Collecting GST/HST on a sale of commercial real property
On a sale of commercial real property, GST/HST usually applies, but the vendor normally does not (and should not) collect the tax from the purchaser, if the purchaser is GST-registered. Instead, the purchaser “self-assesses” the tax (and in most cases claims an offsetting input tax credit so that the tax actually costs nothing).
However, vendors of real estate need to be very careful when relying on this rule.
In the recent case of 2252493 Ontario Ltd. v. The Queen, the vendor (a numbered company) sold a commercial property in Ontario for $3.2 million plus HST. The Excise Tax Act (which contains the GST/HST legislation) provides that a vendor does not collect tax on closing from a GST-registered purchaser. However, the reference is actually to the “recipient”, not the “purchaser”. The term “recipient” is defined as the person who is contractually liable to pay the purchase price.
In this case, the Agreement of Purchase and Sale was signed by Mayling Holding Inc., as purchaser. On closing, Mayling requested that title be directed to 840 Yonge Street Holdings Inc. (“840”). Since 840 was GST-registered, the vendor thought it did not need to collect tax on the purchase, and accepted $3.2 million on closing as satisfying the purchase price.
Mayling was not registered, however. The CRA audited the vendor and assessed it for not collecting and remitting HST of $416,000 on the sale.
The vendor appealed to the Tax Court of Canada. It argued that 840 (whose registration had been retroactively cancelled) was a bare trustee for two other entities that were GST-registered, and which had self-assessed the tax on the purchase.
The Tax Court dismissed the vendor’s appeal. The legislation relieves a vendor from collecting GST/HST on a sale only if the “recipient” is registered, and the “recipient” could not possibly be either 840 or the other entities. Only Mayling was liable under the Agreement of Purchase and Sale, and there was no evidence that, at the time it signed the Agreement, it was doing so in trust for 840 or anyone else. The fact the other entities had self-assessed the tax did not matter.
One must be very careful about these rules!