Written by: Darryl Rankin
There are special rules in the Canada GST/HST (Goods and Services Tax and Harmonized Sales Tax) system for commercial real property — that is, any real property that does not fall within the definition of “residential complex.” These rules also apply to an interest in real property (such as assignment of a right to purchase or assignment of a lease).
In very general terms, all sales of commercial real property are taxable; however, if the purchaser is GST-registered, then the purchaser (and not the vendor) accounts for the tax, reports it to the Canada Revenue Agency (CRA), and in most cases claims an offsetting input tax credit. The vendor does not collect GST/HST on closing in such a case. However, the rules are tricky, and there are traps, twists, turns, and even unexpected windfalls.
Here are some examples:
- If you are selling commercial real property to a GST-registered purchaser, then as noted above, the purchaser normally accounts for the GST or HST and usually claims an offsetting input tax credit so that the purchaser doesn’t actually pay any amount in tax. However, the sale is still “taxable” for GST and HST purposes. As a result, if the purchase and sale agreement says that any GST/HST is “included” in the sale price, the vendor will only get 100/105ths, 100/113ths, or some other percentage of the sale price (depending on the province) when the deal closes. Be careful about how the agreement is worded!
- The same rule applies to require the purchaser to account for the GST or HST if the vendor is non-resident (including a non-resident company with a branch or other “permanent establishment” in Canada and is considered resident for GST/HST purposes). Even if the purchaser is not GST-registered, the vendor doesn’t collect the GST or HST on closing, and the purchaser must report it and pay it to the CRA.
- A vendor sometimes sells property that has GST or HST buried in the price, where the vendor wasn’t able to claim a full input tax credit on purchasing the property. For example, the vendor may be in a business that makes “exempt” sales such as education, healthcare, or financial services. Such a vendor may be able to recover the “buried” GST or HST by way of a special input tax credit or rebate available on selling the property. Unfortunately, these obscure rules, in Excise Tax Act section 193 and 257, are often overlooked by lawyers and accountants advising vendors.
- Property that appears to be residential might not fall into the definition of “residential complex” and may be subject to the rules for commercial property. For example, this may apply to a property rented out mostly on short-term rentals, such as on Airbnb, or to a home that has become uninhabitable.
- Vacant land can be sold exempt in some instances by an individual, but a sale by a corporation is almost always taxable.
- A vendor does not collect GST/HST if the purchaser is GST-registered, but having an “RT” Business Number does not always mean an entity is registered! The CRA gives out “RT” numbers to persons that register with the CRA to obtain rebates (e.g., charities) and for certain other kinds of reporting that is not a “real” GST/HST registration. A vendor refraining from collecting tax on closing must be certain that the purchaser is registered; otherwise, the CRA may assess the vendor for not collecting and remitting the tax. The CRA’s online GST/HST Web Registry can be used to verify registration.
Most real estate lawyers are not GST/HST specialists and may not be aware of all these special rules. Therefore, when buying or selling commercial property, check with a DMA professional if you are at all unsure as to how the rules apply to your case.