Real Property - Too Good to be True?

Real property is any property attached directly to land, as well as the land itself. This can include not only buildings and other structures, but also rights and interests.

Remember the old adage “if something appears too good to be true it probably is”? We see time and again, people and businesses find themselves in a difficult spot having bought or sold real property. It usually followed by the comment of ‘they were told’ GST did not apply.

More often than not, these large transactions tend to move quickly. Reading the fine print or getting proper advice isn’t always top of mind. Being under pressure to make the deal leads to short cuts, only to find out they simply took the tax obligation away from the seller or the seller having to come back and ask for tax they forgot to collect. This can create difficult circumstances at the best of times, let alone receiving a large assessment from the Canadian Revenue Agency (CRA).

Two general rules to always be aware of: First – real property is always taxable when sold until an exemption can be supported. Second – the seller has the obligation to collect the GST / HST unless the legislation puts the obligation in the hands of the purchaser in a taxable sale. It may also be the purchaser bought it exempt but, through a change in use, has triggered a self-assessment.

Exemptions for real property tend to be tied to sales of used residential property, certain sales of personal-use land by individuals or personal trusts and certain farmlands sold to related individuals to use for their personal use or enjoyment. There can also be exempt (or taxable) sales being made by public service bodies and charities.

In reality, this is a pretty small list of exempt options to choose from. The seller has an obligation to know and understand the tax status of what they are selling. The purchaser needs to know what they are buying and if they take on the tax obligation from the seller. This tends to be where an error is likely to occur with real property. Just because tax was not charged does not mean it is correct.

Purchaser’s Obligation to Self-Report

Subsection 221(2) of the Excise Tax Act is not well understood. It is the section that leads to the seller not having to collect the GST / HST. It does not mean the sale is not taxable. The section is only telling us under certain conditions the seller does not have a tax collection obligation.

It does not actually say or imply the purchaser has to self-remit. This is where a mistake can continue its journey by the parties not knowing another provision picks up that requirement. In isolation, this section could lead you to believe no tax is payable on the sale.

Once the purchaser holds the obligation, subsection 228(4) requires the self-reporting of the GST / HST collectible. The self-remitting may come sooner than you think. The taxable real property must be intended to be used 50% or more in taxable activities to be reported on their GST / HST return in the reporting period it took place. Otherwise, it is reported by the end of the month following the purchase using form GST60. How often is this overlooked?

The tax paid or self-assessed by the purchaser becomes the tax that is recoverable in the form of an Input tax credit (ITC) or a rebate. It can be a cost to be recovered down the road or never recoverable at all.

Exceptions to Exceptions

The reason the purchaser be required to self-report the GST / HST was really to avoid the cash flow exchange of GST / HST on large value real property. If the purchaser can claim a full input tax credit, the transaction is effectively papered through the GST / HST return but the tax doesn’t have to flow between the hands of the seller, the purchaser and the CRA. It is an in-and-out on the same return for a net sum of zero in that case. How nice is that? This is usually where the misunderstanding of no tax applies because this step is quite often missed in its entirety as well.

The two most common exceptions to the purchaser’s self-assessment rule are non-residents selling real property and GST / HST registered individuals who are buying new residential property.

• Non-resident sellers were considered too high a risk to leave the GST / HST collected in their possession. Any non-resident making a taxable sale of real property would normally be relieved from collecting the GST / HST. The obligation to self-remit the GST / HST would fall to the purchaser – whether they are registered or not.
• Registered individuals buying a taxable residential property (or a cemetery plot or similar burial or resting place) cannot under any circumstances take the obligation from the seller to self-remit GST / HST. This falls back to the seller, whether a non-resident or not. With the non-resident likely being in a business, they would be less of a risk to not reporting the tax than an individual who likely never deals with the GST who simply want to buy a house to live in.

Note that a registered individual buying taxable real property that is not a residential complex, cemetery plot or similar burial ground will have the obligation to self-remit the GST / HST. Bare land to build a new house could be such an example. It is not yet a residential property.

The back and forth within this set of rules on real property can be mind boggling sometimes. What you see being mapped out is the legislation is difficult. Not knowing what circumstances you find yourself in can be a costly mistake. And if something appears too good to be true it probably is.