Unpaid Municipal Taxes and Redemption by the Previous Owner

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-198

Date of Issue

January 11, 1996

Subject

Sale by a municipality of the property of a taxpayer who is in default on the municipal taxes payment in the province of Québec, and redemption of the property by the taxpayer at a later date.

Legislative Reference(s)

Sections 165, 183, 193, 232, 257, 261 and the definitions of "supply" and "sale" in subsection 123(1) of the Excise Tax Act (ETA)

The Québec Municipal Code, the Cities and Towns Act (Québec) and the Québec Civil Code

National Coding System File Number(s)

11585-35; 11950-1; 11890-1; 11783/2 subsection 123(1)

Effective Date

January 1, 1991

Text

Issue and Decision:

The issues discussed in this policy statement are:

1) the application of the GST to sales of property for unpaid municipal taxes by municipalities located in Québec

2) the application of section 183 of the ETA to such sales by municipalities, and

3) the application of the GST in circumstances where there is a redemption of the property by the previous owner subsequent to that sale.

A sale of property for unpaid municipal taxes is a recourse available to municipalities throughout the country in order to recover the unpaid municipal taxes.

In the province of Québec, such a power is given to a municipality by virtue of the Québec Municipal Code, the Cities and Towns Act (Québec), or for a large city such as Montréal or Québec by virtue of its charter. These laws in Québec also allow the taxpayer to regain ownership of the property within a specified time period following the sale of the property.

Generally a municipality will sell the property at an auction sale, and the buyer (hereinafter referred to as the auction purchaser) will acquire clear title to the property at the time of the auction sale. However, in Québec the auction purchaser does not obtain clear title to the property but obtains a precarious one, due to the fact that the taxpayer (hereinafter referred to as previous owner) has the right to redeem the property after the auction sale.

Where the previous owner exercises the right to redeem the property within the prescribed time period (i.e. one year), under Québec municipal legislation, the redemption has the effect of restoring ownership of the property to the previous owner as of the date of the auction sale.

In some provinces (e.g. Ontario), it is noted that the previous owner may not be able to regain ownership of the property as the municipal laws generally do not provide the right to redeem the property within a prescribed time period.

Thus as stated above, because there in Québec is a possibility that the previous owner will redeem the property within a prescribed time period following the auction sale and because of the effect of the redemption, the issue is whether in that province the auction sale can be considered a supply for GST purposes.

Furthermore when the property is redeemed, the issue is whether a supply occurs for GST purposes.

It is the Department's position that a supply by way of sale occurs at the time of the auction sale pursuant to the definitions of supply and sale in subsection 123(1) of the Excise Tax Act.

It is also the Department's position that under subsection 183(10), the sale by the municipality of the previous owner's property is a deemed seizure or repossession and that the municipality is the deemed supplier. As a result, pursuant to subsection 183(1) the municipality is deemed to have purchased the property and the previous owner is deemed to have sold the property for nil consideration at the time of the auction sale.

Accordingly, as the auction sale is a supply for GST purposes and as the municipality is the deemed supplier, the sale by the municipality will be taxable unless the supply is exempt under the provisions of Schedule V of the ETA. Note that most supplies of real property made by a public service body such as a municipality are exempt under section 25 of Part VI of Schedule 5 of the ETA unless they are excluded from the exemption provisions by paragraphs 25(a) to (h).

Moreover, since the auction sale by the municipality is deemed to be a seizure or repossession under section 183 and because of paragraphs 183(1)(c) and (d), the previous owner may be entitled to claim an input tax credit under section 193 or a rebate under section 257 for the previously non-creditable or non-rebatable tax paid in respect of the property if the deemed supply between the previous owner (the supply that is deemed to have been made for nil consideration under paragraph 183(1)(a)) and the municipality is taxable or if it is exempt under section 9 of Part I, or section 25 of Part VI, of Schedule V.

Finally, it is the Department's position that the redemption by the previous owner of the property sold for unpaid municipal taxes is also a supply by way of sale by the auction purchaser to the previous owner pursuant to subsection 123(1) of the ETA. Accordingly, the supply of the property by the auction purchaser may also be subject to the GST.

Since the auction purchaser is making a supply by way of a sale, for GST purposes, to the previous owner, the auction purchaser may also be entitled to claim an input tax credit under section 193 or a rebate under section 257 for the previously non-creditable or non-rebatable tax paid in respect of the property if the supply is taxable.

SAMPLE RULINGS

EXAMPLE 1

Statement of Facts

In Québec, Mr. A the owner of a parcel of vacant land has defaulted on his municipal taxes payments for the last 5 years. The municipality, after numerous warnings to Mr. A, has decided to sell the property for unpaid taxes and, starts the necessary procedures. Mr. A does not correct the default and the municipality sells the property at an auction on June 1, 1993. The auction purchaser, Mr. B, acquires the property for personal purposes (i.e. otherwise than in the course of a business or in an adventure or concern in the nature of trade), for consideration equal to $ 50,000 plus GST of $ 3,500.

Under the Québec Municipal Code, Mr. A has a right to redeem the property within the year following the day of the auction sale, by paying to the purchaser Mr. B the price paid on the land by Mr. B at auction with interest. On February 1, 1994, Mr. A redeems the property by paying Mr. B $ 53,500 (consideration plus the related GST) plus interest.

Rulings Requested

1) Confirmation that the auction sale of the land by the municipality is a supply for GST purposes even if the previous owner, Mr. A, has a right to redeem the land in the next year.

2) Confirmation of whether the provisions of section 183 of the ETA apply when the municipality sells Mr. A's property and if so, whether Mr. A may claim an ITC or a rebate pursuant to subsections 193(1) or 257(1) of the ETA respectively.

3) Finally, confirmation of whether the auction purchaser, Mr. B, is making a supply of the property to the previous owner, Mr. A, when the latter redeems the property.

Rulings Given

The sale by the municipality of Mr. A's land is a supply by way of a sale for GST purposes which is taxable as it is excluded by paragraph 25(c) of Part VI of Schedule V from the exemption provisions. Therefore, Mr. B will have to pay GST equal to $ 3,500 on the purchase of the land, for a total price of $ 53,500.

Furthermore, pursuant to subsection 183(10) of the ETA, the sale of Mr. A's land by the municipality is deemed to be a seizure and the municipality is deemed to be the supplier of Mr. A's land to Mr. B. Thus pursuant to subsection 183(1), the municipality is deemed to have purchased from Mr. A and Mr. A is deemed to have sold to the municipality the land for nil consideration. As a result, because of the provisions of paragraphs 183(1)(c) and (d), Mr. A will be able to claim an input tax credit under subsection 193(1) or a rebate under subsection 257(1) for the non-creditable or non-rebatable tax paid in respect of the property.

When Mr. A redeems the land on February 1, 1994, a supply by way of a sale by Mr. B to Mr. A occurs for GST purposes. Mr. B is considered to be selling the land back to Mr. A for $ 53,500 plus interest. However, the sale by Mr. B will be exempt under section 9 of Part I of Schedule V and as a result, Mr. A will not pay GST when he redeems the land.

Because the sale by Mr. B to Mr. A is exempt, Mr. B will not be able to claim an input tax credit under subsection 193(1) or a rebate under subsection 257(1) for the non-creditable or the non-rebatable tax paid in respect of the property. However, because the Québec Municipal Code can be interpreted as requiring Mr. A, when redeeming, to reimburse Mr. B the price paid for the property at auction (including the GST), Mr. B's tax cost will be nil.

This ruling is subject to the general limitations and qualifications set out in GST Memoranda Series (1.4). We are bound by this ruling provided that none of the above issues is currently under audit, objection or appeal, that there are no relevant changes in the future to the Excise Tax Act and that you have fully described all necessary facts and transactions for which you requested a ruling.

EXAMPLE 2

Statement of Facts

In Québec, Co. A a GST registrant and owner of a parcel of vacant land has defaulted on its municipal tax payments for the last 5 years. The municipality after numerous warnings to Co. A, has decided to sell the property for unpaid taxes and starts the necessary procedures. Co. A does not correct the default and the municipality sells the property at an auction on July 13, 1993. The auction purchaser, Mr. B who is a registrant, acquires the property for resale in the course of his business, for consideration equal to $ 100,000 plus GST of $ 7,000.

Under the Québec Municipal Code, Co. A has a right to redeem the property within the year following the day of the auction sale, by paying to the purchaser, Mr. B, the price paid by Mr. B for the land at the auction with interest. On April 15, 1994, Co. A redeems the property.

Rulings Requested

1) Confirmation that the auction sale of the land by the municipality is a supply for GST purposes even if the previous owner, Co. A, has a right to redeem the land in the next year.

2) Confirmation of whether the provisions of section 183 of the ETA apply when the municipality sells Co. A's property and if so, whether Co. A may claim an ITC or a rebate pursuant to subsections 193(3) or 257(1) of the ETA respectively.

3) Finally, confirmation of whether the auction purchaser, Mr. B, is making a supply of the property to the previous owner, Co. A, when the latter redeems the property.

Rulings Given

The sale by the municipality of Co. A's land is a supply by way of a sale for GST purposes and such a sale will be taxable as it is excluded from the exemption provisions by paragraph 25(c) of Part VI of Schedule V. Therefore, Mr. B will have to pay GST equal to $ 7,000 on the purchase of the land.

Pursuant to subsection 183(10), the sale of Co. A's land by the municipality is deemed to be a seizure and the municipality is deemed to be the supplier of Co. A's land to Mr. B. Accordingly, pursuant to subsection 183(1) the municipality is deemed to have purchased from Co. A and Co. A is deemed to have sold to the municipality the land for nil consideration. Thus, because the sale between Co. A and the municipality is taxable and because of paragraph 183(1)(c), Co. A will be able to claim an input tax credit under subsection 193(1) for the non-creditable tax paid in respect of the property.

When Co. A redeems the land on April 15, 1994, a supply by way of a sale by Mr. B to Co. A also occurs for GST purposes.
Mr. B is considered to be selling the land back to Co. A for $ 100,000 plus interest. The supply by Mr. B to Co. A will be taxable as it is excluded from the exemption provisions by paragraph 9(b) of Part I of Schedule V.

Mr. B, a registrant, will also be able to claim an input tax credit under subsection 193(1) for any tax paid in respect of the property for which he was not able to claim an input tax credit.

This ruling is subject to the general limitations and qualifications set out in GST Memoranda Series (1.4). We are bound by this ruling provided that none of the above issues is currently under audit, objection or appeal, that there are no relevant changes in the future to the Excise Tax Act and that you have fully described all necessary facts and transactions for which you requested a ruling.

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