Rent To Own Agreements

From: Canada Revenue Agency

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

Example 1

Statement of Facts

An individual enters into a binding rent-to-own agreement with the builder of a newly constructed single unit residential complex. Under the agreement, the recipient is required to pay a sum of $150,000 plus GST with the $150,000 determined as follows:

Initial deposit $5,000
Rent for 24 months @ $1,000 per month 24,000
Final payment on closing 121,000

The individual will take possession of the residential complex at the outset of the agreement but the sale will not be "closed" and title will not be transferred until the end of the 24 month period.

Rulings Requested

Is the builder considered to have made a taxable sale of the complex to the individual?

If so, then when does the sale occur?

Is the GST paid on the full purchase price at the time possession is taken or later?

Do the self-supply rules of section 191 apply?

Will the individual qualify for a GST New Housing Rebate?

Rulings Given

The agreement between the builder and the individual is considered to be an agreement of purchase and sale. A sale is considered to have occurred and the GST is payable in full on the $150,000 (i.e., GST of $10,500) when possession of the complex is given to the individual under the agreement to transfer the ownership of the complex.

The self-supply rules of section 191 of the Act will not apply because the recipient is a purchaser under an agreement of purchase and sale of the complex and possession of the complex is given under an agreement of purchase and sale. The GST New Housing Rebate may be available to the individual following transfer of title to the complex (i.e., at the end of the 24 month period) provided that all of the other conditions of section 254 are satisfied.

Example 2

Statement of Facts

An individual enters into an agreement with a builder to acquire a newly constructed single unit residential complex as follows:

Deposit, Jan. 1/93 $5,000
Interest for 12 months @ $500 per month 6,000
Balance Due, Jan. 1/94 119,000

The individual will take possession of the complex on Jan. 1, 1993 with title to be transferred on payment of the balance due. The individual and the builder agree to the legal relationship of landlord and tenant in respect of the complex until transfer of ownership. The interest payments of $500 per month will accrue until the balance due of $119,000 is paid, or until Jan. 1, 1994, whichever occurs first. The builder provides a guarantee at the option of the individual to "buy back" the complex for a stated price after the initial transfer of ownership and before July 1, 1994.

Rulings Requested

Is the builder considered to have made a taxable sale of the complex to the individual?

If so, then when does the sale occur?

Will the individual qualify for a GST New Housing Rebate?

If the individual exercises the option to have the builder repurchase the complex at the end of the initial rental period, will that repurchase be a taxable supply?

Rulings Given

The agreement constitutes a sale for GST purposes. The sale occurred on Jan. 1, 1993 when possession under the purchase and sale agreement was given to the individual. GST will be payable on the value of consideration at Jan. 1, 1993, however, the GST New Housing Rebate will not be available before the transfer of title.
If the individual exercises the option to have the builder buy back the complex, the sale from the individual to the builder will be exempt under section 2, Part I of Schedule V.

Example 3

Statement of Facts

An individual enters into an agreement with a builder to take possession of a newly constructed single unit residential complex for a period of one year as the individual's place of residence. The individual will be required to make monthly payments of $1,000 throughout the year. The agreement also contains an option to purchase the complex for the sum of $150,000 which can be exercised at any time within one year of occupancy by the individual. Further, it is agreed that where the option is exercised, the sum of the initial payments will be applied against the purchase price of $150,000.

Rulings Requested

Is the builder considered to have made a taxable sale of the complex to the individual?

If the individual exercises the option to purchase the complex, will that supply of the complex be a taxable supply?

Do the self-supply rules of section 191 apply?

Is a GST new housing rebate available to the individual?

Rulings Given

The agreement constitutes a supply by way of lease, licence or similar arrangement for GST purposes. The builder will be required to self-supply under section 191 of the Act when possession of the complex is given to the individual. If the individual exercises the option to purchase the complex, the sale of the complex will be exempt under section 4, Part I of Schedule V. The GST new housing rebate is not available.

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