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Top 7 GST/HST Tips for Sales of Real Property

I am often asked: “Is there GST on the sale of Real Property?”.  The answer of course is, it depends.  The application of the Goods and Services Tax / Harmonized Sales Tax (‘GST/HST’) to real estate transactions is particularly risky for a number of reasons.  First, real estate transactions often involve big dollar amounts (in particular given the hot real estate market in Canada).  Second, real estate transactions tend to happen relatively infrequently.  Finally, and perhaps most importantly, there are unique GST/HST rules that apply to real estate transactions.  Below is my list of the top 7 GST/HST Tips for Sales of Real property:

  1. It doesn’t matter if the vendor is registered for GST/HST.

Normally, GST/HST only applies to the sale of a good or service if the vendor is registered for GST/HST purposes. This however is not the case for sales of real property. The tax status of the sale of real property is generally NOT impacted by the GST/HST registration status of the vendor. The applicability of tax to a particular real estate sale will be based on a number of other factors, regardless of the registration status of the vendor.

2. GST/HST Registered purchasers don’t pay the applicable tax to the vendor, instead they report it directly to the CRA.

Most GST/HST registered purchasers will report the applicable tax directly to the CRA (except for individuals purchasing new residential complexes). This rule is intended to provide cashflow relief for purchasers of commercial use real property. Please note however this reporting method is mandatory – not optional! Failing to apply the rule appropriately not only has negative cashflow consequences, but can lead to reassessments for failing to properly report GST/HST.

3. There are unique rules for real property sales by individuals.

In general, real property sales by an individual will be exempt from the GST/HST.  There are however exceptions to this general rule, including exceptions for property used in a business, sold in the course of a business, that was previously subdivided or is a new ‘residential complex’.  In other words, while most real property sold by individuals is likely to be exempt from the GST/HST, that will not always be the case.

4. Purchasers can protect themselves by having a vendor certify a property transaction is tax exempt.

The responsibility to determine if a transaction is subject to GST/HST rests with the vendor.  Vendors who determine after the fact that they should have collected tax, have a right to collect the additional tax from their customer.  When it comes to sales of real property – often the tax status of a transaction will turn on facts that practically speaking, will be solely within the knowledge of the vendor.   Where a purchaser reasonably relies on a vendor’s written certification that a transaction is GST/HST exempt, the vendor is precluded from collecting any applicable taxes after the fact.  It is crucial that the certification be in writing.  If its not in writing the purchaser remains at risk.  

5. The construction of a new residential rental property will trigger HST on the FMV of the property, not the cost of construction.

Apartment buildings, condominiums, houses and other similar facilities that are intended to be used for long term residential rental purposes are subject to GST/HST at the time of first use as a rental property.  Unlike other assets, the applicable tax is not based on the cost of construction, but is instead based on the fair market value of the property at the time the tax becomes due.  Care must be taken when constructing new rental properties to understand not only the fair market value of the property, but also the timing rules which trigger when the tax becomes due.

6. The Airbnb craze has a whole host of HST implications that no one seems to be considering.

Electronic platforms such as ‘Airbnb’ are making it easier for people to purchase properties for use as short-term rental properties. Generally, short term rentals are subject to GST/HST and depending upon the extent of use of the properties in these short-term rentals, the subsequent sale of the property will likely attract HST, even if the initial purchase of the property was GST/HST exempt. Remember point #1 earlier. It won’t necessarily matter if the vendor is a GST/HST registrant at the time the property is sold.

7. If you sell taxable real property – there might be a rebate available to obtain previously unrecovered GST:

Commercial properties will often be subject to GST/HST when sold.  In some instances, the owners did not use the property in a commercial activity (Ie doctors and dentists) and were therefore unable to recover any of the tax incurred with respect to the property.  Where this is the case, the vendor may be able to claim a rebate to recover a portion of the GST/HST previously paid with respect to the purchase of (and improvements to) the property.

In conclusion, there are many nuances in the GST/HST legislation that are unique to real property transactions.   I have touched on a number of them and hope that you find this information useful.  I am  happy to assist you in determining how GST/HST applies to a particular real property transaction should you require assistance.  Alternatively, you may find the CRA’s administrative guide GST/HST memorandum 19.1 regarding the applicability of GST/HST to real property useful as well.

The Disclaimer:

Please note the content above and throughout this website is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind.  I urge you to seek specific legal advice by contacting me (or your current legal counsel) regarding any legal issues you may face.  I do not warrant or guarantee the quality, accuracy or completeness of any information found on this website and will not be held liable for anything contained in this document or any use you make of it. Finally, accessing the information on my website does not create a lawyer-client relationship.

Regards,

Jeremy

© Jeremy Scott 2021. All rights reserved.

Likely Areas for Finding Missed Input Tax Credits (Free Money)!

As a follow-up to my recent post on how to properly manage a CRA audit, I am pleased to provide the following list of areas where I regularly find clients have failed to fully recover the GST/HST.  If you are still interested in reading my Audit Playbook – it can be found at that bottom of this page.  For now however, I would like to provide some concise information about areas where many taxpayers fail to properly maximize the recovery of GST/HST.

In general – most organizations involved in ‘commercial activities’ as defined in the Excise Tax Act are entitled to recover the GST/HST they have paid – by claiming input tax credits (‘ITCs’) on a GST/HST return filed by them.  Below are some of the areas where I find my clients have routinely missed claiming ITCs.  I hope you find it useful.

Area #1 Employee Reimbursements and Allowances

Generally, employers can claim ITCs for the GST/HST included in reimbursements paid to employees so long as the expenses are incurred in Canada and are incurred on the employer’s behalf for its commercial activities. 

Further, employers are considered to have paid GST/HST on reasonable allowances paid to employees so long as the following are true:

  • the allowance is used to pay GST/HST taxable (other than zero-rated) expenses and at least 90% of the expenses are incurred in Canada, or the allowance is for the use of a motor vehicle in Canada;
  • the allowance is or would be deductible for income tax purposes; and
  • the expense incurred by the employee, would have been eligible for ITC had it been incurred directly by the employer.

Area #2 Goods Imported into Canada

Purchases made outside of Canada are generally not subject to GST/HST.  Commercial imports are however subject to GST at the time of importation.  The tax is collected by the Canada Border Services Agency.  Since there is no GST/HST on the face of the invoice, some businesses fail to appreciate ITCs can be claimed for the tax paid at the border.

Area #3 ‘Recaptured’ ITCs

The ITCs available with respect to the HST paid on certain expenses in Ontario and Prince Edward Island were effectively reduced through a mechanism known as the recapture of ITCs.  The recapture of ITCs was intended to be a short term program.  The recapture program has been fully eliminated in Ontario and will be fully phased out in PEI on March 31, 2021.  It is important to ensure that the recapture process has been monitored and updated to maximize ITC claims in those two provinces.

Area #4 Automatic Payments

Recurring expenses are often setup for automatic payment.  As these expenses (such as commercial rents) are not handled through the ‘normal’ accounts payable process – if the initial ‘setup’ of the payment is not handled properly – there can be repeatedly missed ITC claims.    This problem may continue to go unnoticed as further automated payments are made.

Area #5 ‘Messy’ or ‘Complicated’ Invoicing

Although most invoices are straightforward and clearly identify the amount of GST/HST paid, this is not always the case.  Some invoices can be many pages long, and may include GST/HST on separate lines.  It is important to have accounts payable staff thoroughly review invoices to ensure they are identifying and properly coding all GST/HST found within an invoice.

Concluding Comment:

It is an unfortunate reality that many businesses are leaving money on the table by not claiming the full amount of ITCs to which they are entitled.  I have tried to provide some practical examples of where you can look within your accounts payable to find opportunities to recover additional GST/HST.  If you are not comfortable reviewing your historical records to identify recovery opportunities, don’t hesitate to reach out – I am more than happy to assist you with this exercise. 

The Disclaimer:

As a final comment the lawyer in me can’t help but to note that the content on this web site is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind.  I urge you to seek specific legal advice by contacting me (or your current legal counsel) regarding any specific legal issues.  I do not warrant or guarantee the quality, accuracy or completeness of any information found on this website. Finally, accessing the information on my website does not create a lawyer-client relationship.

Regards,

Jeremy

September 23, 2020

My First Blogpost:

My Canada Revenue Agency (‘CRA’) Audit Playbook

Welcome to my first blog post.  I can’t say I ever expected to host a ‘tax blog’ but given my recent LinkedIn experience I thought I would give it a shot.  I hope you find it useful and it leads to many more future posts.

Prior to August 2020 anything I posted to LinkedIn may have, on a good day, garnered 300 – 500 views.  In August, I worked to increase my connections and I set a goal of providing valuable content free of charge, with the hope that someone would find the information of value.  As of the time of writing this Blog Entry – over 1700 people have viewed my latest LinkedIn Post!

Building on this momentum I have decided to share more content with you.  Given that the CRA has recently announced that targeted CERB / CEWS audits will start this summer, with a broader audit mandate in the fall, I have decided to share my CRA Audit Playbook with all of you.  This is a simple guide intended to help you manage a CRA audit.  The information below is being provided in light of the pending CERB/CEWS audits, but it is equally relevant to any other audits conducted by the CRA (GST/HST, Excise Tax, Income Tax) or any other tax authority for that matter.

Here are the 6 Steps that I think are fundamental to properly managing your CRA audit.

Step #1 – Authorize a Particular Individual to Lead the Audit.

Most people don’t enjoy the thought of managing a tax audit but someone needs to be responsible to play the lead role for the audit.  Ensure you pick someone that can handle it.  Make sure they are aware they own the project and you are counting on them to do a good job.  Finally, and a point that is often missed – ensure the rest of your staff are informed that they are not authorized to speak to the auditor.  While this might seem harsh – the point is to ensure a consistent single message is delivered on behalf of your organization – you don’t need employees making inaccurate or ill-informed comments to the CRA.

Step #2 – Always Respond in a Timely Manner

Attempting to ‘slow play’ an auditor does not typically work well.  The longer an audit takes to complete, the higher the expectation that the auditor must ‘find something’ to re-assess.  Instead of slow playing the audit, aAsk auditors to put any requests in writing (including any follow-up requests for information).  Should you feel there is a deadline that can not be met, raise this issue with the auditor as early in the process as possible, request an extension of the deadline and highlight any reasons to justify the request.

Step #3 – Respond in Writing

In step #2 you asked to auditor to provide any requests in writing.  It is equally important that you provide your answers in writing as well.  This should hopefully minimize any confusion about what answers you have (or have not) provided and should ensure there is no confusion about what was meant.  Written responses can be provided to the auditor via fax, or can be uploaded to the auditor through the CRA’s online portal.

Step #4 – Ensure All Queries are Clearly Answered

Don’t assume that the auditor is well versed in how your business operates, or the standard practices of your industry.  You may need to use plain language to describe aspects of your operations so the auditor can understand your business.  Also – review all information and/or working papers you are providing to ensure that you are providing clear answers.  What may be apparent to your accounting team may not make sense to the auditor.  Be cautious in providing information that was not specifically requested.

Step #5 – Do everything within your power to resolve matters at the audit stage.

I can’t stress this point enough.  Often taxpayers grow frustrated with the audit process, and give up during the audit, assuming that they (or their accountants or lawyers) can make further representations once the auditor has completed the audit.  While there are formal processes for Objecting to Audit findings – often these proceedings are time consuming and expensive.  Put as much effort as humanly possible into resolving the issues during the audit with the auditor, its always better to resolve the matter at this level where possible.

Step #6 – Don’t be afraid to request a discussion with an Auditors Lead, or to bring in your own outside support.

Many taxpayers don’t realize that you have the ability to speak to the Auditor’s supervisor if you feel that is appropriate.  This is particularly useful in situations where you feel the auditor’s properly applying the tax legislation, or conducting themselves in an inappropriate manner.  If you still can’t get resolution with the Auditor’s supervisor – it may be time to bring in your own advisors (if you have not done so already).

Concluding Comment:

I hope you find the above to be useful.  I have tried to provide some practical advice to help with your audit process – without getting into the weeds of the various technical issues that could arise.  If you are not comfortable handling your audit or feel there are issues that may become problematic, don’t hesitate to discuss your situation with a professional as early in the process as possible.  Rarely do I hear a taxpayer complain that they engaged me too early, but all too often I hear “ I only wish I had called you sooner”.

And of course the Disclaimer:

As a final comment the lawyer in me can’t help but to note that the content on this web site is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. I urge you to seek specific legal advice by contacting me (or your current legal counsel) regarding any specific legal issues. I do not warrant or guarantee the quality, accuracy or completeness of any information found on this website. Finally, accessing the information on my website does not create a lawyer-client relationship.

Jeremy

September 1, 2020