Apr 12, 2024

GST Compliance for Real Property Sales

Photo courtesy Felix Haumann
Photo courtesy Felix Haumann
Photo courtesy Felix Haumann

There are two methods of handling GST/HST for real property sales. Each is used in particular situations related to the registration status of the purchaser and/or the residency status of the seller. We will review each in turn, discussing the most common sources of confusion, along with some tips and traps. These special rules are well understood in the commercial real estate industry, but often not well by people who deal infrequently in real estate.

Where the purchaser is not registered for GST/HST

Unless the seller is a non-resident, a purchaser of real property who is not registered for GST pays the tax in the normal manner to the seller, who then remits it to the Canada Revenue Agency ("CRA"). This is the case even if the seller is not registered. A common example is the sale of a new home or condominium unit.

Where the purchaser is registered for GST/HST

With one exception described below, a purchaser who is registered accounts for the tax directly in a return filed with the CRA. The seller is relieved from the normal obligation to collect[1]. The purchaser may claim an input tax credit to the extent that the property is to be used in commercial (i.e., taxable) activities. Where the use is to be primarily in commercial activities, the tax is accounted for, and the credit claimed, in the purchaser’s normal return for the reporting period where the transaction closed.

Most sales of commercial real estate are made to a purchaser who is registered and will be using the property exclusively in commercial activities. Common examples include the sale of an office building, shopping centre or industrial warehouse. The purchaser claims an input tax credit which fully offsets the tax liability, leaving the amount to be remitted or refunded at the bottom of the return unchanged.

It is important that the seller take steps to ensure that a purchaser who claims it is registered under a particular number is actually registered under that number. Otherwise, the seller may be exposed to assessment. This due diligence may be done by completing the GST/HST Registry Search on the CRA website shortly before closing. Instructions may be found on this CRA page.

It is also important that a registered purchaser not remit tax to the seller. Doing so does not relieve the purchaser from the obligation to account for the tax directly.

A common mistake made by registered purchasers

Th full input tax credit offset described above occurs often, which creates an illusion with some people (including some accountants and lawyers) who deal infrequently with real estate that being registered allows a person to purchase real property exempt of GST/HST.  That is not the case.  A purchase of real property is taxable unless specifically exempted under Part I of Schedule V to the Excise Tax Act ("ETA").  For example, the sale of raw land by a corporation is taxable. An individual purchaser who is registered, perhaps because he or she runs a business, will not remit GST/HST to the seller.  However, if the property is acquired for personal or exempt use, the individual will be required to account for the tax on Form GST60 and remit it to the CRA.

Important to register before an initial transaction

It is generally advantageous for a person who is acquiring real property for use primarily or exclusively in commercial activities, but who is not registered, to become registered before the transaction closes. In that case, the person does not pay GST/HST to the seller and may offset the tax liability accounted for on their first return with a full or partial input tax credit.

This is particularly important where the purchaser is not a small supplier, which often occurs where the purchaser is a newly formed corporation or partnership that is a subsidiary of, or otherwise associated with, an entity that carries on substantive commercial activities.  An unregistered small supplier may pay the tax to the seller, register later and claim the input tax credit within the four year time limit[2].  However, an entity that is not a small supplier may not claim the credit after the effective date of registration.  To help alleviate this problem, the CRA generally allows any entity involved in commercial activities to back-date a registration for up to 30 days.  However, this administrative tolerance would likely not stand up in court.

Where a seller collects GST/HST from a registered purchaser

The one case where a seller collects tax from a registered purchaser is the sale of a residential complex or of a cemetery plot or place of burial, entombment or deposit of human remains or ashes.  The most common example of is the sale of a newly constructed house to an individual who is registered because he or she operates a business,

Where the seller is a non-resident

A non-resident person who makes a taxable supply of real property does not collect GST/HST under any circumstances.  A registered purchaser accounts for the tax in the same manner as where the seller is a Canadian resident.  An unregistered purchaser remits the tax directly to the CRA on Form GST60.

Rationale for the two methods

If you’ve come this far, you may be wondering why these special and sometimes confusing rules exist.  The answer lies in the fact that real property transactions often have substantial value.  The Department of Finance does not want to have sellers collecting large amounts of tax that they might be tempted to not remit.  This is particularly true for non-residents, who would be difficult to prosecute and collect from if they had few or no remaining assets in Canada.

[1] Subsections 221(2) and 228(4) of the ETA.

[2] Subsection 171(1) of the ETA.

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