Application of GST in Commercial and Residential Real Estate Transactions

Articles

By Karen Ngan and Jimmy Zhang

Did you know that the sale of commercial real property is treated as a taxable supply, for which the Goods and Services Tax (“GST”) applies? A common pitfall for investors and advisors in real property transactions is determining whether GST will apply to a transaction, and which party is responsible for paying it. The application of GST in residential and commercial real property sales is set out in Canada’s Excise Tax Act, R.S.C., 1985, c. E-15 (the “ETA”). Generally, GST applies to all transfers of real property, unless explicitly exempted.

Under the ETA, an owner or vendor of a property is obligated to collect and remit GST. However, excluding certain circumstances involving residential complexes and special types of properties, if the purchaser is registered for GST purposes, then the purchaser will be obligated to account for GST instead. In this situation, the vendor should obtain and validate the purchaser’s GST registration number and the purchaser may claim an input tax credit on its GST remittance form, if eligible.

Commercial transfers of real property will be subject to GST. Moreover, purchasers of new residential property, including pre-sales, will be required to pay GST. Broadly, there are several exemptions under the ETA for real property transactions:

  1. Property that has been previously occupied and used for residential purposes will be exempt from GST. However, if the property was substantially renovated prior to being sold, then GST may apply to the sale of that property.
  2. Residential lands, such as a residential land leases or trailer parks.
  3. Land or residences acquired for personal use, unless the land is subdivided into more than two parcels.
  4. Bare land sold by non-profit organizations or an individual or trust will usually be GST-exempt. However, land sold by a corporation or partnership will be subject to GST.

Note that GST is also payable on rental payments for commercial properties, unless specifically exempted, such as a lease made by a public service body. Businesses paying a commercial lease will usually be entitled to claim an input tax credit on that GST, but landlords of residential leases will not be able to claim input tax credits on their businesses.

All stakeholders in commercial real estate should be well advised as to their obligations, liabilities and exemptions. They should make clear in their contracts whose responsibilities it is to pay, collect and remit such taxes.

Sources: Commercial Real Property – Sales and Rentals, Canada Revenue Agency GST/HST memorandum 19.4.1.; Real Property and the GST/HST, Canada Revenue Agency GST/HST memorandum 19.1; Sales of Vacant Land by Individuals, Canada Revenue Agency GST/HST Info Sheet GI-003.