Since the self-supply rules apply only to leases, it must be determined whether the rent-to-own agreement constitutes a sale or a lease.
If a rent-to-own agreement obliges the lessor to sell the residential complex to the lessee during or at the end of the lease period and obliges the lessee to acquire it, and all the terms of the sale are contained in the agreement, the transaction is considered a sale with deferred transfer of ownership.
In such a case, the lessor is generally required to collect GST and QST from the lessee on the selling price and remit the taxes to us when possession of the residential complex is transferred to the lessee. The self-supply rules do not apply.
However, if the parties' intention is to enter first into an agreement to lease the residential complex and then to proceed with its sale, the transaction is considered a lease agreement rather than a sale, in which case the rules set forth in the next paragraph apply.
If, under a rent-to-own agreement, the lessee is free to exercise or not the purchase option at any time during the lease period, the transaction is considered a lease, not a sale. The self-supply rules apply and the builder is deemed to be the recipient who paid and the seller who collected the GST and the QST calculated on the fair market value (FMV) of the residential complex by the later of the following dates:
- the date on which possession of the residential complex is transferred under the lease agreement
- the date on which work is substantially completed (90% or more)
When the builder subsequently sells the residential complex, the transaction is tax-exempt. For more information on rent-to-own agreements, contact us.