The HST is a potential landmine for real estate solicitors and, consequently, their clients. In Ontario, the 13% surcharge for the Harmonized Sales Tax applies to all real estate transactions unless the transaction is exempt. The default position in the Excise Tax Act is that HST will be added to the cost of a transaction and lawyers and their clients should assume that to be the case unless they can show definitively that an exemption applies – that the transaction is an “exempt supply” within the meaning of the Act.
On a real estate transaction, collection of HST and remittance of the tax to the CRA is normally the responsibility of the vendor. Where HST is payable, CRA will deem HST to have been collected by the vendor. That’s the landmine: even if the vendor didn’t collect HST, the vendor is deemed to have collected it and must immediately pay the amount owing to CRA. Therefore, the question of whether HST is “included in” the purchase price or is “in addition to” the purchase price in a deal between vendor and purchaser can be vitally important. In some cases, a vendor may agree that HST is “included in” the purchase price based on an understanding that no HST is payable. If it turns out that HST is payable, then the vendor’s anticipated recovery on the sale could come up 13% short.
While there are a number of HST exemptions that can apply to the sale of farmland such as sales by an individual to a related person and sales by a partnership, trust or corporation to a partner, beneficiary, shareholder or related person, situations do arise where HST is payable. In a case recently decided by the Superior Court of Justice, a vendor and purchasers sued and counter-sued each other over the way HST was handled in the sale of a mixed-use property after CRA reassessed the HST amount after the transaction closed.
The vendor agreed to sell the purchasers a 14.7-acre property containing a house and equestrian centre. The purchase price was $1.285 million. The parties used the standard Ontario Real Estate Association (“OREA”) Form 100 Agreement of Purchase and Sale and agreed that if HST was payable on the transaction, it would be “included in” the purchase price. As none of the parties to the transaction was an HST registrant, the vendor was responsible to collect and remit any HST payable. The residential portion of the property was not subject to HST, being exempt as used residential property. The commercial/agricultural portion of the property was subject to HST. The vendor and purchasers agreed that 30% of the property would be considered subject to HST, meaning $45,500 would need to be remitted to CRA. The net purchase price would therefore be $1,239,500. After closing, the vendor remitted the HST to CRA and received a Notice of Assessment showing no balance owing.
Before closing, the purchasers’ lawyer had communicated to the vendor that the purchasers intended to use the property for residential purposes. However, the purchasers did not move into the property after closing and instead leased the equestrian part of the property to a commercial tenant and the residential part of the property to a residential tenant. One of the purchasers then applied to CRA to be registered for HST and also requested input tax credits for the HST paid on the purchase of the property. She mistakenly asked for credits based on HST being payable for the whole purchase price (i.e. the entire property) rather than just the non-residential portion.
CRA then looked into the situation and reassessed the HST payable on the original sale transaction. CRA disagreed with the allocation of the purchase price as between the exempt residential portion and the non-exempt commercial/agricultural portion, finding that the commercial/agricultural portion represented 78% of the sale price. The HST payable for the taxable portion of the property was $130,466.88 rather than the $45,500 that had been remitted by the vendor to CRA.
Where a purchaser is registered for HST, the vendor is not required to collect HST generated by the sale of farmland. The purchaser reports the HST payable and claims an offsetting input tax credit in the purchaser’s first HST return after the sale, which is what the purchaser in this recent case did. The problem from the vendor’s point of view was that, had she known that the purchaser would be an HST registrant (which is not what was understood at the time the transaction closed), she would not have had to collect HST and would have kept the full purchase price without the $45,500 deduction. The vendor sued the purchaser to recover that amount.
The vendor later discontinued her claim because CRA refunded the $45,500 to the vendor on the basis that the purchaser (one of the two joint purchasers) was now registered for HST. However, the purchasers continued their counterclaim against the vendor arguing that they had suffered the loss of the $45,500 price adjustment on the sale; effectively, the purchasers contended that they had only agreed to pay the vendor $1,239,500 for the property plus any HST payable. If no HST was payable, then the vendor should refund them $45,500.
The Superior Court dismissed the counterclaim, finding that the purchasers suffered no loss. The purchasers agreed to pay $1.285 million for the property and only paid that amount. The purchaser who was registered for HST received input tax credits for the full amount of any HST that had been paid and suffered no financial loss.
Read the decision at: 2022 ONCS 919.
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