Distinction Between Lease, Licence and Similar Arrangement

Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

GST/HST Policy Statement P-062

Date of issue

May 25, 1993

Subject

Distinction Between Lease, Licence and Similar Arrangement in Relation to Supplies of Real Property by Public Sector Bodies.

Legislative Reference(s)

Paragraph 25(f) of Part VI of Schedule V to the Excise Tax Act.

National Coding System File Number(s)

11950-1

Effective Date:

January 1, 1991 and September 15, 1992.

Issue and Decision:

Supplies of real property (other than short-term accommodation made by a public service body other than a financial institution or a government), the agreement for which was made prior to September 15, 1992, made by way of lease, licence or similar arrangement for a period of less than one month, is excluded from the exemption in section 25 of Part VI of Schedule V where the supply is made in the course of a business carried on by the body.

A supply of real property (other than short-term accommodation made by a public service body other than a financial institution or a government) the agreement for which is entered into after September 14, 1992, is excluded from the exemption in section 25 of Part VI of Schedule V where the supply is made by way of lease for a term of less than one month, or by way of licence, regardless of the time period, where either supply is made in the course of a business carried on by the body.

It is important, therefore, to distinguish between a lease and a licence and to properly apply the one month period or term to supplies of real property, to determine whether the exemption is applicable. In addition, given the deletion of the words"similar arrangement" to supplies of real property after September 14, 1992, the treatment of such arrangements must also be determined.

(i) Leases and Licences

In the province of Quebec, for real property purposes, the distinction between a lease and licence should be made in accordance with civil law principles.

In all provinces except Quebec, leases and licences of real property should be distinguished on the basis of common law principles applied to the particular supply in question based on the nature of the property, the relationship between the parties, the intention of the parties, and the wording of any agreement.

In the common law provinces, it has generally been determined that a lease normally confers exclusive possession, while a licence of real property normally would not. A person may be considered to have a right of exclusive possession, and therefore a lease of the real property, even where the right is subject to some limits, such as restrictions on the use to which a property may be put. An agreement that imposed such limits could still be regarded as a lease, unless the other terms of the agreement clearly revealed an intention to have a licence.

Under common law, a licence is in the nature of a right or privilege to enter upon and use the grantor's land in a certain manner or for a specified purpose. It is a personal right between the licensor and licensee and does not create any estate or interest in the property. In the common law provinces, a lease generally confers an interest in the real property, binding on the property owner and on other persons.

Other differences between a lease and a licence are that a lessee can generally sublet or assign its interest in the real property, subject to the terms of the lease; a licensee may not "sublicence" or assign its rights to a third party, except by the express agreement of the licensor. Further, if real property is sold or the lease is assigned by the lessor, the interest of the lessee normally flows with the property; rights under a licence normally cease upon the sale of the property.

The actual reference in the agreement to the supply as a lease or a licence may be helpful but not necessarily conclusive.

A lease, licence or similar arrangement of real property supplied by a public sector body (other than a government or financial institution) entered into prior to September 15, 1992, for a period of one month or more would be exempt pursuant to paragraph 25(f) of Part VI of Schedule V provided the other exclusions to section 25 do not apply. Leases of real property by a public sector body entered into for a term of less than one month, or any licence (regardless of the time period or term involved) entered into after September 14, 1992, where the supply is made in the course of a business carried on by the body, would be subject to GST unless another exempting provision applied.

(ii) Period or Term of the Lease

For purposes of applying the one month requirement in paragraph 25(f), the period or the term of a lease (or licence if entered into prior to September 15, 1992) should be regarded as the length of time of continuous occupancy, or right to such occupancy, provided in the lease (or licence prior to September 15, 1992), rather than the total time span covered by the agreement. If, for example, the lease specifies several periods of continuous occupancy, and some are for less than one month and some are for one month or more, it may be necessary to prorate the lease so that part of the lease may be exempt pursuant to paragraph 25(f) and part may not, because of the varying periods of occupancy.

(iii) Similar Arrangements After September 14, 1992

There may be supplies of real property by way of similar arrangements which are not strictly leases or licences. An easement, for example, is the granting of an interest in real property (similar to a lease) which can be registered on title, but such interest normally provides for specific and limited rights to the interest (similar to a licence). Accordingly, the supply of an easement otherwise than by way of sale, may be considered a "similar arrangement" to a lease or licence.

Since easements can not be classified as either leases or licenses because they have features of both, and may in certain cases be considered a "sale" of real property (for example, where they are granted in perpetuity for a single consideration), they should be treated as being outside the scope of paragraph 25(f), effective for agreements entered into after September 14, 1992, and consequently exempt of tax pursuant to section 25 from such time provided the other exclusions to section 25 do not apply.

Other arrangements should be treated as either leases, or licences, or where not clearly a lease or a licence, as a similar arrangement (similar to those in the nature of easements) where appropriate. The parties to and the terms of the arrangement, the nature of the interest being supplied, and the actual dealings between the parties should be considered to determine how the supply is to be classified. Once determined, the applicable tax treatment, discussed above, would follow.

 

SAMPLE RULINGS

Example 1

Statements of Facts

A church continuously rents out its basement five days per week for a period of one year to a person who operates a day care centre. The church is entitled to rent out the basement to others during the weekend.

Ruling Requested

Is this supply exempt of tax pursuant to section 25 of Part VI of Schedule V to the Excise Tax Act?

Ruling Given

No. Depending on the arrangement, the supply is made either by way of lease or licence. As a licence, if made after September 14, 1992, the supply is taxable. As a licence made before September 15, 1992, or as a lease since the supply covers periods of less than one month of continuous occupancy, or right of continuous occupancy, it would be excluded from the exempting provisions of section 25 by virtue of paragraph 25(f).

 

Example 2

Statements of Facts

A non-profit organization in British Columbia carries on a business of allowing groups of people to enter its property for nature hikes. Agreements are made to allow groups to enter the property every day for a period of two months.

Ruling Requested

Is this supply exempt of tax pursuant to section 25 of Part VI of Schedule V to the Excise Tax Act?

Ruling Given

No. Since the supply at issue would be considered as a licence it would be excluded from the exempting provisions of section 25 by virtue of paragraph 25(f).

 

example 3

Statements of Facts

A charity, within the meaning of subsection 123(1), permits a utility company to run a pipe through its property.

Ruling Requested

Would the supply be excluded from exemption from tax pursuant to section 25 of Part VI of Schedule V to the Excise Tax Act by virtue of paragraph 25(f)?

Ruling Given

Depending on the nature of the agreement, the supply at issue may be considered a supply by way of sale or a supply by way of a lease, licence or similar agreement.

Paragraph 25(f) is not applicable, however, in the case of a sale, or in the case of a lease or licence (or similar arrangement prior to September 15, 1992) that is not made in the course of a business carried on by the public service body. Since the charity is not likely making the supply in the course of a business, as a lease or licence, the supply would not be excluded by paragraph 25(f) from the exemption provided in section 25 of Part VI of schedule V.

Where the supply is in the nature of an easement, the supply would be considered an arrangement similar to a lease or a licence. As a similar arrangement entered into after September 14, 1992, the supply would not be affected by paragraph 25(f), and would be exempt by section 25, provided the other exclusions to section 25 do not apply. (Prior to September 15, 1992, such similar arrangements would not be excluded from the exemption since the supply was not made in the course of a business.)

If the supply is made by way of sale of the property by the charity, the supply may be exempt under section 25 without reference to paragraph 25(f) provided the other exclusions to section 25 do not apply.