AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:
The HST is a potential
landmine for real estate solicitors and, consequently, their clients. In Ontario, the 13% surcharge for the
Harmonized Sales Tax applies to all real estate transactions unless the
transaction is exempt. The default
position in the Excise Tax Act is that HST will be added to the cost of
a transaction and lawyers and their clients should assume that to be the case
unless they can show definitively that an exemption applies – that the
transaction is an “exempt supply” within the meaning of the Act.
On a real estate
transaction, collection of HST and remittance of the tax to the CRA is normally
the responsibility of the vendor. Where
HST is payable, CRA will deem HST to have been collected by the vendor. That’s the landmine: even if the vendor
didn’t collect HST, the vendor is deemed to have collected it and must
immediately pay the amount owing to CRA.
Therefore, the question of whether HST is “included in” the purchase
price or is “in addition to” the purchase price in a deal between vendor and
purchaser can be vitally important. In
some cases, a vendor may agree that HST is “included in” the purchase price based
on an understanding that no HST is payable.
If it turns out that HST is payable, then the vendor’s anticipated
recovery on the sale could come up 13% short.
While there are a
number of HST exemptions that can apply to the sale of farmland such as sales
by an individual to a related person and sales by a partnership, trust or
corporation to a partner, beneficiary, shareholder or related person,
situations do arise where HST is payable.
In a case recently decided by the Superior Court of Justice, a vendor
and purchasers sued and counter-sued each other over the way HST was handled in
the sale of a mixed-use property after CRA reassessed the HST amount after the
transaction closed.
The vendor agreed to
sell the purchasers a 14.7-acre property containing a house and equestrian
centre. The purchase price was $1.285
million. The parties used the standard
Ontario Real Estate Association (“OREA”) Form 100 Agreement of Purchase and
Sale and agreed that if HST was payable on the transaction, it would be
“included in” the purchase price. As
none of the parties to the transaction was an HST registrant, the vendor was
responsible to collect and remit any HST payable. The residential portion of the property was
not subject to HST, being exempt as used residential property. The commercial/agricultural portion of the
property was subject to HST. The vendor and
purchasers agreed that 30% of the property would be considered subject to HST,
meaning $45,500 would need to be remitted to CRA. The net purchase price would therefore be
$1,239,500. After closing, the vendor
remitted the HST to CRA and received a Notice of Assessment showing no balance
owing.
Before closing, the
purchasers’ lawyer had communicated to the vendor that the purchasers intended
to use the property for residential purposes.
However, the purchasers did not move into the property after closing and
instead leased the equestrian part of the property to a commercial tenant and
the residential part of the property to a residential tenant. One of the purchasers then applied to CRA to
be registered for HST and also requested input tax credits for the HST paid on
the purchase of the property. She
mistakenly asked for credits based on HST being payable for the whole purchase
price (i.e. the entire property) rather than just the non-residential portion.
CRA then looked into
the situation and reassessed the HST payable on the original sale transaction. CRA disagreed with the allocation of the
purchase price as between the exempt residential portion and the non-exempt
commercial/agricultural portion, finding that the commercial/agricultural
portion represented 78% of the sale price.
The HST payable for the taxable portion of the property was $130,466.88
rather than the $45,500 that had been remitted by the vendor to CRA.
Where a purchaser is
registered for HST, the vendor is not required to collect HST generated by the
sale of farmland. The purchaser reports
the HST payable and claims an offsetting input tax credit in the purchaser’s
first HST return after the sale, which is what the purchaser in this recent
case did. The problem from the vendor’s
point of view was that, had she known that the purchaser would be an HST
registrant (which is not what was understood at the time the transaction
closed), she would not have had to collect HST and would have kept the full
purchase price without the $45,500 deduction.
The vendor sued the purchaser to recover that amount.
The vendor later
discontinued her claim because CRA refunded the $45,500 to the vendor on the
basis that the purchaser (one of the two joint purchasers) was now registered
for HST. However, the purchasers
continued their counterclaim against the vendor arguing that they had suffered
the loss of the $45,500 price adjustment on the sale; effectively, the
purchasers contended that they had only agreed to pay the vendor $1,239,500 for
the property plus any HST payable. If no
HST was payable, then the vendor should refund them $45,500.
The Superior Court
dismissed the counterclaim, finding that the purchasers suffered no loss. The purchasers agreed to pay $1.285 million
for the property and only paid that amount.
The purchaser who was registered for HST received input tax credits for
the full amount of any HST that had been paid and suffered no financial loss.
Read the decision at: 2022 ONCS 919.