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
GST/HST Rulings Directorate
Place de Ville, Tower A, 5th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 236685a
Business Number: [...]
[Client]:
Subject: GST/HST RULING
Purchase of a residential condominium unit
[…][This is concerning your letter] on the application of the goods and services tax/harmonized sales tax (GST/HST) to the purchase of a condominium unit.
[…]
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
You submitted the following documents for our review:
* Statement of Adjustments, […].
* […][Agreement A], signed and dated [mm/dd/yyyy] - only portions of this agreement were provided.
* Statements on letterhead of […] indicating lease payments on each of [mm/dd/yyyy], [mm/dd/yyyy] and [mm/dd/yyyy].
* Land Transfer Tax Statement evidencing conveyance of property […].
* […][Lease Agreement] - an incomplete document: it does not identify the parties to the agreement nor is it signed or dated.
Based on your submission and our telephone conversations, we understand the following:
1. You represent […] (the Individuals) who are the purchasers of a condominium unit that is legally described as […] (the Unit).
2. The Individuals purchased the Unit from […] (the Corporation) on[mm/dd/yyyy] and paid HST in the amount of $[…] to the Corporation.
3. The Land Transfer Tax Statement dated [mm/dd/yyyy] identifies the transfer of the Unit and includes the following details:
* The Transferor is the Corporation
* The Transferees are the Individuals, as joint tenants.
4. At the time of purchase, the Individuals intended to lease the Unit to a tenant who would facilitate and manage the Unit for use as short term accommodation.
5. On [mm/dd/yyyy], the Individuals entered into […][Agreement A] with […][X]. […] of […][Agreement A] provides that [X] is Tenant and the Individuals are the Landlord. [Agreement A] sets out the following definitions and terms of the arrangement:
Definitions (Footnote 1)
* Clients means those persons to whom the Tenant intends to rent the Premises.
* Commencement Date means the first day upon which the Landlord has the right of occupancy of the Premises.
* Effective Date is [mm/dd/yyyy].
* Permitted Use has the meaning ascribed to it in […].
* Premises means the Unit and Parking Unit, if applicable, as set out in […]. (Footnote 2)
* Rent means the Unit Lease Rate plus the Parking Unit Lease Rate(s), if applicable. (Footnote 3)
* Tenant means [X] and its successors and permitted assigns.
* Term means the initial term of the Lease as set out in […] (see below).
Terms
* The Landlord will lease the Unit to the Tenant in consideration of the Rent to be paid. (Footnote 4) (The amount of Rent was not set out in the documentation provided for our review.)
* The Tenant will use the Unit for the Tenant’s business of renting the Unit to Clients on a daily and short term basis (the Permitted Use). (Footnote 5)
* The term of the Lease is for a period of ten years commencing on the Commencement Date and ending on the tenth anniversary of the Commencement Date unless terminated earlier as provided in the Lease. (Footnote 6)
* The Tenant will not assign the Lease to a new tenant without the prior written consent of the Landlord. (Footnote 7)
* The Tenant may rent the Unit for the Permitted Use without the Landlord’s prior written consent, provided that the term of the arrangement does not extend past the term of the Lease. (Footnote 8)
Certain statements in [Agreement A] suggest that it supports or is ancillary or supplementary to some other lease agreement that the Landlord and Tenant may have entered into at an earlier date. For example, page [#] of the [Agreement A] states, in part, that the “Landlord and Tenant have entered into a Lease… ” and that the “… Landlord and Tenant wish to enter into this agreement to further determine their rights and obligations in connection with the Lease.”
The [Agreement A] is incomplete as some of the pages are missing or truncated. The […] Lease Agreement offers no further clarification. (Footnote 9)
6. Three statements on the Tenant’s letterhead indicate that the Tenant made a lease payment to the Landlord in the amount of $[…] on each of [dd/mm/yyyy], [dd/mm/yyyy] and [dd/mm/yyyy]. Each statement sets out the following details:
* Income Collected – […] $[…]
* Expenses Incurred – […]$[…]
Although the terms of the lease payments are not set out in the documentation provided, the statements suggest the lease is paid on a monthly basis.
7. The Individuals registered a business for GST/HST purposes by telephone and a GST/HST account was opened under the Business Number with an effective date of [dd/mm/yyyy]. The type of ownership of the business entity is identified as a partnership; the Individuals are indicated as the partners and the business activity is indicated as “Residential Buildings and Dwellings - Residential.”
8. Neither of the Individuals is registered for the GST/HST.
9. We were provided with no agreements between the Tenant and any person to whom the Unit was rented. However, we understand that, during the Individuals’ ownership, the Unit has been used only for short-term accommodation as described in […] of [Agreement A].
10. In [dd/mm/yyyy], a […], GST/HST New Residential Rental Property Rebate Application (the Rebate) was filed under the Business Number for a portion of the GST/HST paid on the purchase of the Unit. The Rebate was disallowed as the conditions for the Rebate were not met.
11. A GST/HST return was filed under the Business Number, and an input tax credit (ITC) was claimed, for the reporting period ending [dd/mm/yyyy]. The ITC claim was allowed and adjusted to include the full amount of GST/HST that was paid on the acquisition of the Unit. In [mm/yyyy], the amount was disbursed as a refund.
RULINGS REQUESTED
You would like to know:
1. Are the Individuals eligible to claim an ITC for the GST/HST paid on the acquisition of the Unit?
2. Are the Individuals required to self-assess the GST/HST with respect to the acquisition of the Unit?
RULINGS GIVEN
Based on the facts set out above, we rule that:
1. The Individuals are not eligible to claim an ITC for the GST/HST paid on the acquisition of the Unit.
2. The Individuals are not required to self-assess the GST/HST that was payable on the acquisition of the Unit; the GST/HST was correctly paid to the Corporation.
EXPLANATION
Ruling 1 – ITC eligibility
Although not addressed in your submission, we have stated as a fact that, for purposes of the GST/HST, an account was opened as a partnership. Below, we explain the importance of determining the identity of the owner of real property and the implications for GST/HST registration and for claiming ITCs.
For purposes of the GST/HST, a “person” registers for the GST/HST as a business entity that operates a commercial activity. In part, the term “person” is defined to mean an individual, a partnership or a corporation and therefore, a partnership is considered to be an entity that exists as a separate person from an individual.
Partnership
It is a question of fact and law as to whether a partnership exists. The law governing partnerships will apply in the relevant province or territory. Under real property law in common law jurisdictions […], the fee simple estate can be fragmented into its legal and equitable (or beneficial) component interests. A partnership cannot hold legal title recognized by common law and provincial statute law. However, for GST/HST purposes, a partnership could lawfully own the beneficial interest in real property while the partners could own the legal interest in the same real property.
The CRA will not generally consider that a partnership has a beneficial interest in real property unless it can be reasonably substantiated, and without such substantiation, the CRA will consider the entire estate (including the beneficial interest) in the real property to belong to the person who holds the legal interest.
Indications that a partnership may own the beneficial interest in real property could include:
* A notation on land transfer documents indicating that the real property is purchased on behalf of a partnership.
* A written partnership agreement stating that a purpose for forming the partnership is to acquire real property.
* An agreement setting out that the partnership will lease the real property (as lessor) to the partners (as lessees).
Additional factors that may be relevant in determining the identity of the beneficial owner of real property may be the source of the funds used to purchase the real property (for example, the owner of a bank account) and how the purchase was recorded in books and records (for example, whether the asset was recorded by a partnership or by the partners).
The fact that persons may describe themselves as partners or that they register for GST/HST purposes as a partnership does not prevail over the actual facts or the law.
In the present case, the Individuals are named as the purchasers of the Unit on the Statement of Adjustments. The Individuals are named as the transferees of the Unit on the Land Transfer Tax Statement; the type of ownership is noted as joint tenants. Joint tenants of real property have an identical and undivided interest in the real property and therefore, each joint tenant owns 100% of the property. Legal title is held by each of the joint tenants as if they are a single owner.
[Agreement A] names the Individuals as the Landlord. There is no partnership agreement and there is no evidence that a partnership has beneficial ownership in the Unit nor that the Individuals purchased the Unit on behalf of a partnership. We note that the laws governing partnerships provide that joint tenancy does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof. (Footnote 10)
Input tax credits
The eligibility criteria for claiming an ITC are set out in section 169 and outlined in paragraph 3 of GST/HST Memorandum 8.1, General Eligibility Rules. One of the conditions that must exist before a person is eligible to claim an ITC is that the property or service must be acquired, imported or brought into a participating province by a person for consumption, use or supply in the course of the person’s commercial activities. Another condition for claiming an ITC is that the person is a registrant during the reporting period in which the GST/HST on the property or service becomes payable by the person or is paid without having become payable.
In the present case, the Individuals paid the HST on the acquisition of the Unit. Neither Individual was a GST/HST registrant in the reporting period in which the Unit was acquired and therefore, neither Individual is eligible to claim an ITC for the HST paid on the purchase of the Unit. Although a Business Number was opened with an ownership type identified as a partnership, a partnership did not exist and therefore a partnership could not acquire or pay the HST on the purchase of the Unit. Accordingly, a partnership was not eligible to claim an ITC.
Ruling 2 – obligation to self-assess
The general rule for the collection of the GST/HST is that every person who makes a taxable supply shall collect the GST/HST payable by the recipient in respect of the supply. There are certain exceptions where the supplier of a taxable supply of real property is not required to collect the GST/HST that is payable by the recipient.
One such exception applies where the recipient of the supply is registered for the GST/HST and, in the case of a recipient who is an individual, the property is neither a residential complex nor a cemetery plot or place of burial, entombment or deposit of human remains or ashes. In such a case where the exception applies, the recipient may be required to report and remit (self-assess) the GST/HST that is payable on the supply.
Where consideration is payable under an agreement for a supply, the “recipient” of the supply is the person who is liable under the agreement to pay that consideration. In this case, the Individuals are the recipient of the Unit.
The exception to the collection of the GST/HST does not apply in the present case where the Individuals are the recipient of a supply of a residential complex (which includes a condominium unit): the Individuals are not required to self-assess the GST/HST on the Unit. As the exception does not apply, the Corporation was required to collect the GST/HST on the sale of the Unit.
Please refer to paragraphs 26 to 29 of GST/HST Memorandum 3.1, Liability for Tax for further information on the collection of GST/HST on the taxable supply of real property.
ADDITIONAL INFORMATION
A person who acquires real property for consumption, use or supply in a commercial activity should be clear in their intentions for the operations of the business entity before registering for the GST/HST. For a partnership, such intention may be demonstrated by a partnership agreement or with other supporting documentation as described above. The CRA will not accept a partnership agreement as having retroactive effect.
Subsection 221(1) provides that a person who makes a taxable supply shall collect the tax that is payable by the recipient as agent of the Crown. Subsection 222(1) deems the person to hold the amount collected as tax in trust until the amount is remitted to the Receiver General or withdrawn as an input tax credit or net tax deduction.
As noted above, where real property is held in joint tenancy, each joint tenant is considered to hold the same interest in the property. A supply of real property that is held in joint tenancy is considered to be a single supply made by all joint tenants as each has 100% interest in the property. Where joint tenants hold real property for supply in a commercial activity, for example, for the lease of short-term accommodation, the joint tenants are jointly and severally liable to account for the GST/HST that is collectible on the lease payments. Further, the lease payment including the applicable tax is considered to be a payment to all joint tenants.
Where one joint tenant accounts for the tax collected, the accounting for, and the remittance of net tax by that joint tenant will discharge the liability of the other joint tenants. This means that only one of the joint tenants may be required to register for the GST/HST. A joint tenant who is registered for the GST/HST may be eligible to claim an ITC for the GST/HST paid on the acquisition of real property to the extent that the property will be used in commercial activities of the joint tenants.
DISCLAIMER
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, the CRA is bound by the ruling(s) given in this letter provided that: none of the issues discussed in the ruling(s) are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed. The interpretation(s) given in this letter, including any additional information, is not a ruling and does not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.
CONTACT
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 780-504-3442. Should you have additional questions on the interpretation and application of the GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Sincerely,
Johanne Cairo
Senior Rulings Officer
Real Property Unit 1
Financial Institutions and Real Property Division
GST/HST Rulings Directorate
FOOTNOTES
1 The definitions are set out differently in the […][Agreements].
2 As no Parking Unit was identified in […], we have presumed none was applicable and therefore the Premises includes only the Unit.
3 The portion of […] provided for our review does not include the definitions for Unit Lease Rate and Parking Unit Lease Rate.
4 […] .
5 Ibid, […].
6 Ibid, […]
7 Ibid, […].
8 Ibid, […]
9 Neither copy was provided in its entirety.
10 [...]
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