@Roy N,
@Doug P.
Thought I would add this CRA Ref for Canadians (CRA is like IRS)
http://www.cra-arc.gc.ca/E/pub/gl/p-111r/p-111r-e....
The Meaning of Sale with Respect to Real Property (Revised)
Legislative Reference(s)
Sections 121, subsection 123(1) - definitions of "real property" and "sale", ss. 168(5), s. 191, ss. 221(2), s. 254256, s. 336, sections 2, 3, 4, 5, 5.1, 5.2, 8, 9, 10 and 12 of Part I, and section 25 of Part VI of Schedule V to the Excise Tax Act.
National Coding System File Number(s)
11950-1
Effective Date
January 1, 1991
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A. Transfer of Ownership
For purposes of the provisions relating to supplies of real property which refer to transfers of ownership, such as subsections 168(5) and 336(1), (2) and (3) of the Act, "ownership" generally refers to the legal ownership (that is "titled" ownership in the case of the underlying real property), rather than equitable ownership of property. Accordingly, references to agreements of sale or agreements to transfer ownership of the underlying real property are generally to the ownership of the property that is transferred on the closing of the transaction. As discussed subsequently, the transfer of the legal ownership of an equitable interest in real property may be considered a sale of real property. Further, as subsequently discussed, unless specifically referred to in the provision, a sale of real property generally arises upon the transfer of ownership even where there may be no agreement to transfer ownership.
B. Transfer of Possession
A determination of whether there has been a transfer of possession
is relevant for various provisions of the Act relating to supplies of real property by way of sale, including subsections 168(5), 336(1), (2) and (3) of the Act. A person may be in possession of real property if that person is entitled to hold, control or occupy the property either with or without the right of ownership to the property. Occupation is not necessary for there to be possession; nor does occupation necessarily mean that one has possession.
Determining if and when possession is transferred in the case of real property is a question of fact, dependent on several indicia. Factors such as the payment of property taxes, the right to alter the land, the planting of crops or trees, collection of rents, repairs to the property, maintaining of the lot, etc., by the recipient serve to indicate, but are not necessarily conclusive, that possession has been transferred. In any event, possession alone is not sufficient under the Act to trigger a supply by way of sale since such possession must be made under an agreement to transfer ownership of the property.
C. Application of Agreement to Transfer Ownership
For purposes of determining whether a "sale" has occurred, a transfer of ownership need not be made under an agreement to transfer ownership. This is consistent, for example, with the intention of the legislation that the supply of a used residential complex, personal use property or qualifying farmland by gift or upon death is exempt under section 2, 9 or 10 of Part I of Schedule V, as the case may be, as an exempt supply of the property by way of sale even though there may be no agreement to transfer ownership of the property. An agreement to transfer ownership, however, is required for a transfer of possession to be considered a "sale".
Accordingly, the definition of "sale" in subsection 123(1) applies where there has been either:
1. a transfer of ownership; or,
2. a transfer of possession under an agreement to transfer ownership.
D. Transfer of Possession under an Agreement to Transfer
A transfer of possession under an agreement to transfer ownership must be distinguished from a transfer of possession under an agreement to transfer property by way of lease, license or similar arrangement. The former constitutes a sale while the latter does not.
Unless expressly stated otherwise in the legislation, verbal agreements relating to transfers of ownership may be sufficient to trigger a "sale" where there has also been a transfer of possession, provided such oral agreement contains the basic elements of a valid
contract at law (i.e. offer and acceptance, capacity to contract,consideration paid or payable, certainty of subject matter, essential terms agreed upon, etc.). Certain factors which may indicate that there has been a valid verbal agreement to transfer ownership of property (as opposed to an agreement to transfer property by way of lease, license or similar arrangement) include:
* cash, a cheque or a mortgage indicating payment for the property and a receipt given by the vendor;
* at some point, a deed evidencing the transfer of ownership would be registered on title;
* written memoranda of understanding between the parties or professional advisors indicating the date ownership is to be transferred which may be evidence of the existence of the verbal agreement;
* an order for specific performance of the verbal agreement from a court of law.
Where the parties are claiming that a verbal agreement to transfer ownership has been made, the onus is on the parties to prove that such agreement has in fact been made. In addition to the above noted factors, the parties should be prepared to sign a written declaration to the effect that there was such an agreement specifying when the transfer of ownership is to take place.
E. Other Applications of Sale
In the common law provinces, legal and equitable interest in real property specifically considered "real property" within the meaning of paragraph (b) of the definition of real property in subsection 123(1) of the Act. (The concept of equitable interest does not apply in the province of Quebec.) The grant or transfer of the legal ownership of an equitable interest in real property may, therefore, be considered a "sale" of real property. The consideration for the grant or transfer of the interest would then be subject to GST to the extent that the consideration paid is in respect of the acquisition of the interest and not for the ongoing rights to use the property without legal ownership of the underlying property. Where such grants or transfers are considered a "sale", the self-assessment rules of subsection 221(2) of the Act would apply.
For example, a person may grant another person an option to purchase or lease real property. The granting of such rights gives the grantee an equitable interest in the property. The consideration paid for the actual grant of the interest may be considered as being in respect of the sale of the interest where there is no consideration related to the actual use of the underlying property. However, any consideration which is not reasonably attributable to the granting of the option, such as consideration payable by the recipient of the option for the use or right to use the property until the option is exercised (whether pre-paid or by periodic payments), would not be consideration for the granting of the option and, therefore, would not relate to the "sale" of the equitable interest, but rather the right to use the property. Such consideration would be payable for the supply of the property by way of lease, license or similar arrangement. Similar considerations would apply with respect to the transfer of an equitable interest by way of assignment or other means.
The determination of whether the consideration is paid for the grant (i.e. sale) or use (i.e. lease) of the property may be reflected in the nature of the interest being transferred, the terms of the agreement or other documentation relating to the transfer, and the actual dealings among the parties involved.
The grant of a right of way or an easement may be in the nature of a grant of real property by way of sale or by way of lease, license or similar arrangement. Where the right of way or easement gives the recipient the use or right to use real property without legal ownership in the underlying property over a specified period of time, the supply would normally be considered to be by way of an arrangement similar to a lease or license.
Where, similar to an option, the consideration for the supply of an easement relates to the actual grant or transfer of the equitable interest in the property and not to the use or right to use the property, the supply would normally be considered as being in respect of the sale of real property. For example, an easement granted in perpetuity for a single consideration or the transfer of the easement by assignment or otherwise may constitute a "sale"to which subsection 168(5) relating to the timing of liability for sales of real property would apply, as well as the self-assessment rules in subsection 221(2).