Real estate transactions and related activities are subject to complex GST/HST rules and the Canada Revenue Agency (CRA) has been applying those rules to closely scrutinize transactions with a view to extract more revenue for the government coffers. Below we have highlighted key developments in the GST/HST jurisprudence that are noteworthy for professionals that deal with real property transactions and related activities.
Structuring as a joint venture may provide GST/HST savings
GST/HST on property management fees are generally an unrecoverable expense for residential landlords and other providers of GST/HST-exempt services (hospitals, universities, charities, etc.). In Medallion, the landlord and the property manager avoided the cost of unrecoverable GST/HST on their services by structuring their relationship as a joint venture.1
Based on Medallion, the key to ensuring a property manager is a joint venture and not a taxable service provider, is to satisfy the essential criteria of a joint venture. One such criteria that was central to the dispute was the "subject matter" of the joint venture. Notably, the Court found that the subject matter of the joint venture was the leasing of real property and that despite having no ownership interest or right to profits from the real property, the property manager had a contractual right to lease the real property in its own name. Accordingly, as the property manager held a property interest in the real property of the joint venture and this criteria was met and the property manager's supplies to the owners were not subject to GST/HST.2
Secured creditors have priority over CRA where the bankrupt is a GST/HST debtor
Callidus Capital Corporation v. HMQ (SCC) clarifies that once a borrower files for bankruptcy a secured creditor is not subject to the CRA's deemed trust super-priority with respect to the property of a borrower.3 Callidus confirms that, in such cases, the CRA loses its deemed trust and is treated as an unsecured creditor with respect to its claim to unremitted GST/HST. View our bulletin from November 2018 for a summary of this decision.
Limited partnerships may need to consider the Investment Limited Partnership rules
The "investment limited partnership" (ILP) rules were formally introduced by the October 25, 2018 Notice of Ways and Means motion. ILPs are subject to the byzantine Selected Listed Financial Institution rules, and can trigger unrecoverable GST/HST if a partner of the ILP provides the ILP with "management or administrative services". If a limited partnership fund is structured so that the general partner is taking an active role in the fund's management, it may be worthwhile to consider the application of these rules.
Note that an ILP is generally defined as either (a) a limited partnership that is, or forms part of an arrangement that is represented as a hedge fund, investment limited partnership, mutual fund, private equity fund, venture capital fund or other similar collective investment vehicle; or (b) a limited partnership that has 50 per cent or more ownership by "listed financial institutions" (for example, a bank, insurer, or investment plan). View our bulletin from September 2017 for more information.
GST/HST New Housing Rebates (NHRs) where non-family members "co-sign" the APS
Cheema v. HMQ4 is an important case as to a purchaser's eligibility for the NHR where the APS is co-signed with unrelated persons, usually for mortgage finance purposes. The Federal Court of Appeal held that each purchaser on the APS must have intended to acquire the property for use as their primary place of residence. The FCA rejected the argument that the purchaser's friend, Mr. Akbari, was bare trustees or agent of Mr. Cheema. In a rare split decision, Justice Stratas held that sections 133 and 254 of the Excise Tax Act could not be read to accommodate a bare trustee or agent relationship. Justice Webb, in dissent, disagreed that a bare trust or agent relation was not applicable. In April 2018, Mr. Cheema filed an application to the Supreme Court of Canada for leave to appeal.
1 Medallion Corp. v R, 2018 TCC 157 (Tax Court of Canada [General Procedure]).
2 Ibid, para 27.
3 Callidus Capital Corporation v Canada, 2018 SCC 47 (Supreme Court of Canada).
4 Cheema v R, 2018 FCA 45 (Federal Court of Appeal).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.