Section 221

A U.S. based company took the position that it was not required to be registered for GST purposes, but after a CRA review, CRA unilaterally registered the company and issued a notice of assessment. The company filed a notice of objection. Will CRA accept the filing of nil returns during the period between the assessment and the final decision (with adjusted returns filed should the assessment be maintained) or must the involuntary registrant remit GST on its supplies? CRA responded:

There is no administrative tolerance to allow a person to disregard the requirements for filing and remitting tax…. Under subsection 221(1)…, every person who makes a taxable supply is generally required to collect any tax that is payable by the recipient of the supply and file a GST/HST return under subsection 238(1)….

Where a person fails to file a return or remit amounts as required by legislation, interest and penalties will be assessed in respect of such failures. In addition, if a person knowingly makes false statements or omissions in a return, penalties described in section 285… may be applicable.

…If a person chooses to file nil returns in situations where tax is required to be collected and remitted, the CRA can apply… the ETA to address non-compliance.

The Corporation, which was registered, purchased a hotel through two unregistered nominees and was charged and paid GST, and claimed an ITC therefor. On audit, CRA adjusted the return to add tax payable under s. 228(4) and told the Corporation to apply under s. 261 for tax paid in error.

After noting that the Corporation was required to self-assess under s. 228(4) and that the sellers were relieved under s. 221(2) of their obligation to collect GST, Headquarters found that the Corporation was eligible for the rebate as tax paid in error.

On the 15^th of the month, Aco sell a commercial rental property, on which it had collected the monthly rents at the beginning of the month, to Bco. After noting that under s. 136.1(1), Aco was required to account for the supply of property made by it, CRA went on to state:

If in fact Bco is making supplies in the half-month period for no consideration payable by the lessee or the recipient, then Bco is not required to collect GST/HST from the lessee or recipient unless the non-arm's length rules under [s.] 155(1).

Listing in Appendices of other amounts required to be collected, amounts required to be added to net tax, and other deductions from net tax.

Usual s. 221 rules apply to taxable assignments of purchase contract with builder (p. 4 under Q.3)

S. 192.10 does not change who is responsible for remitting the tax on the assignment sale. The assignor in respect of a taxable assignment sale would generally continue to be responsible for collecting the GST/HST and remitting the tax to the Canada Revenue Agency (CRA). Where the assignor is a non-resident of Canada, the assignee would continue to be required to self-assess and pay the GST/HST directly to the CRA.

In the context of sales of real property, the parties will normally prepare a statement of adjustments whereby, at closing, adjustments are made for expenses pre-paid by the vendor (e.g., lawn mowing or snow removal fees, property taxes, amenities fees) and/or revenues of the vendor that should partly be attributed to the purchaser (e.g. rents paid in advance by tenants), so that there is a net amount either owed to, or by, the vendor, therefore resulting in a purchase-price adjustment. What is the HST treatment of these adjustments, and does it make a difference if some of these adjustments are paid post-closing? CRA responded:

[T]he adjustment for prepaid property taxes that relate to the period during which time the purchaser will be the owner of the real property is additional consideration for the sale of the real property. … With respect to other adjustments for amounts that the vendor has paid or collected and that relate to the period during which time the purchaser will be the owner of the real property, it is a question of fact as to whether the adjustments increase or decrease the value of consideration for the sale of the real property. …

[I]f an obligation is inextricably tied to the real property itself, then it is likely not a separate supply from the sale of the real property and the adjustment likely increases or decreases the value of consideration, as the case may be.

Conversely, if it is determined that an obligation giving rise to the adjustment is a separate supply from the sale of the real property that is not incidental to the sale of the real property, then the application of the GST/HST to the adjustment depends on the nature of the separate supply itself. …

With respect to any adjustment described above that is made post-closing (that is, made after the transaction has been finalized and the purchaser has paid the balance owing to the vendor), the application of the GST/HST to the adjustment would be as described above.

Joint venture participants, who had not made a joint venture election, purchased real estate collectively through a representative who was registered for GST/HST purposes. No s. 273 election was made. The vendor did not collect GST/HST on the sale in reliance on s, 221(2), but as it emerged, one of the purchasers was not registered for GST/HST purposes. Is there any administrative relief?

CRA responded that, given that purchaser’s non-registration, s. 221(1) imposed liability on the vendor, but “That said, the minister may consider assessing the purchaser under paragraph 296(1)(b) where warranted.”

A supplier relied on the GST/HST Registry – which showed that the recipient of a sale of real estate (a charity) had a business number ending in RT0001 – in not charging HST on the sale. The supplier subsequently learned that the charity’s business number ending in RT0001 was only for use in filing public service body rebates, and that the charity was not registered for GST/HST under Part IX.

(a) If the GST/HST Registry is unreliable, how can suppliers meet their obligations to check the recipient’s GST/HST registration status and apply s. 221(2)?

(b) If a supplier relies on the GST/HST registry, which gives a false positive, is it CRA’s policy to waive interest and penalties?

CRA responded:

(a) The Business Number and Authorization Division, Business Returns Directorate, Assessment, Benefit, and Service Branch, recently confirmed that they have resolved the issue of false positives that occurred in some instances … .

Suppliers can meet their obligation under subsection 221(2) of the ETA by obtaining the information from the recipient. Suppliers can call the CRA's Business enquiries line at 1-800-959-5525 to confirm the registration status of the recipient.

(b) The CRA does not currently have a specific policy to waive penalty and interest in cases where a supplier of real property relied on the GST/HST registry to verify a recipient’s GST/HST registration status and the GST/HST registry gave a false positive.

A vendor transfers an office tower without a s. 167 election being made:

(a) Would a reimbursement to the vendor at closing for the portion of prepaid property taxes relating to the post-closing period be treated as: (i) a non-taxable reimbursement of taxes paid as agent for the purchaser; or (ii) an adjustment of the purchase price.

(b) Would the assignment by the vendor of tenant leases form part of the single supply of the building where none of the purchase price was allocated to the leases?

CRA responded:

(a)

Based on the scenario, there is no evidence that the essential qualities that determine whether a person is acting as agent in making a transaction on behalf of another person are met. Consequently … no agency relationship exists between the vendor and the purchaser, and therefore, the prepayment of property taxes by the vendor cannot be treated as a non-taxable reimbursement of taxes paid as agent for the purchaser.

Consequently, it is our view that the adjustment for the amount equivalent to the portion of the property taxes that relates to the period during which the purchaser will be the owner of the real property is additional consideration for the supply of the real property.

(b)

In applying Policy Statement P-077R2 to the scenario: there is one supplier and one recipient; the sale of the office building is one element of the supply; the assignment of tenant leases is another element of the supply; none of the purchase price is allocated to the leases (but a single price does not in itself determine whether there are one or more supplies); and the recipient does not have the option to acquire the building without the assignment of tenant leases.

Consequently, it is our view that the sale of the office building and the assignment of tenant leases likely form a single supply. However, we would have to review the applicable agreements before we could make a definitive pronouncement on the matter.

Mr. X has agreed to purchase a newly-constructed home from its builder and is subsequently paid $100,000 by the builder for the purchase agreement’s cancellation, does s. 221(2) apply to relieve the builder from having to pay GST/HST on the $100,000 if Mr. X is registered? After first noting that Mr. X would not be a builder if he had agreed to purchase the new residence for his own personal use (in which case, the question would be moot), CRA went on to state::

If Mr. X, however, is considered to be a builder in his own right (for example, at the time of entering into the agreement of purchase and sale, he did so for the primary purpose of selling the interest or the house itself), tax would be payable by the Vendor calculated on the value of consideration ($100,000) for the supply. If Mr. X is a non-resident or is resident by reason only of subsection 132(2), or the Vendor in the scenario is GST/HST registered, pursuant to paragraph 221(2)(a) or (b) respectively, Mr. X would be relieved of his obligation to collect the tax payable.

7. A nominee who fails to disclose, to the supplier of an immovable, the fact that the nominee is a mandatary is acting in the nominee's own name and becomes personally bound to the supplier to pay the consideration for the supply (article 2157 C.C.Q.). The nominee thus becomes a recipient of the supply, within the meaning of section 1 of the AQST, along with the mandator (article 2160 C.C.Q.).

Option grant a sale of real property

66. …[A] person may grant another person an option to purchase or lease property. The granting of such rights gives the grantee an equitable interest in the property. The consideration paid for the actual grant of the interest may be considered as being in respect of the sale of the interest but only to the extent such consideration is not paid for the actual use of the underlying property.

S. 221(2) applies where transfer of an equitable interest, e.g., grant of option or of right to lease

E. Other application of sale

In the common law provinces, legal and equitable interest[s] in real property [are] specifically considered "real property" within the meaning of paragraph (b) of the definition of real property in subsection 123(1) of the Act. … The grant or transfer of the legal ownership of an equitable interest in real property may, therefore, be considered a "sale" of real property. … Where such grants or transfers are considered a "sale", the self-assessment rules of subsection 221(2) of the Act would apply.

For example, a person may grant another person an option to purchase or lease real property. The granting of such rights gives the grantee an equitable interest in the property. The consideration paid for the actual grant of the interest may be considered as being in respect of the sale of the interest where there is no consideration related to the actual use of the underlying property. …