Section 256.1

DeveloperCo which holds land under a 99-year headlease, hires Contractor to develop housing lots for fees charged to it, and will enter into subleases of the lots with Builder who intends to construct, market and sell homes in the subdivision to third party buyers. The houses will become part of the land under general legal principles. On completion of the homes, Builder will sell the homes to purchasers, who will be assigned the Builder’s sublease.

Polygon indicates that such assignment is a sale on which GST/HST is payable, and that the self-supply rule in s. 191 does not apply to DeveloperCo. Accordingly:

• The land headleased to DeveloperCo is exempt under Sched. V, Pt. I, s. 6.1.
• The sublease to Builder is exempt under Sched. V, Pt. I, s. 7, so that DeveloperCo cannot claim ITCs.
• No rebate provision permits recovery by DeveloperCo on its development costs. The s. 256.1 rebate as Builder is never subject to ss. 190(3) to (5) or 191.

Is there a solution to the potential double taxation problem outlined above?. Can DeveloperCo recover the GST/HST paid on the costs of developing and servicing the lots?

CRA responded:

Pursuant to … Polygon, Builder’s supplies are characterized as taxable supplies that are outside the scope of section 191 … .

…[B]ecause Builder does not make (or hold the lots for the purposes of making) exempt supplies included in section 6 or 7 of Part I of Schedule V …, DeveloperCo’s subleases of the lots to Builder are exempt under subparagraph 7(a)(ii) of Part I of Schedule V as opposed to being exempt under section 6.1 of Part I of Schedule V. In either case:

DeveloperCo’s subleases of the lots to Builder are (or would be) exempt supplies for GST/HST purposes; and

DeveloperCo is not (or would not be) entitled to claim ITCs in respect of the GST/HST payable on Contractor’s supply of developing and servicing the lots.

[I]n order for DeveloperCo to be eligible to claim a rebate under section 256.1, DeveloperCo’s subleases of the lots to Builder must be exempt supplies under section 6.1 or 6.11 of Part I of Schedule V. Since DeveloperCo’s subleases of the lots to Builder are exempt supplies under subparagraph 7(a)(ii) of Part I of Schedule V, DeveloperCo is not eligible for a rebate under section 256.1.

The CRA recognizes this result, but we are not aware of any solutions.