GST/HST and 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:
- 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.
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.
© Jeremy Scott 2021. All rights reserved.