Reducing the GST/HST Payable on a Possible “Builder” Assessment
A taxpayer that buys new residential real estate and then sells the property may think that the sale is tax-exempt and hence not charge GST/HST. The CRA may disagree and seek to collect the unpaid tax from the taxpayer, but will that tax be computed on a tax-inclusive or tax-extra basis? Choosing appropriate language on the standard form of legal agreement used in residential real estate sales can ensure that the more favourable tax-inclusive basis will be used. Although this precludes the possibility of shifting the burden of the extra tax assessed to the purchaser, this disadvantage is not often considered, since it is difficult for a seller to deviate from the industry-standard practice of tax-inclusive pricing.
Sales of previously occupied residential property are generally tax-exempt, but a sale of new residential property will be taxable if the seller is a “builder” as defined in ETA subsection 123(1). A builder includes a person who obtains an interest in, or directs the construction or substantial renovation of, property in the course of a business or adventure in the nature of trade. A taxpayer that sells a new residential property soon after completion often falls into the definition of “builder” (see “The Complexity of Residential Complexes,” Canadian Tax Highlights, November 2019). For a taxpayer who is an individual, this will mean that GST/HST must be remitted on the sale, even if the person is not involved in any way in the construction of the residential property but has simply purchased the home and then resold it. (This is not the case if the self-supply rules are applicable. For example, if the taxpayer occupies the property after substantial completion of construction, the taxpayer becomes liable to pay the GST/HST at that time, instead of the subsequent sale being taxable. See sections 4 and 5 of ETA schedule V, part I.)
GST/HST may be imposed on a “tax-extra” basis, so that the normal rate is applied to the sale price. On the other hand, GST/HST may be imposed on a “tax-inclusive” basis (that is, the sale price is considered to include GST/HST). The latter approach lowers the tax by as much as 2 percent of the purchase price, depending on the province. Consider a sale in Ontario with a $1 million stated sale price. GST/HST is $130,000 ($1 million × 13%) if the price is tax-extra, but only $115,044 ($1 million × 13/113) if the price is tax-included.
Where CRA adjustments are proposed on a tax-extra basis, scrutiny of the contract for a statement that the sale is tax-inclusive can reduce the assessment. In particular, all standard form agreements of purchase and sale include a space for the parties to agree on whether tax, if payable, is in addition to or included in the sale price (for example, the Ontario Real Estate Association’s standard agreement of purchase and sale). Choosing “included in” rather than “in addition to” has two effects:
- It reduces the tax remittable or payable on a possible CRA “builder” assessment. Both the CRA (per GST/HST Policy Statement P-118R, “Assessments on a Tax-Extra or Tax-Included Basis,” revised May 5, 1999) and the courts (for example, in Rive v. Newton, 2001 CanLII 27986 (ONSC); aff’d 2003 CanLII 48370 (ONCA)) will respect the parties’ intentions. This reduces the value of the consideration and determines GST/HST on a tax-inclusive basis.
- More importantly (but not the subject of this article), this language protects the buyer from a civil suit to collect the tax under ETA section 224 or direct assessment under ETA paragraph 296(1)(b), since the buyer has already paid the tax.
Even if the parties agree in the contract that GST/HST is to be in addition to the purchase price, a statutory declaration or similar written certification that the sale is exempt will (subject to certain conditions) trigger the rule in section 194 that will treat the sale as tax-inclusive, with the buyer and seller being deemed to have paid and collected it, respectively (see, for example, 2137691 Ontario Limited. v. Lucia Pessoa Park, 2018 ONSC 4218). One problem with this non-contractual route is that section 194 will not apply where the purchaser “knows or ought to know” that the sale is not exempt (see, for example, Diamond Stacking Co. Ltd. v. Zuo, 2019 BCSC 1849). As a result, purchasers should be cautious about placing uncritical reliance on certifications, particularly where the purchaser is sophisticated or there is some commercial use of the property.
Kalfa Law, Toronto
David M. Sherman
First published by the Canadian Tax Foundation in (2020) 10:2 Canadian Tax Focus.
© Kalfa Law 2020