Canada: GST/HST Tips And Traps

INTRODUCTION:

When Does GST/HST Apply?

• On "taxable supplies" of goods and services made in Canada (collected by vendor)
• On importation of goods into Canada (collected by CBSA at the border points of entry)
• On self-assessment in certain situations (paid by recipient of supply)

Characterization of Supplies

• Property
  
  
  • Real property
  • Tangible personal property (goods)
  • Intangible personal property
• Services
• Taxable supplies - includes "zero-rated" supplies
• Exempt supplies - distinguish from zero-rated

GST/HST & REAL PROPERTY:

Definition of Real Property - s. 123(1)

• Any interest in real property (legal or equitable)
• "Every estate or interest in real property, whether legal or equitable" is, itself, real property
• For example, an option on, or a leasehold interest in, real property is real property
• Definition also includes mobile or floating homes and any interest therein

Liability for Tax

• Real property sales are subject to tax unless specifically exempted, because:
• the supply of real property is always made in the course of a "commercial activity" unless specifically exempted under Schedule V - s. 123(1)
• a non-registrant may have to collect tax on a supply of real property - s. 221
• even a small supplier is required to collect tax on a taxable sale of real property (unless purchaser is a registrant) - s. 166

Collection and Remittance of Tax

• S. 221(2)(b) – no tax is collected on real property sold to a registered person
• A registered purchaser of real property must self-assesses tax - s. 228(4)
• S. 221(2)(b) is mandatory – vendor must not collect tax from a registered purchaser
• A person whose only commercial activity is the taxable sale of real property need not register - s. 240(1)
• An unregistered vendor who collects tax on a real property sale reports on a monthly basis - s. 245(1)
• Unrecovered tax previously paid on acquisition or improvements to RP by an unregistered vendor can be recovered when the property is sold in a taxable supply - ss. 193, 257

Timing of Payment of Tax

• Tax on a taxable sale of real property becomes payable when ownership is transferred or when possession is transferred under the agreement of sale, whichever occurs first - s. 168(5)
• Tax on a taxable lease, license or similar arrangement becomes payable when the rents are paid or become payable under the lease, etc., whichever occurs first - ss. 168(1), 152(2)

Exempt Supplies (V-1)

• Sale of used residential real property (half hectare rule)
• Sale of leased land that forms part of a residential complex, where land sold w/o building
• Sale of "personal use" real property by individual or personal trust - can not have been subdivided into more than 2 parts (exception where part(s) acquired by a former spouse or relative for personal use)

Exempt Supplies

• Exempt leases of residential real property (same tenant for at least one month or rent does not exceed $20/day)
• Transfer of farmland to a relative for personal use or change in use of farmland to personal use
• Exempt supplies by public sector bodies (but be careful – many supplies of RP by PSBs are taxable)

Liability for Misrepresenting Exempt Status

• The use to which real property is put before being supplied can determine whether the supply is taxable – generally, the purchaser is unable to ascertain use
  
  
  • pursuant to s. 194, where the purchaser obtains written confirmation from the supplier that a supply of real property is exempt as used residential real property, the purchaser is relieved of any obligation to pay GST if it is subsequently determined that the exemption did not apply and the supply was taxable – the vendor is then deemed to have collected GST on the supply
  • s. 194 does not protect the purchaser where the purchaser knew, or ought to have known, that the supply was not exempt

Combined Supplies - s. 136

• Specific rules require that combined supplies of real property are accounted for separately
  
  
  • s. 136 contains rules specific to real property that require that taxable (e.g., commercial) and exempt (e.g., used residential) supplies of real property be accounted for separately
  • however, s. 138 could deem personal property that is incidental to real property to form part of the real property where the two are supplied together for a single consideration
• E.g., chattels (fridge, stove) supplied with a new house or condo and included in the purchase price
• But be careful...

Incidental Supplies - s. 138

• CRA policy:
• Is the supplier's primary objective to provide a particular property or service, or several properties or services together?
• Is the value of consideration charged for a particular property or service provided together with other properties or services the same as, or only marginally different from, what the value of the consideration for the particular property or service would be if it were provided alone?
• 9056-2059 Quebec Inc. v. The Queen, [2011] GSTC 143, 2011 FCA 296
  
  
  • "Secondary" does not equal "incidental"
  • Minor, non-essential
  • Small value in relation to the principal supply (< 10%?)
  • Not intended to apply to transactions where application would have significant tax revenue implications

Definitions Key - Builder

• The definition of "builder" is important in determining:
  
  
  • whether the exempting provisions apply to the supply of a residential complex (tax status depends on whether supplier is a builder – e.g., sale of a previously unoccupied residential complex is exempt if sold by someone other than the builder)
  • whether a rebate is available (rebates for new housing and new residential property are generally only available where the home is supplied by a builder)
  • if tax is to be self-assessed on a newly constructed or substantially renovated residential complex (conversion to use)

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.