The way to understand section 9 of Part I of Schedule V is that it is the provision that generally exempts all real property other than a residential complex or farmland (which have their own provisions) subject to exclusions.

The first and most important exclusion is whether the seller is an individual or personal trust (testamentary or inter vivos). If the vendor is any person (corp., partnership, etc) other than an individual or personal trust, this provision cannot exempt the supply and it will generally be taxable.

Assuming that the supply wasn’t deemed to be taxable under sections 206 or 207 (change of use), and wasn’t a saleback to the vendor (I’ve never seen it happen), the way to approach the rest of the exclusions is to work backwards from paragraph (c) of the provision and ask these questions:

Para (c): Has the real property been severed or subdivided into more than two pieces since it was first acquired by the seller? Where it has been severed into more than two pieces, have any of the pieces been supplied to a relation, a common law partner, or a former spouse? If it has been severed into more than two pieces and not supplied to a relation or similar, the pieces sold will generally be taxable. Occasionally, even where these exclusions are met, supply of the property may still be exempt where it is a result of an involuntary severance such as an expropriation by a level of government.

Subpara (b)(i): Has the seller supplied the real property in the course of a business.  Business is defined in subsection 123(1) :

includes a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment; 

The definition of business is surprisingly really two definitions with two different publications explaining their meanings, the first part, and the second part. Generally, you can understand business as what you would expect a business to mean, something done in a structured way that resembles a business like activity, or the ongoing supply of property (tangible, intangible, real) by way of lease, licence or similar arrangement. What is lease, licence or similar, well that has it’s own publication.

If one buys and sells real property with regularity they will generally be considered to have sold it in the course of a business, but there is no hard and fast rule on the frequency that makes it a business. Appendix C of GST/HST memorandum 19-5 gives additional guidance on the definition of business in relation to real property.

Subpara (b)(ii): Has the seller supplied the real property in the course of an adventure. An adventure is best thought of as something less than a business but still somewhat commercial or speculative. For example, I buy some pieces of vacant land in an area that I think cottagers may want to buy in a few years. If I have a primary or secondary intention that is somewhat commercial or speculative, it may qualify as an adventure. However, selling it in the course of an adventure doesn’t in and of itself make the sale taxable. To make it taxable the seller must have filed a GST-22 election prior to the sale. In most cases filing a GST22 isn’t a good idea but there is one scenario where it is, when you paid tax on acquisition of the property and are selling it to a person who is registered for GST/HST purposes and is intending to use the property exclusively in commercial activity. In that scenario making a taxable supply of real property enables the seller to claim back the tax they paid on acquiring the property.

A rule of thumb that generally applies to any of para (b) is to think of it as the exclusion that catches real property owned and sold as inventory.

Paragraph (a) has several exclusions that must be broken down into parts. The first part is the question of whether it is capital property versus inventory. If it’s inventory you’re looking at para (b), if it’s capital property you’re looking at para (a). The next question is whether it was last used (even if that use was years before) primarily, or for the purpose of:

Subpara (a)(i) excludes real property used in the course of a business (there’s that definition again) with a reasonable expectation of profit. The question of whether there’s a reasonable expectation of profit can often be thought of as, do the revenues one generates through use of the property exceed the costs of maintaining it. The CRA gives more factors to look at in GST/HST memo 19-5, but generally the rule of thumb is a good proxy. This exclusion also catches some landlords of residential complexes by surprise because they don’t see the land being used primarily in the course of a business but the CRA sees it otherwise. For example, a landlord leases a residential complex sitting on 5 acres of land to a family using it exclusively as a place of residence. We all generally know that a used residential complex (a house for example) is not subject to GST/HST when sold, but most of us don’t know that only a half hectare is considered reasonably necessary for the use and enjoyment of the residential complex, and the rest is generally deemed to be a separate supply from the residential complex under subsection 136(2). Where the landlord did not exclude use of the excess land (more than a half hectare) from the tenants lease, or otherwise make it unusable by means of a fence or by supplying it to others, the CRA can find that the excess land was used in the course of a business (second part of the definition) and assess tax for that part under both subpara (b)(i) and subpara (a)(i).

Subpara (a)(ii) excludes real property sold by a registant (a person who is registered or required to be registered) who supplies the real property by way of lease, licence or similar. This is another tricky provision because people who are registrants may not think they are supplying the property because they don’t have a lease agreement and aren’t charging their neighbour to graze their cows on their fields, but the CRA doesn’t see it that way. If one is a registrant they should be very careful on who they allow onto their lands or they may be viewed as having supplied the real property by way of licence, therefore making it taxable regardless of expectations toward profit.

This explanation of section 9 is not complete because there are additional edge cases that may make the sale taxable or exempt. If you are assessed for tax on the supply of real property and it doesn’t seem quite right to you, reach out to a ZheroTax GST/HST real property expert and let them walk you through the use and determine whether an appeal has a good chance of being successful.