Land and Associated Real Property

GST/HST memorandum 19.5
October 2001

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Overview

For GST/HST purposes, all supplies of land situated in Canada are taxable, unless explicitly exempted. For a detailed list of issues related to supplies of land that are discussed in this Memorandum, see the Table of Contents.

Disclaimer

The information in this memorandum does not replace the law found in the Excise Tax Act and its Regulations. It is provided for your reference. As it may not completely address your particular operation, you may wish to refer to the Act or appropriate Regulation, or contact a Canada Revenue Agency (CRA) GST/HST Rulings Centre for more information. These centres are listed in GST/HST Memorandum 1.2, Canada Revenue Agency GST/HST Rulings Centres. If you wish to make a technical enquiry on the GST/HST by telephone, please call the toll-free number 1-800-959-8287.

If you are located in the Province of Quebec, please contact Revenu Québec by calling the toll-free number 1-800-567-4692 for additional information.

Note
This section of Chapter 19 incorporates the information from and supersedes the following policy statements: P-059, Business vs. Adventure or Concern in the Nature of Trade Relating to Sales of Real Property; P-088 Sale of Single Sites in a Residential Trailer Park; P-109, Transfer of Farmland by a Farmer, Holding Sole Title, to One or More Related Persons and Themselves as Joint Tenants; P- 121, Sale of Land Related to a Residential Complex, P-183 Input Tax Credits on Farmland Acquired in Joint Tenancy.

Table of Contents

Note – This section of Chapter 19 incorporates the information from and supersedes the following policy statements: P-059, Business vs. Adventure or Concern in the Nature of Trade Relating to Sales of Real Property; P-088 Sale of Single Sites in a Residential Trailer Park; P-109, Transfer of Farmland by a Farmer, Holding Sole Title, to One or More Related Persons and Themselves as Joint Tenants; P- 121, Sale of Land Related to a Residential Complex, P-183 Input Tax Credits on Farmland Acquired in Joint Tenancy.

APPENDIX A - Guidelines for determining if capital real property is used primarily in a business

1. Capital real property must be used, or held for use, for one or more purposes at all times. In other words, capital real property of an individual or personal trust cannot be regarded as having no use.

2. For purposes of the GST/HST, primarily means more than 50%.

3. When determining if land that is capital real property of an individual or personal trust is used primarily in a business rather than primarily in non-business uses immediately prior to its sale, consideration must be given to all uses of the land throughout the time it is owned by the individual or personal trust.

4. If there is no evidence of personal use, this would suggest business use and conversely, if there is no evidence of business use, this would suggest personal use.

5. At the time of acquisition, there may be an intention to use the property primarily for one use, and secondarily for another.

6. If an individual or personal trust has concurrent business and non-business uses of capital real property, it is necessary to determine if the property is used primarily in business or non-business uses.

7. The following are some of the factors to consider when determining if land is used primarily in a business carried on by an individual or personal trust immediately prior to its sale. This list is not exhaustive. There could be other factors not listed here that may be relevant in a particular circumstance. Note that each factor considered separately may not support the same conclusion. Therefore, the determination as to how land is used primarily is generally not based upon a single factor, but rather upon a weighing of all factors, although in some cases, some factors could be more significant than others in making such a determination. Factors to consider include:

  • the extent to which land is employed for, or dedicated to, one or more business or personal uses measured by reference to land area used, value of land used, or time spent in relation to the land used;
  • the extent to which improvements to the land are employed for, or dedicated to, one or more business or personal uses measured by reference to improvement area used, e.g., floor space, size of the improvement or part used, value of the improvement or part used or time spent in relation to the improvement or part used;
  • the other resources, i.e., inputs, employed for, or dedicated to, one or more business or personal uses such as costs incurred, attention and effort devoted, time spent, etc.;
  • the output or expected output from one or more business uses as compared to one or more personal uses;
  • legal restrictions such as land use regulations or zoning bylaws;
  • the likelihood of the individual's stated use or intended use of the property. Such likelihood may be viewed with regard to the property's size, value, and the present uses of comparable properties.

8. The following examples use the preceding factors to determine whether or not capital real property is being used primarily in the course of a business carried on by an individual immediately prior to the sale of the land by the individual.

Example 1

Ms. Cook operates a restaurant. The building where the restaurant is located also contains a single-unit residential complex that she occupies as a place of residence. Since Ms. Cook anticipates future expansion of the restaurant, she purchases the vacant lot adjacent to her property. On occasion, she parks her vehicle on the lot. However, after she buys the vacant lot, there is an economic recession and her restaurant business declines. She makes no improvements to the vacant lot. Finally, Ms. Cook decides to sell it.

In this situation, the vacant lot is capital real property since it was not acquired for the purpose of resale. At the time of acquisition, the intended use of the property was exclusively for business purposes, i.e., in relation to Ms. Cook's restaurant business. Although there was some personal use of the property throughout the time the property was held, the amount of use was minimal in relation to the intended business use. Moreover, based upon additional information, the likelihood of Ms. Cook acquiring the vacant lot primarily for her personal use as a parking space is very low for a number of reasons: the value of the land far exceeded the cost of comparable parking spaces in the immediate area, the size of the lot made it unreasonable for such a limited use, and the zoning would not have permitted such use other than on an interim basis. For these reasons, the sale of the vacant lot would be a taxable supply since paragraph 9(2)(a) of Part I of Schedule V would exclude it from exemption under section 9 and no other exempting provision applies.

Example 2

Mr. Park acquired 25 hectares of land of which 10 hectares formed a wood lot and 15 hectares were scrub land. Mr. Park intended to selectively log/harvest the treed area and to construct a single-unit residential complex for use as his primary place of residence. Mr. Park, who is involved in the logging industry, realised his intentions. After two years, both the logging and the house were completed. Mr. Park continued to live there for another year before selling the entire property.

In these circumstances, GST/HST applies to the sale of the property in the following manner:

  • Under the provisions of subsection 136(2) there are two separate supplies: 1) the single-unit residential complex, and 2) the remaining land not included in the residential complex Footnote 15.
  • The sale of the single-unit residential complex is exempt under section 2 of Part I of Schedule V.
  • The sale of the land not included in the residential complex is not exempt under section 9 of Part I of Schedule V. It is excluded due to the provisions of paragraph 9(2)(a), since the only identifiable use of the land not included in the residential complex is in the logging business. There is no evidence of personal use.

Example 3

Ms. Brown owns 20 hectares of land that is used for hay farming and for keeping horses for recreational use. The facts of her property use are as follows:

  • land use:
    • – 15 hectares are dedicated to hay farming and includes a building for hay storage,
    • – 5 hectares are dedicated to the horses and includes a riding ring, stable, pens and grazing areas.
  • value of improvements:
    • – farming — $25,000,
    • – horses — $75,000.
  • value of land:
    • – all parts of the land valued equally.
  • distribution of time and effort:
    • – 25% on farming activity
    • – 75% on horses and related activity.
  • output:
    • – 65% of hay sold in the farming business
    • – 35% of hay used to feed horses.

Ms. Brown decides to sell her property. In examining the facts of her situation, there is no predominating factor that determines whether the property has been used primarily for business use or primarily for personal use. The area of land use and output (i.e., hay production) support business use, while the value of improvements and the amount of time and effort spent support personal use. However, as 35% of the hay is used to feed the horses, more than one-third of the indicators that would appear to support business use are in fact directed to personal use. The result is that the balance of the factors shifts in favour of primarily personal use. Consequently, the supply of the property will be exempt under section 9 of Part I of Schedule V.

APPENDIX B - Determining if there is a reasonable expectation of profit in the context of paragraph 9(2)(a) of Part I of Schedule V

1. The discussion in the next paragraphs is expressed in terms of an individual's activities. These remarks apply equally to the activities of a personal trust as defined in subsection 123(1) of the Act.

2. A determination of whether or not an individual has a reasonable expectation of profit must be based on an analysis of all the facts and an assessment of the activities actually undertaken by the individual. Such a determination cannot be made solely upon the fact that the individual is engaged in particular activities with the intent of gaining a profit from the activities. Rather, in addition to the individual's intention to profit, there must be an objective determination as to whether the profit expectation is reasonable under the circumstances. Determining if an activity carried on by an individual constitutes a business with a reasonable expectation of profit requires an analysis of the activity using some or all of the factors below. In assessing the situation against these factors, it is important to remember that it is the "expectation" of profit that is being assessed not the actual realisation of profit. In addition, the term "reasonable" refers to the expectation of profit, and not to whether the profit or profits are reasonable.

3. Generally, the following factors should be considered when determining if an activity engaged in by an individual has a reasonable expectation of profit:

  • the profit and loss experience in past years;
  • the amount of gross income, if any, reported over several years;
  • the length of time over which a profit could reasonably be expected to be shown must be relevant to the nature of the activity, e.g., in the case of a tree farm, the relevant time period might be longer than for a vegetable farm;
  • the extent of activity in relation to businesses of a comparable nature and size in the same locality;
  • the amount of time spent on the activity in question;
  • the individual's qualifications, such as experience, training and education, including eligibility for membership in a professional association;
  • the qualification of the individual for public assistance given to those who are carrying on a business in that field of activity;
  • the individual's intended course of action, as evidenced by efforts showing an intention to make a profit, e.g., the preparation of a business plan;
  • the capability of the venture as capitalised to show a profit after charging depreciation, and the development of the operation and commitment for future expansion according to the individual's available resources, including the ability to secure proper and reasonable financing in order to make the venture a viable business capable of showing a profit;
  • the degree of effort in promoting and marketing the products or services supplied by the individual as, for example, the registration of a trading name and the opening and maintaining books and records;
  • the type of expenditures claimed and their relevance and reasonableness to the activity, e.g., will the expenditure enhance the ability to make a profit; and
  • the nature of the product or service supplied, such that it has a profit potential, e.g., a market exists or can be developed.

4. None of these factors is more important than another and generally no single factor determines whether or not an activity is carried on with a reasonable expectation of profit. Each factor should be weighed in light of the whole. The individual's failure to meet any one particular factor will not in itself prevent the individual's activities from qualifying as a commercial activity. However, in certain circumstances only one factor could be sufficient to determine if an individual has a reasonable expectation of profit. For example, an individual may have access to large amounts of capital, may be willing to spend extensive amounts of time on the activity, may have the relevant experience, but if it is clear that there is no market nor potential for a market for the product or services being offered, there is no reasonable expectation of profit.

APPENDIX C - Business vs. adventure or concern in the nature of trade

"Business"
[ss 123(1)]

1. For GST/HST purposes, a business

"includes a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment."

[Policy statement P-059]

2. Paragraph 9(2)(b) of Part I of Schedule V excludes from exemption supplies made in the course of a business of an individual or personal trust and supplies to which the election GST 22 applies—Election to Treat the Tax Exempt Supply of Real Property By Way of Sale by an Individual or Trust as a Taxable Supply. This election can be made in respect of an otherwise exempt supply made as an adventure or concern in the nature of trade. To determine whether a sale of real property takes place in the course of a business or as an adventure or concern in the nature of trade or neither, for purposes of paragraph 9(2)(b) of Part I of Schedule V, the CCRA will consider the following factors:

  • the supplier's whole course of conduct in dealing with the property;
  • the activities undertaken relating to the sale; and
  • the characterization of the transaction for income tax purposes.

Each factor will be considered in light of the particular facts of the transaction.

General approach

3. Generally, a sale made in the course of a business may be distinguished from a sale that constitutes an adventure or concern in the nature of trade by the amount of time, attention and resources devoted to the transaction or by the frequency or regularity of similar transactions. In this regard, a sale made as an adventure or concern in the nature of trade usually involves acquiring property on an isolated basis with the primary or secondary intention of resale at a profit and only passive or limited activities related to the resale (i.e., those necessary to facilitate the resale). Regular sales of property or sales made in a business-like manner as demonstrated by extensive marketing and advertising, or the devotion of extensive time, attention and resources to the sale of the property, would normally be considered as sales made in the course of a business. Only in circumstances where the supplier changes or abandons the primary and, where applicable, the secondary intention of resale, would the eventual resale be made neither in the course of a business nor as an adventure or concern in the nature of trade. Footnote 16

Intention of resale

4. Where property was originally acquired without the primary or secondary intention of resale (for example, inherited property or property acquired solely for personal use), or the primary and, where applicable, the secondary intention of resale was abandoned during the holding of the property (as seen perhaps by a change of use), the subsequent sale of the property generally would not be considered as being made as an adventure or concern in the nature of trade. The CCRA considers that a primary or secondary intention of resale from the time of acquisition to time of disposition is normally a prerequisite for the resale to have been made as an adventure or concern in the nature of trade. If a primary or secondary intention of resale is present, the extent of activities in relation to a particular property as well as the frequency or regularity of similar transactions involving other properties must be examined to determine whether the sale was made in the course of a business or as an adventure or concern in the nature of trade.

Guidelines
[Interpretation bulletins IT 218 and IT 459]

5. Determining whether or not there is a primary or secondary intention of resale is based on guidelines similar to income tax guidelines that are set out in interpretation bulletins IT-218 and IT-459. An intention to sell is almost invariably present even when a true investment has been acquired as demonstrated by the fact that the property would be sold if circumstances arose making it more beneficial financially to sell the investment than to continue to hold it. Nevertheless, the intention to sell, by itself, is not sufficient to establish that a sale was made in the course of a business or as an adventure or concern in the nature of trade.

6. However, if one of the tests set out in these interpretation bulletins (e.g., the nature of the property, the length of holding period of the property, the taxpayer's conduct and actions while holding the property, and the taxpayer's background) points to a business or an adventure or concern in the nature of trade and if it can be established or reasonably inferred that the supplier's intention was to sell the property at the first suitable opportunity, then such a corroborated intention is viewed as evidence that the sale was made either in the course of a business or as an adventure or concern in the nature of trade. On the other hand, the inability to establish that an intention to sell existed does not preclude a transaction from being regarded as having been made in the course of a business or as an adventure or concern in the nature of trade if it can otherwise be so regarded pursuant to one or more of the tests set out in the interpretation bulletins.

7. For purposes of the application of subparagraph 9(2)(b)(ii) (election GST 22, Election to Treat the Tax Exempt Supply of Real Property By Way of Sale by an Individual or Trust as a Taxable Supply), it must also be determined if the sale is a disposition made on account of capital. Where the property is capital real property and the proceeds from the sale would be considered a capital gain or capital loss, as the case may be, for income tax purposes, the sale of the property would not have been made either in the course of a business or as an adventure or concern in the nature of trade. Such a supply would not be eligible for the election.

8. If, however, the sale results in a gain that is business income for income tax purposes because it is a sale made in the course of a business (which, for income tax purposes, includes an adventure or concern in the nature of trade), it is important for GST/HST purposes to determine if the sale was made in the course of a business or as an adventure or concern in the nature of trade.

Business or adventure or concern in the nature of trade

9. Generally, applying the principles set out in paragraphs 2 to 8 to paragraph 9(2)(b) of Part I of Schedule V would lead to the following conclusions:

Acquired without the intention of resale

  • Real property that was originally acquired without a primary or secondary intention of resale and that is subsequently sold by an individual or a personal trust, with only passive or limited activities involved in the sale of the property, would be considered as having been made neither in the course of a business nor as an adventure or concern in the nature of trade. A sale of such real property would be exempt under section 9 of Part I of Schedule V, unless one of the other exclusions to the exemption in section 9 applied.
  • Where real property that was originally acquired without a primary or secondary intention of resale is subsequently sold by an individual or a personal trust, and there are activities undertaken with respect to the sale of the property, then, depending on the extent of the activities undertaken, the sale may be considered as having been made in the course of a business or on account of capital. Such a sale would not normally be considered as having been made as an adventure or concern in the nature of trade.

    If the activities involved in the sale are minimal, the sale will generally be considered as having been made on account of capital. An example of such minimal activities would be filing a simple subdivision plan for the property in question creating lots similar in size to other lots in the area. If the activities undertaken are required solely for purposes of facilitating the sale, such as providing the minimum amount of services required by existing law, the activities would be considered minimal. If services were installed at a time when the property was intended to be for personal use, they would also be regarded as minimal activities. With such minimal activities, the sale is exempt from GST/HST unless one of the other exclusions to the exemption in section 9 applies, e.g., paragraph 9(2)(c), in spite of the fact that such simple subdivision or minimal services may enhance the value of the land.
  • Even where the supplier did not acquire the subdivided land with the intention of resale, once the supplier goes beyond such minimal activities, it may be that the supplier's intention has changed and the sale of the lots is made in the course of a business and, therefore, subject to GST/HST. The supplier's activities may be considered to have been undertaken in the course of a business, which would include sales of the lots, if such activities of the supplier were to include servicing the lots to a greater extent than required by law, or selling the property in a business-like manner as demonstrated by extensive marketing and advertising, or by devoting extensive time, attention and resources to the sale of the property.

Acquired with intention of resale

  • Where real property was acquired originally with a primary or secondary intention of resale, and no activities were undertaken with respect to the sale of the property (other than those to merely facilitate the resale), the sale of the property by an individual or a personal trust would generally be considered as being made as an adventure or concern in the nature of trade. As a result, the sale by an individual or a personal trust would be exempt unless an election is filed under subparagraph 9(2)(b)(ii) to exclude it from exemption or unless one of the other exclusions to the exemption in section 9 applies. If such sales become frequent, the activity may become a business of the individual or personal trust. In this regard, the occupation of the individual or trustees (e.g., whether or not the individual or trustee carries on the business of a builder or a building contractor either as a sole proprietor, as a member of a partnership, or as an employee, officer of director of a corporation) and the number and frequency of single or isolated sales may be factors in determining whether or not the intention of resale is present and in determining if the supply is made in the course of a business or as an adventure or concern in the nature of trade.
  • Where real property originally acquired with a primary or secondary intention of resale is sold, and activities were undertaken with respect to the sale of the property, the extent of such activities is important in determining whether the character of the sale has changed from having been made as an adventure or concern in the nature of trade to having been made in the course of a business. Where the buying and selling of the real property are isolated events or are done infrequently, where such events are not connected to other activities of a business carried on by the supplier, and where the activities are minimal or are required solely for purposes of facilitating the sale, the sale of the property is normally treated as having been made as an adventure or concern in the nature of trade.

Business intentions

  • If the individual has gone beyond such minimal activities to more extensive ones, such as servicing the lots beyond the services required by law for subdivision approval, or the individual exhibits some of the indicators of a business enterprise, such as establishing a pattern of purchasing and selling real property or engaging in extensive marketing and advertising activities, the sale might be considered as having been made in the course of a business.
  • Once there is a business intention in reselling the real property, the sale is not exempt under section 9 of Part I of Schedule V. The fact that such intention may be frustrated does not change the character of the sale as having been made in the course of a business and, therefore, subparagraph 9(2)(b)(i) of Part I of Schedule V applies to exclude the sale from being exempt. If while holding the property after the intention to resell was frustrated, the supplier intended to use the property solely for personal use such that the supplier no longer had the intention of reselling the property, a subsequent sale of the property could be exempt. However, consideration should be given to possibility of section 196.1 applying in such circumstances Footnote 17.

Example 1

Mrs. Forest acquired vacant land a number of years ago for the personal use of her family. Later, she sold the property. No activities were undertaken to enhance the value of the land. The disposition of the land resulted in a capital gain for income tax purposes.

The sale of the property would be considered as having been made neither in the course of a business nor as an adventure or concern in the nature of trade. Accordingly, the election cannot be filed to make the sale taxable. The sale is exempt under section 9 unless one of the other exclusions to the exemption applies.

Example 2

Mr. Acres inherited vacant land that was used by another person some time ago in the business of farming. He held on to the land for a number of years but did not use it for business purposes. Later, he decided to sell the land. To enhance its value, Mr. Acres severed the property into two lots and serviced the lots to the minimum extent required by law. No other activities were undertaken. The disposition of the land resulted in a capital gain for income tax purposes (in accordance with paragraph 24 of interpretation bulletin IT-218).

The activities of filing the subdivision plan, providing minimum services and selling lots thereunder do not, by themselves, mean that the sale of the land was made in the course of a business, notwithstanding that such subdivision and services may enhance the value of the land. Given that the land in question was inherited, there was no primary or secondary intention to acquire the property for resale, thus, the sale would not be considered as having been made as an adventure or concern in the nature of trade. Accordingly, paragraph 9(2)(b) of Part I of Schedule V does not apply to the sale of these lots and the election cannot be filed to make the sale taxable.

However, if Mr. Acres had provided more than the minimum amount of services or had devoted much time, attention and resources to the project or carried out an extensive marketing and advertising campaign, the sale could be considered as having been made in the course of a business and, therefore, subject to GST/HST.

Example 3

Mrs. Gardener purchased vacant land with the intent of building a home for her personal use as a place of residence. The lot was serviced as required to be habitable, e.g., water mains, gas pipes. Then Mrs. Gardener's circumstances changed. She was unable to build the home and decided to sell the serviced lot. No other activities were undertaken to make the property saleable. The disposition of the land resulted in a capital gain for income tax purposes. Under the provisions of subsection 9(2) of Part I of Schedule V, the sale of the lot is exempt from GST/HST.

The sale of the serviced lot is considered as having been made neither in the course of a business nor as an adventure or concern in the nature of trade. Accordingly, paragraph 9(2)(b) of Part I of Schedule V does not apply to the sale of the serviced lot and the election is not available to make the sale taxable.

Example 4

Mr. Meadows acquires vacant land with the intent of selling it for a profit as soon as possible and sells it within one year. No further activities are undertaken in respect of the land during the time he owned it. The gain on the resale of the property is business income for income tax purposes and, therefore, is subject to income tax on the full amount of the gain (i.e., it is not treated as a capital gain since the venture is considered to be a business for income tax purposes) Footnote 18. Mr. Meadows does not have a history of buying and selling real property. The sale of this vacant land would be considered to have been made in the course of an adventure or concern in the nature of trade.

Accordingly, GST/HST does not apply unless Mr. Meadows files an election in accordance with subparagraph 9(2)(b)(ii) of Part I of Schedule V. Should there be a pattern of such purchases and resales by the individual, then the resale may be considered as having been made in the course of a business for GST/HST purposes and, therefore, subject to GST/HST. The characterization of the sale as either having been made in the course of a business or as an adventure or concern in the nature of trade may also depend on such factors as the occupation of the individual and the number and frequency of such transactions.

Example 5

Mrs. Land purchases vacant land with the intention of selling it for a profit. There are no municipal or other requirements necessary to service the land in order to sell it. Nevertheless, to enhance the land's value, she subdivides it into two lots and installs the minimal services required by law for subdivision approval. Upon completion of the subdivision and improvements, the land is sold. For income tax purposes, the full amount of the gain is on account of income (and not treated as a capital gain).

The sale is considered as having been made as an adventure or concern in the nature of trade. In such a case, although the gain on the sale is fully subject to income tax, GST/HST applies only if Mrs. Land files an election in accordance with subparagraph 9(2)(b)(ii) of PartI of Schedule V.

Example 6

Mr. Fields purchases a previously occupied residential complex. He intends to demolish the residential complex, construct a new one, and then sell it. Accordingly, the used complex is demolished, but Mr. Fields is unable to build the new one and decides to sell the property. The proceeds from the disposition of the property are considered business income and not a capital gain for income tax purposes.

Mr. Fields is engaged in the housing construction industry and has established a pattern of buying lots, constructing houses and selling them for the purpose of earning a profit. He is therefore considered to have acquired the property in the course of a business. The fact that the project was not completed does not change the character of the sale of the land from also having been made in the course of a business. Accordingly, GST/HST applies on the sale of the land.

If Mr. Fields had used the land for personal or other business purposes (such as a parking lot or farming) after demolishing the house, he may be seen as having abandoned his original intention of selling the property in the course of a business. Whether GST/HST would apply on the subsequent sale of the land would depend on the exclusions to the exemption that may be applicable at such time. Such a determination would require examining such factors as the use of the property immediately prior to the sale and the nature of the activities undertaken by Mr. Fields in respect of the sale of the property. For example, do activities undertaken by Mr. Fields constitute a business carried on by Mr. Fields with a reasonable expectation of profit?

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