Selling Commercial Real Estate in Canada? Know the Basics on self-assessment of GST/HST collected on the sale of real property in Canada
The sale of commercial real property in Canada is treated as a taxable supply, for which the Goods and Services Tax ("GST") applies (and Harmonized Sales Tax in Ontario (“HST”)). A common issue for investors and advisors in real property transactions is determining whether GST/HST will apply to a transaction, and which party is responsible for paying and remitting it. The application of GST/HST in residential and commercial real property sales is set out in the Excise Tax Act, R.S.C., 1985, c. E-15 (the "ETA"). Generally, GST/HST applies to all transfers of real property in Canada, unless explicitly exempted under the ETA. For the purposes of this article, we will refer to GST and HST collectively as “GST”.
Under the ETA, an owner or vendor of a property is obligated to collect and remit GST. However, excluding certain circumstances involving residential complexes and special types of properties, if the purchaser is registered for GST purposes, then the purchaser will be obligated to account for GST instead. In this situation, the vendor must obtain and validate the purchaser's GST registration number and the purchaser may claim an input tax credit on its GST remittance form, if eligible.
The accounting for GST is referred to as “self-assessment”. The ETA requires self‑assessment of GST/HST payable on a transaction by the purchaser, rather than collection and remittance by the vendor. Instead of immediately remitting the GST/HST to the vendor, the buyer is required to declare GST/HST collected and GST/HST paid (if the expense is eligible for an input tax credit) on their own return.
This approach comes into play for transactions on all commercial real property unless the purchaser is not a GST/HST registrant or the real property purchased will be used in a GST/HST exempt activity, used residential property owned by a business or sales of real property by a residential rental business.
This legislation was created to ease the cash flow requirements on qualifying real property transactions due to their high dollar value. If this self‑assessment mechanism didn’t exist and a vendor sold a piece of property, the purchaser would pay GST on this sale to the vendor at the time the transaction closed. The vendor would then remit the tax owing to the Canada Revenue Agency (CRA) and the buyer would claim an input tax credit for the GST paid on their next return. This means the purchaser would unnecessarily fund a significant tax that would be returned to them when their next GST/HST return is filed - an inefficient result the self-assessment regime mitigates. For these rules to apply to a qualifying transaction, the purchaser must be a registrant, who intends to use the property primarily in the course of a commercial activity. The term “primarily” is generally considered to mean greater than 50 per cent.
In any commercial real estate deal, the vendor should ensure the signed purchase and sale document for the transaction indicates both parties are aware of the self‑assessment nature of the transaction and note the GST number of the purchaser. This will provide proof the purchaser is the responsible reporting party in the event the CRA reviews the transaction. The documents should also contain indemnification for the benefit of the vendor for unremitted GST if CRA does not agree with the self-assessment or nature of the transaction.
Reporting for the transaction should be done in the first reporting period following the transaction. In cases where a registered purchaser does not intend to use the real property primarily in commercial activity, they are required to directly remit GST to the CRA. The purchaser must submit their payment along with a separate form known as the GST 60, and this should happen no later than the month following the transaction.
For more information on commercial real estate sales matters or leasing, do not hesitate to contact us.