GST and other tax structures are extremely complex, especially in the sale of real estate. Real estate deals can require GST, PTT and additional PTT (foreign buyer’s tax), vacancy tax, speculation tax, taxes on commissions and legal fees and on other services.
GST BasicsUnder the Federal Excise Tax Act (ETA), the sale of real property is a taxable supply and subject to GST, unless an exemption applies. The typical exemption is when the property is used residential real estate. This means that the property is not brand new or substantially renovated, and it’s been used as a primary residence for the owner or a tenant.
Ultimately, GST must be collected and remitted by the seller of property (if the seller is non-resident, then the buyer typically remits the GST). Practically, most sellers have the buyer pay it and it is handled at adjustments and remitted by the seller. To avoid ambiguity and potential claims, the treatment of GST should be clearly set out in the contract: is there GST payable, is it included in the price or extra, and who pays it. The Real Estate Council’s Knowledge Base recommends that when confronted with tax issues, a licensee should recommend, in writing, that their clients get legal or accounting advice and/or advice from the CRA.
When is GST Payable?Although licensees are not expected to be tax lawyers or accountants, they generally should be able to spot issues when it comes to GST. Certain facts may give rise to GST payable such as:
- A vacant lot (may be different if sold by an individual vs. a company)
- An operating farm property (some parts of the land may be exempt but not others)
- A commercial property
- A newly constructed property
- A property that has been used for a commercial purpose such as a nightly rental or vacation rental
- The re-sale of a new unit that has not been occupied
- Substantially renovated property
- Pre-sale assignments
- Change in use
Remember it is not the end of the inquiry if the seller has paid GST in the past or if the buyer and seller are GST registrants. Each transaction is unique. It’s recommended that the clients retain a legal advisor early in the relationship, so that they can get timely legal advice on the deal and any thorny tax issues and ensure the contract reflects the agreement they made.
Misrepresentation ClaimsIn these claims, the licensee is alleged to have misrepresented the applicability of GST. Examples include advising a client that GST did not apply to:
- Any used properties
- Properties where GST was paid in the past by the seller
- An operating vacation property, or
- A pre-sale condo.
- In those cases, the buyer objected when charged with paying the GST and did not close the deal, and a battle ensued over payment of the GST they were not expecting to pay.
These are the most common claims involving GST and can be avoided by recommending the seller get professional advice before representing that no GST is payable, having buyers get professional advice on whether GST applies, and documenting that advice. Unless you are a tax expert, do not give advice or make assumptions about taxes. It isn’t always as clear as you may think.
Silence on GSTIn some claims, there is no discussion about GST and it isn’t mentioned in the contract. Case law suggests that in these situations, the buyer will pay the GST, if it applies. However, on completion date, a battle is likely to ensue between the buyer and seller as to whether GST applies, who pays it, whether the contract price is inclusive or exclusive of the tax, and for any related damages should someone refuse to complete the deal.
These claims can be avoided by asking questions up front about the property’s occupancy and use and recommending your client obtain tax advice. The contract should indicate who pays GST, if applicable, and should be clear if it is part of the agreed price or extra. This helps bring certainty to the deal.
Purchase Price Inclusive or Exclusive of GSTIn other claims, the promotional materials, discussions, and contract indicate GST is payable. In those cases, the price is agreed at X, but it isn’t clear if X is inclusive or exclusive of GST. Each side takes the view that benefits them and claims that they cannot pay it or wanted to net a certain amount and — you guessed it — a battle ensues.
Avoid these claims by clearly indicating if the price on the contract includes GST or if the tax is on top of the price. Again, this avoids uncertainty. Use GST clauses to cover where GST is included in the price or not included in the price, confirming the seller and the buyer had the opportunity to get professional advice on GST, and dealing with credits, rebates and their assignment.