Section 126

A provincial government department constructs a school and then transfers it for nominal consideration to another department within the same government which is a school authority that will use the school primarily in exempt activities, although it is also registered because it engages in commercial activities including the supply of parking spaces.

CRA noted that ETA s. 155 would apply to deem the supply to be made for FMV consideration if this transfer was a supply between persons not dealing with each other at arm’s length, but did not discuss the issue of whether a transfer of property between two departments within the same government could be such a transaction, nor did it discuss whether a transfer within the provincial government can be a supply. It stated:

The term “non-arm's length” is not defined in the ETA and is generally understood to mean a relationship where persons are acting in concert without separate interest, rather than acting independently of each other.

The term “non-arm's length” also includes persons who are related, which is a defined term in subsection 126(2) to include persons who are related under subsections 251(2) to (6) of the Income Tax Act. These provisions generally only speak to persons that are individuals or corporations and are generally contingent on whether one person has a controlling interest in the other person, or a related third party.