Canada: Ontario HST: What it Means for Landlords and Tenants of Commercial Real Properties

Last Updated: June 1 2010
Article by Catherine Bray and Xue Yan

Most Read Contributor in Canada, September 2016

On December 9, 2009, Ontario legislators approved the sales tax reform proposed by the 2009 Ontario Budget. The single harmonized sales tax ("HST"), set to begin in Ontario on July 1, 2010, will essentially harmonize the current Ontario Retail Sales Tax ("RST") with the federal Goods and Services Tax ("GST") into a single value-added sales tax-HST. The HST rate will be 13%, composed of the federal part (5%) and the provincial part (8%).

For both landlords and tenants of commercial real properties (including retail, office and industrial properties), this new HST regime has at least one of the following implications:

  • costs of running business may increase;
  • cash flow of business will be affected; and
  • timing of incurring costs of certain capital properties becomes relevant.

Accordingly, landlords may want to:

  • include in the category of "operating costs" in their net leases, the HST they have paid and of which they cannot claim Input Tax Credit ("ITC");
  • amend existing leases where necessary to ensure that they can collect and enforce the payment of HST by their tenants on the rent and the additional rent;
  • plan the timing of incurring costs of certain capital properties depending on the treatment of these costs under the current RST regime and the new HST regime; and
  • adopt proper HST filing frequency to minimize cash flow costs.

Similarly, tenants may want to:

  • negotiate a special arrangement with their landlord such that they are directly liable for certain costs in respect of the leased real property, and as a result the cost in respect of such real property can be lowered;
  • plan the timing of incurring costs of certain capital properties depending on the treatment of these expenses under the current RST regime and the new HST regime; and
  • adopt proper HST filing frequency to minimize cash flow costs.


Generally speaking, the current RST applies to almost all sales of tangible personal property and certain services relating to tangible personal property and technology. This single-stage retail sales tax is imposed on all users of such goods and services without possibility of claiming an ITC.

In contrast, the HST is a multi-stage, value-added tax designed to be paid by the ultimate consumer. In most cases, businesses will be able to recover the HST they have paid by way of an ITC. Unlike the RST, however, the HST will apply to the supplies of virtually all property including real property and services. Starting July 1, 2010, subject to the transitional rules discussed below, amounts paid in relation to a supply of real property will be subject to the HST, including:

  • rents and additional rents of commercial leases;
  • costs of capital properties such as equipment and supplies;
  • service fees such as real estate commissions and legal fees; and
  • costs of utilities (excluding water).

In general, the rules currently applying to the GST will apply to the HST, except for the restrictive ITC requirements that will be imposed on the provincial portion of the HST for financial institutions and large businesses as discussed below.

Although a supply of commercial real property by way of a lease or licence will be subject to the HST, most landlords and tenants will be able to recover the HST they have paid in respect of such commercial real property, including costs of capital properties such as equipment and supplies, payments of rents and additional rents, by claiming ITCs. In other words, in most cases, the new HST is almost neutral from both the landlord's and the tenant's perspectives, except for its impact on their respective cash flow For others, however, the impact of the HST will not be negligible. This is most notable for commercial landlords and tenants that provide HST-exempt supplies, or who are financial institutions or large businesses with taxable sales in excess of ten million dollars annually. This is either because ITCs are not available to them for the supplies they provide, or because certain restrictions are imposed on the ITCs that they can claim with respect to such supply of commercial real properties.

GST/HST-Exempt Supplies

The Excise Act (the "Act") provides that the following supplies are GST/HST exempt and therefore are not entitled to ITCs:

  • health care services;
  • educational services;
  • childcare services;
  • legal aid services;
  • certain services supplied by charities;
  • certain services supplied by public sector bodies; and
  • financial services

As a result, landlords and tenants of commercial real properties that provide these tax-exempt services will see an increase in the costs of their businesses because they will be required to pay the additional provincial portion of the HST but are ineligible to claim ITCs. A word of caution should be given that such tax exemption (and hence unavailability of ITCs) under the Act is based on the nature of the supplies that an entity provides, not the nature of the entity alone. For example, a landlord who is a public sector body1 is entitled to ITCs in respect of a license of parking space because the supply of parking space by a licence is not an exempt supply under the Act.

Some public sector bodies are able to claim for rebates that range from 78% to 93% in lieu of ITCs for a percentage of the provincial portion of the HST they have paid. These public sector bodies include:

  • municipalities,
  • universities and public colleges,
  • school boards,
  • hospitals,
  • charities, and
  • qualifying non-profit organizations ( i.e. non-profits organizations at least 40% of whose funding is directly from some level(s) of government)

Restrictive ITC Requirements

Even where ITCs are available under the Act for the supplies that a business provides, there is twist. During the first five years of the new system, financial institutions and businesses with taxable sales in excess of ten million dollars annually will be unable to claim ITCs on certain inputs used in their HST-applicable activities. These inputs include:

  • energy (except where purchased by farms or used to produce goods for sale);
  • telecommunication services (except internet access or toll-free numbers);
  • road vehicles weighing less than 3,000 kilograms (and parts and certain services) and fuel to power those vehicles; and
  • food, beverage and entertainment.

These restrictions will apply only to the provincial portion of the HST and will be temporary. After the first five years, full ITCs for these inputs will be phased in over three years. In other words, for the period from July 1, 2010 to June 30, 2015, this new HST will cause landlords and tenants of commercial real properties that are qualified as "large businesses" for the purpose of the HST, to pay an additional amount in sales tax equal to 8% of the cost of utilities (excluding water). Note, however, that such restrictive ITC requirements would generally not apply to these specified properties and services acquired by a large business for the sole purpose of being re-supplied including by way of sale, lease, license or similar arrangement. In other words, a landlord will be able to claim ITCs for the provincial portion of the HST paid respecting these specified properties and services if they directly invoice such costs to its tenants. Where a landlord includes these costs in the rent, the restrictive ITC requirements will apply.

While a landlord can always pass onto its tenants the HST it has paid on these restrictive inputs by including them in the "operating costs" in the leases to offset the additional costs, the tenants will have to pay HST on these HST amounts as part of the additional rent. Worse yet, where the real property in question is in connection with an HST-exempt supply that a tenant provides, such tenant will have to bear the additional costs without being able to pass them onto their customers. For instance, a bank tenant will, in this situation, have to bear such additional costs if the real property in question is leased for the purpose of providing financial services.

One way to minimize such negative impact on these tenants is for them to negotiate a special arrangement with their landlord such that where possible, these supplies be directly billed to them instead of having the landlord include the HST amounts they have paid thereon in "additional rent". That way, the tenants will be able to avoid pay HST again on these HST amounts paid by the landlord. Similarly, it is also beneficial for the tenants to have HST-exempt supplies directly charged to them rather than having the landlord include costs of these supplies in the "operating costs". For example, property tax, water supply and insurance premiums are all HST-exempt. If the landlord includes these costs in its operating costs, the tenant will have to pay HST on these expenses as they are considered to be additional rent, which is HST-applicable. On the other hand, if the tenant is legally liable to the suppliers directly for these payments, the tenant will not have to pay HST on these services because they are HST-exempt.

Transitional Rules

On October 14, 2009, the Government of Ontario released transitional rules that will apply to transactions that straddle the July 1, 2010 implementation date for the HST. The rules determine whether the RST or HST will apply in a certain transaction.

In commercial leasing, the HST generally applies to payments corresponding to the part of the lease interval that occurs on or after July 1, 2010.

  • There is an exception for those leases that started before July 2010 and end before July 31, 2010. In these limited cases, the HST will not apply to the property in question regardless of when the payment is made.
  • Commercial parking, as a lease of a parking space, is also subject to these transitional rules.

The following are some key dates:

  • October 14, 2009: the HST does NOT apply to consideration that becomes due, or is paid without having become due, on or before this date. Certain businesses and public service bodies may be required to self-assess the provincial component of the HST on consideration that becomes due, or is paid without having become due, after this date and before May 2010 for property and services provided on or after July 1, 2010. Such self-assessment is also required for large businesses on restricted inputs as described above. Generally speaking, self-assessment is required on those transactions where the recipient is not eligible to claim a full recovery of the HST.
  • May 1, 2010: the HST generally applies to consideration that becomes due, or is paid without having become due, on or after this date for property or services provided on or after July 1, 2010;
  • July 1, 2010: the implementation date of HST.
  • October 31, 2010: any outstanding RST becomes due on this date, and the RST regime ceases to exist on this date.

Be Prepared

For most landlords and tenants of commercial real properties, the new HST will not impact them in a major way other than cash flow issues, because they can eventually pass the additional provincial portion of the HST onto their customers. Where the cash flow costs become sufficiently large, such landlords and tenants should consider opting to be monthly filers where eligible.

With respect to existing leases that do not make reference to the HST, the landlord should make efforts to amend such leases so that they can collect applicable HST amounts from the tenant on the rent and additional rent. Although the absence of such reference does not defeat the legal obligation of the tenant to pay HST on such amounts, the landlord is also legally obligated to remit these amounts. In other words, a clear contractual obligation on the part of the tenant to pay such HST amounts will help the landlord later successfully recover the HST amount it has remitted. Where a landlord cannot however make amendments to its existing leases respecting HST, such landlord should invoice its tenants by clearly disclosing the extra amount of HST payable, and account for or remit the HST payable to the Crown. Then and only then, can such landlord initiate a legal action against its tenants to recover same.

In some cases, landlords and tenants may also be able to organize their business activities such that planned expenses of certain capital properties that are currently subject to RST be incurred after July 1, 2010, and ITCs vis-à-vis these expenditures therefore can be claimed.

The Commercial Leasing Group at BLG is able to assist you in planning and drafting in light of the impacts of this new HST regime on your businesses.


1. For the purpose of "exempted supplies" under the Act, "public sector bodies" include governments, non-profit organizations, municipalities, school authorities, hospital authorities , universities and public colleges.

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