HST/GST and cottage properties – it’s a minefield!

The basic rule for HST/GST and Real Property is that everything is taxable, and the Vendor must collect for the government, unless there is a specific exemption. There is an exemption for “used residential” property, which will apply for most cottages. A purchaser that is registered for GST/HST can “self-assess” on a purchase of a property that they intend to use for business purposes (as a rental), and claim an offsetting input tax credit, thus paying no tax. This is the only exception to the requirement of the Vendor to collect the HST/GST.

Often purchasers, vendors, and even sometimes lawyers, will mistakenly assume that a property is “used residential” or otherwise exempt from HST/GST under Schedule V of the Excise Tax Act. Consider the following scenarios: the property was “used residential”, but there was a change of use to a short-term rental; the property was subdivided twice or more prior to sale; or the lot is larger than CRA considers “necessary.” Generally, CRA allows the cottage and the 1 acre/half hectare immediately surrounding, exceptions may be made if local zoning requires a larger minimum lot size). In any of these scenarios HST/GST is payable and should be collected by the Vendor and remitted.

Did you know that if CRA reassesses a transaction, which can be many years after closing, and demands HST/GST, penalties and interest, it must be paid by the Vendor? The Vendor can then sue the Purchaser for the HST/GST even after the normal limitation period has, and even if it was the Vendor’s error that HST/GST was not collected and remitted. Section 224 of the Excise Tax Act permits the Vendor to sue the purchaser for the HST/GST. In some cases, the Vendor has successfully sued the purchasers many years after closing, and often after the time limit has expired for the purchaser to claim input tax credits on a commercial transaction.

It is important that purchasers and their legal counsel ensure that they get the right indemnities from the Vendor on closing regarding the representations about use of the property, and that these representations survive the closing date so that the purchaser has a defence to such an action.

If your offer to purchase is silent on HST/GST then, under current legislation, HST/GST is deemed not to have been included in the purchase price and the purchaser will be required to pay HST/GST in addition to the purchase price.

How might this affect you?

If you are the person selling the cottage and CRA reassesses the transaction and says it was subject to HST, CRA can collect the HST/GST and interest and penalties from you as it is the Vendor’s duty to collect and remit the HST/GST. You can sue to recover the HST/GST from the purchaser, but this will require a lawsuit and caselaw suggests you may not be able to recover the interest or penalties.

What should you do?

If you are selling commercial property and relying on the Purchaser self-assessing, your lawyer should search the purchaser’s HST/GST number to confirm the number matches the actual purchaser. Never agree to allow another party to take title without a new GST indemnification.

If you are purchasing a cottage, the safest way to protect yourself would be to include in the agreement a provision confirming that the vendor acknowledges that HST/GST has been included in the purchase price.

If you are the vendor, you need to have your lawyer and accountant advise you on whether HST/GST is owing: (1) never assume that the property is exempt from HST/GST; and (2) always consult a lawyer knowledgeable in taxation and real property law, who can advise on whether HST/GST is payable and how that should be properly dealt with.

For more information on HST/GST exemptions and how they may apply to your specific circumstances you can contact Mona Brown at PKF Lawyers.

The information contained is provided for informational purposes only. Mona and Stéphane at PKF Lawyers would be pleased to provide additional advice for your specific circumstances.