1. The determination of G.S.T. is open to interpretation, Revenue Canada can reassess for G.S.T. after a real estate transaction has closed.

2. The only opinion in the long run that counts is that of Revenue Canada if it is in the form of a "ruling".

3. G.S.T. is a "hot potato" and should be handled carefully

vendors and purchasers generally assume that G.S.T. is not an issue unless they are warned, i.e., "no news is good news"

vendors and purchasers incorrectly assume that it is the real estate agent's obligation to warn them about G.S.T. if it is going to be a problem

G.S.T. normally becomes a problem when it involves vacant land, farm purchases, commercial property, and recreational property

G.S.T. problems can occur even on the sale of a used house

4. Vendors and purchasers need to deal with the following G.S.T. issues in most real estate transactions

Is G.S.T. owing?

Who pays the G.S.T.?

Is there an exemption for G.S.T. which applies?

Is there more than one exemption available?

Can G.S.T. be avoided if the purchaser is a G.S.T. registrant?

Does there need to be an allocation of the purchase price?

Does the Agreement of Purchase and Sale require a custom G.S.T. clause?

1. G.S.T. applies to every sale of land unless an exemption applies.

2. G.S.T. is payable on the earlier of the transfer of title or possession, except for possession of a condominium.

3. The vendor is required to collect and remit G.S.T. subject to certain exemptions.

4. The determination of whether an exemption applies depends upon the vendor's use of the property and not the purchaser's intent.

5. A certificate by a vendor that the transaction is exempt means that the vendor becomes liable on a reassessment for G.S.T. plus interest and penalty

6. If the vendor has not given a certificate, the vendor can invoice and recover G.S.T. from the purchaser after closing.

7. The responsibility to determine if G.S.T. is owing on a transaction is that of the vendor alone and not the purchaser.

8. Residential Complex Exemption (Used Residential Property)

an exemption will apply to the sale of a "residential complex" by a person selling who is not a "builder"

"residential complex" includes a house, townhouse, condominium unit, apartment building, mobile home or floating home used as a place of residence for individuals, plus up to one half hectare of contiguous land

a "builder" is a person who either builds or engages another to build a residential complex or acquires an interest in the property while it is under construction or conducts substantial renovations but does not include a person building a residence purely for his personal use provided he pays G.S.T. on the materials used

the vendor must not have claimed an input tax credit either in respect of the last acquisition of the complex or in respect of improvements to the complex

• any claim of input tax credit will result in the loss of the exemption

• if input tax credit is refunded back to Revenue Canada before the sale, then property will revert to exempt status again
  
  

  9. Farm Land Transfer to Family Members Exemption (Farming Exemption)
  
  

  there is no general exemption for the sale of farm land

  there is a limited exemption on the sale of farm land if:

• property was used by the individual himself and was farmed at any time;

• immediately before transferring the property the property has been farmed; and

• the new use of land must be personal to the individual or to the relative of the individual

  similar exemption also extends to the sale by a corporation, partnership or trust with the same criteria as above

  prevents G.S.T. becoming payable on deemed change of use of farm land to personal use or conveyance of farm land to family member
  
  
  
  
  
  
  
  

  10. Personal Use Property Exemption (vacant land)
  
  

  an exemption applies on the sale of vacant land by an individual (not by a corporation), or by a personal trust, i.e., a testamentary trust or a intervivos trust where the beneficiaries are individuals

• need to determine if property is held in trust

• if intervivos trust, need to determine who the beneficiaries are to ensure that there are no corporations, except charities as contingent beneficiaries on intervivos trust

  personal use property (vacant land) exemption will not apply if:

• it is the sale of a "residential complex"

• the sale involves real property that is immediately before the time ownership is transferred capital property used primarily in a business of the individual or a trust with a reasonable expectation of profit

  * does not include the land designated as "farm land" where municipal farm tax rebate is claimed or property is claimed as farm property for income tax purposes

  * no definition of what "immediately before" means

  it is a sale made in the course of a business

  it involves the sale of land which the vendor previously severed or sub-divided that results in more than two parcels of land

  * since this exception has retroactive application, it is important to determine the history of severance by the vendor including severance completed before G.S.T. came into effect in 1991

  * mandatory road widenings required by a severance will require a G.S.T. ruling to determine if it is included as a severance
  
  

  11. Sale by a Public Service Body Exemption
  
  

  the sale of property by a "public service body" may be exempt

  a "public service body" includes a non-profit organization, charity, municipality, school authority, hospital authority, public college, and university

  the sale of a public service body is exempt unless:

  the sale is of a "residential complex"

  the sale is to an individual except property on which is situate a structure that was used by the "public service body" as an office or in the course of commercial activities

  the sale of property used primarily in commercial activities
  
  

  12. Collection and remittance of G.S.T. (section 221(2))
  
  

  the vendor is required under the Act to collect G.S.T. from the purchaser

  but the vendor is not required to collect G.S.T. when

• the vendor is a non-resident; or

• where the purchaser is registered for G.S.T. except where the purchaser is an individual and the property is a "residential complex"

  in either situation the vendor should not collect G.S.T., since the purchaser will still be liable for tax and to self assess
  
  

  the purchaser is responsible to report the transaction, pay the G.S.T. and claim a notional input tax credit, if applicable, on its G.S.T. return or on Form 60

  if vendor has incorrectly collected G.S.T. from the purchaser where it is not payable under section 221(2), then the vendor should refund it to the purchaser who will then self assess for G.S.T.

  for the vendor to avoiding having to collect G.S.T under subsection 221(2), the vendor needs to be satisfied that section 221(2) applies and will therefore need to:

  obtain proof of purchaser's G.S.T. registration number before closing and confirm the number with Revenue Canada;

  ensure that the name of the G.S.T. registration is consistent with the name of the purchasing entity;

  obtain appropriate representations and warranties that purchaser is not an agent acquiring land for another party, i.e., in trust; and

  obtain indemnity from the purchaser regarding G.S.T. related liabilities.

  if property includes a residential complex, need to do an allocation of the purchase price and only apply section 221(2) to taxable portion of purchase price, otherwise section 221(2) will not apply and G.S.T. will be owing on the full purchase price
  
  

  13. Allocation of purchase price may be required in the Agreement of Purchase and Sale
  
  

  different portions of a single real estate transaction may be treated a separate transactions for G.S.T. purposes depending upon availability of an exemption

  where a portion of the transaction is taxable, then whether the vendor has to collect G.S.T. or not, the purchase price will need to be allocated between the exempt portion and the taxable portion of the purchase price

  allocation of the purchase price should be addressed in the Agreement of Purchase and Sale

  where a transaction is not exempt and G.S.T. is owing, then the vendor (or the purchaser if section 221(2) applies) will need to ensure that the appropriate G.S.T. returns are filed with Revenue Canada
  
  
  
  

  DISCLAIMER: This summary of Avoiding G.S.T. Pitfalls in Real Estate Transactions is distributed with the understanding that it does not constitute legal advice or establishing the solicitor/client relationship by way of any information contained herein. The contents are intended for general information purposes only and under no circumstances can be relied upon for legal decision making without first consulting

  with a lawyer and obtaining a written opinion concerning the specifics of your particular situation.

  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  

  tsc/updates/legalupdates/gst1999