When to Charge GST/HST on Real Property Sales?
A recent decision by the Tax Court of Canada highlights a difficult issue faced by sellers of commercial real estate (“real property” in GST/HST parlance): when to charge GST/HST? Unlike most other sales where vendors charge GST/HST, a special “self-assessment” rule in subsection 221(2) of the Excise Tax Act requires a GST-registered purchaser (the “recipient,” as defined) to self-assess applicable GST/HST on purchases of real property (except where an individual purchases residential real property). This is meant to relieve purchasers of cash-flow issues in situations where they can claim full input tax credits (for example, commercial property purchased for rental). But it places the risk of not collecting GST/HST squarely on the seller. Thus, commercial real property purchase agreements will commonly require the purchaser to certify that it is GST-registered and will self-assess as required, and include appropriate indemnities. But there is a complicating factor: it is not uncommon for the person who signs the agreement of purchase of sale to be the bare trustee (essentially an agent) for the “true” owner, i.e., the beneficial owner (or principal). Can the seller still rely on the GST registration of the person who signed the agreement? After all, “recipient” is defined as the person liable to pay under the agreement. It turns out that the answer is not so simple and depends on the concepts of undisclosed versus disclosed agency under agency law. Some sellers try to cover off all possibilities by including a certification that the purchaser is not acting as agent or bare trustee. If the purchaser discloses that it is acting as agent or bare trustee for someone else, the seller would be wise to ask if that person is registered.
In 2252493 Ontario Limited v. The Queen 2017 TCC 20 (General Procedure), Company A signed an agreement of purchase and sale (“APS”) for commercial real property as purchaser. It was not GST-registered. On the day of closing, Company A directed that title be transferred to Company B, which provided a statutory declaration and other proof it was GST-registered. The seller did not charge GST/HST, relying on the direction re: title and Company B’s GST registration (curiously, that registration was retroactively revoked half a year after closing). The Canada Revenue Agency later assessed the seller for failing to collect over $400,000 GST/HST. The seller’s argument is not entirely clear; however, it appears to be that Company B somehow became liable under the APS as agent/bare trustee for Companies C and D, both of whom were GST-registered.
The court noted several problems with the seller’s position. First, there was no evidence Company B assumed liability under the APS or became trustee of the property; the direction re: title was insufficient. Further, there was no contemporaneous documentation to indicate that Companies C and D were disclosed to the seller prior to closing. There was no basis on which the seller could have concluded at closing that anyone other than Company A was liable under the APS. Thus, Company A was the only “recipient” and since it was never GST-registered, the seller was required to charge tax.
With respect, the court goes too far in appearing to suggest (para. 41) the seller needed to consider Companies C and D obligated to pay for consideration at closing. If agency existed, Companies C and D simply become liable by operation of law once they were disclosed. The seller’s actual subjective belief that they were liable should not be necessary. Further, the court appears to suggest that the seller could not have relied on Company B’s GST-registration because it was not “ultimately a HST registrant at the closing date” due to the retroactive cancellation of its registration after closing. This seems unreasonable given the registration was in effect and verified at the time of closing, which is when the seller’s obligation to collect tax is triggered.
This case provides some valuable guidance to sellers of commercial real property. It is incumbent on sellers relying on the GST registration of someone other than the person who signed the APS to obtain adequate documentation to dislodge the presumption that the person signing the APS is recipient. This should include clear disclosure that the person signing the APS was acting as agent or bare trustee; a mere direction re: title may not be sufficient. Finally, the purported principal/beneficial owner must exist at the time the APS is signed. Some of this is perhaps obvious with the benefit of hindsight. But one can feel some sympathy for the seller who was likely trying its best to “close the deal” and accommodate the buyer. Hopefully the seller will be able to rely on the indemnities in the APS and hopefully those indemnities include interest and legal expenses.
When it comes to GST/HST and commercial real estate, it’s “Seller Beware.”
Simon Thang, LL.B, LL.M (Taxation) is Toronto tax lawyer practising exclusively in the areas of sales tax (GST/HST, PST), and customs and trade. He is the principal of Thang Tax Law.