Mar 19, 2024

GST/HST Complexity in the Sale of a Rural Property

The most common transaction I have dealt with in 35 years of GST/HST practice is the sale of a multi-use rural property, typically 10 to 40 acres. These transactions occur infrequently for most taxpayers, accountants and lawyers – not often enough for them to become familiar with the complex array of GST/HST rules that may come into play.

To the surprise of many purchasers, the GST/HST treatment of these sales is determined by the seller’s situation and use of the property.  The purchaser’s intended use becomes relevant if the sale is taxable, or partially taxable, and the purchaser’s right to an input tax credit must be determined.

My work usually starts with a phone call or email from an accountant or lawyer.  Over the years, I’ve developed a mental decision tree of questions to ask as I gather the relevant facts.  These questions form the headings below.

Is there a residence on the property?

If the answer is yes, and the residence is a “residential complex” (as it will be 95+% of the time), two separate properties are deemed to exist for GST/HST purposes.  They must be dealt with individually.

With rare exceptions, a residential complex portion is exempt. It generally includes a residential unit (e.g., a house) or group of units (e.g., an apartment building) that is being used, or was last used, as a place of residence by the owner or a tenant, together with the surrounding land reasonably necessary for the use and enjoyment of the residence.

The remainder of the property may be taxable or exempt depending on the rules described in the rest of this article.  Where the remainder is taxable, the sale proceeds must be allocated on some reasonable basis between it and the exempt residential complex.

The Canada Revenue Agency (CRA) will generally allow, without question, up to half a hectare (1.23 acres) of subjacent and surrounding land as being attributable to a residential complex.  If there is a minimum residential lot size in the municipality, they will also generally allow that.  Anything beyond those thresholds will be difficult to justify unless it is clearly required for access to the residence.

One must be careful to make sure that a building that looks like a residence from the outside meets the definition of a residential complex.  A property that is being used primarily for commercial purposes, such as a bed and breakfast, offices, a medical practice or for short-term rentals, may be partially a residential complex or may not be a residential complex at all.

A residence must be complete and habitable for a residential complex to exist.  A house under construction is not a residential complex, nor is one that has deteriorated or been damaged to the point where it is no longer habitable.

What type of entity is the seller?

Substantially all sales of real property, other than a residential complex, made by a for-profit corporation, partnership or commercial trust are taxable.  The only significant exception is for certain transfers of farm property to shareholders, partners or beneficiaries and certain related individuals for their personal use and enjoyment.

A corporation, partnership or commercial trust cannot have personal use of real property.  Personal use by a shareholder or partner results in a deemed taxable supply made by the corporation or partnership.

A sale of real property made by an individual or personal trust may be taxable or exempt depending on the rules described below.

A personal trust is (a) a testamentary trust (an estate) or (b) an inter-vivos trust that is a personal trust for income tax purposes, of which all the non-contingent beneficiaries are individuals and all the contingent beneficiaries, if any, are individuals, charities or public institutions.

Is a sale by an individual or personal trust made in the course of a business?

A sale of land made in the course of a business such as land development or land trading by an individual or personal trust is taxable.  However, this issue rarely comes up in practice due to the subdivision rule discussed below.

Is the property the result of a subdivision done by a seller who is an individual or personal trust?

In the early days of GST, the CRA and taxpayers found it difficult to distinguish between a sale made in the course of a land development business (taxable) and the subdivision and basic servicing of personal use real property to facilitate its sale (exempt).  To provide certainty, the legislation was amended to provide that, once a property had been subdivided into three or more parts, a sale of each part made by the person who did the subdivision is taxable.  It doesn’t matter when the subdivision occurred, even if it was before the GST was implemented.  I have always considered this rule overly arbitrary and unfair.  However, it has been in place for over 20 years.

The rule does not apply if the subdivision was the result of an expropriation or if a subdivided part is being sold to certain related persons for their personal use and enjoyment.

Is the property capital property of an individual or personal trust used primarily in a business with a reasonable expectation of profit?

This mouthful accounts for a large portion of the time spent on determining the GST/HST treatment of the sale of multi-use rural properties.  It involves two concepts that cannot easily be measured and for which the purchaser, who is often left to sort the matter out, may not be privy to the facts.  How does one determine the primary use of a multi-use property, or whether a business has a reasonable expectation of future profit?

I usually ask whether there is a business use that is substantive, i.e., one that is not a hobby and does not have a significant element of personal use and enjoyment.  A substantive business use is usually the primary use, and it generally has a reasonable expectation of profit.  The most common example is a commercial farm. Other examples might include a manufacturing operation, recreational vehicle storage, a construction business where equipment and materials are stored on the property, a medical or dental practice or the rental of the property to a corporation that carries on one of those businesses.

The most difficult situations to deal with are activities such as hobby farms, pottery shops or art studios where some sales of products are made but the primary purpose may be a personal hobby.  There may not be a reasonable expectation of profit.  The activity will generally continue whether profitable or not.

Rental of a property is a business for GST/HST purposes.  Where the renter is a registrant, a reasonable expectation of profit is not required for the sale of the property to be taxable.  The renter would have been entitled to claim an input tax credit on the purchase of the property.

The sale by an individual or personal trust of a property that has had no use or nominal use is exempt.  This is true even if the property was acquired for resale as an adventure or concern in the nature of trade.  In that event, the seller may file an election to make the sale taxable.  This election is advantageous where the seller paid GST on the acquisition of the property (and thus may now claim an input tax credit) and the purchaser is a registrant who intends to use the property exclusively in commercial activities (and thus may also claim an input tax credit).  The election is made on Form GST22, which must be filed before the sale occurs.

If the sale is taxable, what is the intended use by the purchaser?

The purchaser is entitled to an input tax credit to the extent they intend to use the property in commercial activities (taxable or zero-rated activities).  This is often obvious.  However, there are instances where judgment must be applied, especially where a purchaser has more than one potential use in mind.

Is the purchaser registered?

The seller does not collect GST/HST where the purchaser is registered at closing.  Rather the purchaser self-assesses the tax, in most cases in their regular return for the reporting period where the transaction closes.  An input tax credit, if available, may be claimed on that return. This special compliance rule is explained more fully in the article GST Compliance for Real Property Sales.

A purchaser who is not registered may register if they intend to use the property in commercial activities.

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