HST and commercial real estate transactions – Tax

Canada: HST and commercial real estate transactions

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Harmonized sales tax (“HST“) 13% is imposed on each taxable supply (ie sale) of property or services in Ontario, including commercial real estate.

For commercial real estate, an exception1 applies where a party who makes a taxable supply of commercial real property is not required to collect HST as long as the purchaser is a HST registrant. The registered purchaser is responsible for assessing and remitting the HST on the acquisition directly to the Canada Revenue Agency. The buyer then usually claims input tax credits (“CTI“) to offset the HST payable and will not be required to remit amounts for the HST.

Common practice in the sale of commercial property is for a seller to obtain a certificate from the buyer confirming that he is acquiring the property on his own account. The purchaser will also provide guarantees regarding the status of registrant, self-assessment, payment of tax and applicable indemnities.

Categories of real estate and specific transactions

The application of the HST to real estate transactions can be complex and highly specific to the facts. There can be significantly different results depending on the nature of the property and its previous ownership and use. This complexity is particularly applicable to transactions involving new or largely renovated residential and multi-residential properties, and conversions between commercial and residential uses.

The purchase of an “apartment building”, being a multi-residential building that is not built by the vendor, is generally an “exempt supply” and therefore is not subject to HST. This applies to mixed-use property, where the part of the property containing residential units is deemed to be a residential complex for the purposes of calculating the HST and claiming ITCs. Suppliers who make exempt supplies are generally not eligible to claim ITCs.

The purchase of vacant, undeveloped land (including agricultural land) is generally treated the same as any other supply of commercial real estate. However, the acquisition of vacant land may be exempt from the HST in certain situations, such as personal-use recreational property or land acquired from charities. These exemptions are very fact-specific, as there are often narrow distinctions between farmland, used residential properties, and personal-use recreational properties.

For commercial leases, landlords must collect and remit HST on all rents (including operating expenses and property taxes) and are generally entitled to claim ITCs for all HST paid on expenses. related to their business activities.

TVH: Practical Considerations for Commercial Sellers / Buyers

Since the consequences of HST non-compliance can be significant in the form of a payment of 13% of the value of the transaction in question, it is recommended that buyers and sellers take precautions to protect themselves. of possible liability.

For a seller:

  1. ensure that the party signing the purchase contract also receives the taxable supply by becoming beneficial owner and is a HST registrant2;
  2. when the purchase contract is assigned by the purchaser, ensure that the contract is assigned to the beneficiary of the beneficial interest assignment rather than to the agent / trustee; and
  3. obtain indemnities from the purchaser for HST, penalties, fees and / or interest related to any failure of the purchaser to comply with HST registrant status, self-assessment and remittance of tax.

For a buyer:

  1. if you intend to claim ITCs, make sure the procuring entity is a HST registrant on the date of the supply (i.e. the “cut-off date”), otherwise the claim of CTI will be refused;
  2. when using an agent, assign the purchase contract to the party taking the beneficiary title rather than a registered title;
  3. incur costs on behalf of the purchasing entity so as not to jeopardize the right to ITCs;
  4. for transactions where the applicability of the HST is uncertain (eg, residential or vacant land), ensure that the purchase contract provides that the HST is to be “included” in the purchase price; and
  5. in transactions involving joint ventures, ensure compliance with the “operator” rules and the choice required under article 273 of the LTA.

Conclusion

The application of the HST to real estate transactions is highly technical and fact-specific. Expert advice is strongly recommended for all transactions involving unique features, property use changes, or multiple parties.

Footnotes

1 See paragraph 221 (2) (b) of the Excise Tax Act(the “ETA“)

2 The Canada Revenue Agency’s GST / HST Online Web Registry allows parties to verify the status of a HST registrant on a specific date.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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