Rent To Own Agreements

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-164

Date of Issue

February 15, 1994

Subject

Rent-to-own agreements

Legislative Reference(s)

The following provisions of the Excise Tax Act may apply: 123(1) Definition of "sale"; 133 Agreement as supply; 152(2) Consideration under leases; 168(5) Sale of real property; 168(6) Combined supply; 191(1) & (3) Self-supply of residential real property; 191(2) Self-supply on termination of purchase and sale agreement; 254 GST New Housing Rebate; 336 Transitional provisions

National Coding System File Number(s)

11870-5

Effective Date

January 1, 1991

Text

This policy statement will discuss the transfer of possession of a newly constructed or substantially renovated residential complex from a builder to a recipient under a lease, licence or similar arrangement before transfer of ownership of the complex to the recipient.

Issue and Decision

Various types of residential rent-to-own agreements are in use by builders. These agreements may be subject to a wide range of terms and conditions; however, it is important to distinguish between two main categories of such agreements, which may involve:

1) a binding purchase and sale agreement, with transfer of ownership at or before the end of a specified period of occupancy.

This type of rent-to-own agreement will generally trigger a sale of the property for GST purposes when possession is first transferred to the recipient under the agreement.

A "sale" in respect of property is defined in section 123 of the Act to include "any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer ownership of the property".

A rent-to-own agreement may constitute a sale of the real property if the agreement is the basis on which ownership of the property is subsequently transferred. A supply will be considered to be by way of sale, for example, where:

(i) the rent-to-own agreement contains a binding purchase and sale clause ;

or

(ii) possession is given under or as a consequence of an agreement to transfer the ownership of the complex to the recipient.

Each of the agreements described above constitutes a sale of property because each one results in the transfer of ownership of the property or the transfer of possession of the property under an agreement to transfer ownership of the property.

If the sale is taxable, the recipient will generally be required to pay GST on the value of the consideration for the sale at the earlier of the transfer of possession and the transfer of ownership of the property. The GST New Housing Rebate under section 254 of the Act, if available, may not be claimed until transfer of ownership (i.e. legal title) of the complex. An eligible recipient may claim the rebate within four years after the transfer of ownership of the complex.

2) a lease, licence or similar arrangement with an option to purchase the unit at any time within or at the conclusion of the occupancy period.

If the agreement does not directly result in the current or intended transfer of ownership of the property, the transaction will generally be considered to be a lease, licence or similar arrangement, and not a sale, in respect of the property.

If the agreement does not result in a sale as discussed above, the builder may be liable for tax under section 191 of the Act on the fair market value of the residential complex at the time possession is given to a person for the purpose of its occupancy as a place of residence. In this case, the GST New Housing Rebate would not be available in respect of the complex and a subsequent sale of the complex would generally be exempt.

Sale or Lease

In order to determine whether a particular supply of a residential complex is made by way of a sale or a rental (i.e. lease, licence or similar arrangement), it may be necessary to review the terms of the applicable agreement and the facts of each situation. Although not necessarily conclusive, factors which would be indicative of a sale of the property for GST purposes include:

(a) the agreement for the transfer of possession is referred to purchase and sale of the complex;

(b) the recipient acquires legal title to the property after payment of a specified amount or after a specified period of time;

(c) the recipient is required to buy the property from the supplier during or at the termination of the occupancy period or is required to guarantee that the supplier will receive the full option price from the recipient or a third party (except where such guarantee is given only in respect of excessive wear and tear inflicted by the recipient);

(d) a deposit is paid at the time the agreement is entered into and the deposit is to be applied to the balance due on sale of the property;

(e) payments under the agreement are referred to as instalments, interest or similar amounts;

(f) reference in the agreement is made to the new housing rebate entitlement; and

(g) the recipient is liable for property taxes, utility payments and other amounts payable in respect of the property (this criterion is only relevant if other criteria are met since the condition in this criterion may occur in net lease agreements).

SAMPLE RULINGS