Land Deals: What’s the GST/HST Consequence?

In a recent decision of the Tax Court of Canada (TCC), the honourable Justice Hogan had to decide if a promise to purchase land, as well as the related deposit, constituted a single supply or multiple supplies for GST/HST purposes within the meaning of the Excise Tax Act (the ETA).

Casa Blanca Homes Ltd. v. The Queen provides guidance on the concept of single or multiple supplies under the ETA for other taxpayers trying to ascertain their own situation. 

The Facts

Casa Blanca, a real estate developer, promised to purchase vacant lots from another party; along with the promise to purchase went a non-refundable deposit. Casa Blanca later sold the lots to third parties under assignment agreements. Under the agreements entered into with these third parties, the purchasers paid Casa Blanca a fee for the assignment and an amount equal to the non-refundable deposit Casa Blanca had paid to the developer.

Casa Blanca only collected GST from the purchasers on the assignment fee, not for the amount charged as their deposit recovery. The Canada Revenue Agency (CRA) reassessed Casa Blanca on the basis that it should have collected GST for both because the transaction was a single supply of an interest in real property, the consideration being both the assignment fee and the amount charged to recover their previous deposit.

The Law

To determine whether a given transaction comprises a single supply or multiple supplies, the test is whether the ostensibly separate supply is an integral part of the other supply, such that in reality there is only one supply. Justice Hogan analyzed the transactions at issue and noted certain factors, such as the degree of interconnection and interdependence of the supplies and whether each supply could be purchased individually and still be useful before holding that Casa Blanca had in fact made two distinct supplies. The first supply, he reasoned, was the supply of the rights under the promise to purchase, the consideration for which was the fee charged for the assignment and which was taxable as the supply of an interest in real property. The second was the supply of the rights in respect of the deposit, which was not taxable because he characterized the deposit as a supply of a debt security, an exempt "financial instrument" under the ETA.

The Decision

Although Justice Hogan’s finding left no adverse tax consequences for Casa Blanca in this case, it was interesting that he noted that the transaction could have been structured differently. Casa Blanca, he stated at paragraph 24, could have sold the rights under the promise to purchase first and then those purchasers could have paid a deposit to the developer, who would then have refunded Casa Blanca's original deposit. He found this to be the case notwithstanding the fact that the initial deposit was stated to be non-refundable. He relied on the 1884 English Court of Appeal case Howe v. Smith for the proposition that the refundable nature of a deposit is considered an implied term with regard to deposits. In that seminal case on deposits, Fry L.J. held that:

“The terms not naturally to be implied appear to me in the case of money paid on the signing of a contract to be that in the event of the contract being performed it shall be brought into account, but if the contract is not performed by the payer it shall remain the property of the payee.”

Those that are looking for guidance distinguishing between single and multiple supplies under the ETA for GST/HST purposes should consult the judgment of Justice Hogan. The full reasons can be found here. The comments in regards to the refundable nature of deposits are an interesting aside.

Greer Jacks is updating jurisprudence in EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.