Self-assessing in Residential Pre-construction
Residential pre-construction purchases are the acquisition of new residential properties from a developer (a builder). These properties can range from condominium apartment units, common elements condominium townhouse units, freehold townhouse units, and detached or semi-detached homes. It is usually simple to identify the supply of a newly constructed property, although, in irregular market circumstances, where custom home building becomes increasingly profitable, it may be harder to identify and separate a resale and the supply of new property. As a rule of thumb, reconstructing the foundations of a home would qualify the sale as the provision of a new home. However, a general renovation project to an existing home may have to be examined closely to answer that question.
The acquisition of newly constructed properties in Ontario is subject to the remittance of HST exigible on that taxable sale. The HST amounts to a very significant amount of money, and subject to various incentives such as the GST/HST New Residential Rental Property Rebate. The collection procedure, as well as the onus to remit, is becoming an increasingly interesting process. Members of the public are generally not familiar with the matter, and surprisingly even legal counsels are sometimes unfamiliar with the nuances of the field.
Generally speaking, the payment of HST applies in the participating provinces at differing rates, as follows: 13% in Ontario, 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
When the purchaser of a newly constructed property is an individual who is not an HST registrant, then the obligation to collect and remit HST on that sale rests with the seller. Developpers will usually protect themselves in the Agreement of Purchase and Sale and introduce a clause guaranteeing the purchaser’s obligation to pay the HST on closing. Section 221(1) of the Excise Tax Act places the onus of collection of HST on the supplier (the seller) from the recipient (the buyer). As we will be dealing in this article with Section 221 of the Excise Tax Act, we will bring an excerpt from it as follows:
DIVISION V
Collection and Remittance of Division II Tax
SUBDIVISION A
Collection
Collection of tax
221 (1) Every person who makes a taxable supply shall, as agent of Her Majesty in right of Canada, collect the tax under Division II payable by the recipient in respect of the supply.
Exception
(2) A supplier (other than a prescribed supplier) who makes a taxable supply of real property by way of sale is not required to collect tax under Division II payable by the recipient in respect of the supply where
(a) the supplier is a non-resident person or is resident in Canada by reason only of subsection 132(2);
(b) the recipient is registered under Subdivision d and, in the case of a recipient who is an individual, the property is neither a residential complex nor supplied as a cemetery plot or place of burial, entombment or deposit of human remains or ashes;
(b.1) the supplier and the recipient have made an election under section 2 of Part I of Schedule V in respect of the supply; or
(c) the recipient is a prescribed recipient.
Idem
(3) Where a carrier who makes a particular taxable supply of a service of transporting tangible personal property
(a) is provided with a declaration referred to in section 7 of Part VII of Schedule VI by the shipper, and
(b) at or before the time the tax in respect of the particular supply becomes payable the carrier did not know and could not reasonably be expected to know that
(i) the property was not being shipped for export,
(ii) the transportation by the carrier was not part of a continuous outbound freight movement in respect of the property, and
(iii) there was or was to be any diversion of the property to a final destination in Canada,
the carrier is not required to collect tax in respect of the particular supply or any supply that is incidental to the particular supply.
(3.1) [Repealed, 2001, c. 15, s. 9]
Definitions
(4) In subsection (3), continuous outbound freight movement and shipper have the same meanings as in Part VII of Schedule VI.
Most Agreements of Purchase and Sale of a newly constructed property will include a clause pertaining to the liability to collect and remit HST similar to the following example:
- Purchaser and Vendor agree that the Harmonized Sales Tax (the “HST”) applies to this transaction and the Purchase Price includes the applicable HST, net in certain cases of the new housing rebate. The Purchaser shall, at his/her own cost and expense, be responsible for payment of all taxes including, without limitation, the tax exigible pursuant to the Harmonized Sales Tax and any transaction tax, value added tax, sales, use, or transfer tax and any increase in the rate of such taxes imposed by any of the Government of Canada, Government of Ontario or City of _____________, on all amounts payable under this Agreement of Purchase and Sale, including, without limitation, for extras, changes and upgrades. The Purchaser shall assign, in form required by the Vendor or the Government to the Vendor, all of its right, title and interest in the Rebate to which the Purchaser is entitled. In connection with such assignment, the Purchaser shall deliver to the Vendor, upon request by the Vendor, on or after the Occupancy Date, such application, documents and affidavits as may be required by the Vendor or the Government to establish the Purchaser’s entitlement to the Rebate. If the Purchaser is not entitled to the Rebate for any reason whatsoever or if the Rebate is reduced or withdrawn by the Government and not replaced with an amount equivalent to the amount of the Rebate to which the Purchaser is entitled by the Government or if the Rebate is not or cannot be assigned to the Vendor then, the Purchaser shall forthwith upon demand by the Vendor pay to the Vendor an amount equal to the Rebate or the amount so reduced or withdrawn and until so paid, the amount of the Rebate shall form a charge against the Unit which charge shall be recoverable by the Vendor in the same manner as a mortgage in default. The Purchaser acknowledges and agrees that he/she shall not be entitled to any refund, credit or abatement in any manner whatsoever should the provincial portion of the HST not apply to this transaction for any reason whatsoever. The provisions of this paragraph supersede any provisions to the contrary contained in the Agreement of Purchase and Sale.
As you can see, developers will usually cover the matter of HST collection and remittance in their Agreements of Purchase and Sale. However, the Excise Tax Act does not permit the alteration of liability set out there and as such, text contained in the Agreement can be overruled by the Excise Tax Act.
We will review the exceptions to the general rule in Section 221 (1) as those can bring about some interesting opportunities. The purchase price presented in the Agreement of Purchase and Sale will usually include the HST component on the net consideration received by the vendor. It is the responsibility of the buyer and his counsel to check the agreement and confirm that indeed the stated price is HST inclusive, or the buyer may be unpleasantly surprised when the time comes to close the purchase.
An increasing number of buyers are setting up holding companies to invest in real estate properties. Some business oriented members of public are using their operating companies to redirect unused profits towards other investments. These companies (and sometimes individuals) are registered for GST/HST purposes (considered HST Registrants). Their primary business is not the acquisition of properties for the use or subsequent supply (resale) in their regular course of commercial activity. In these common cases, we turn to section 221(2) of the Excise Tax Act to examine the applicability of the general rule regarding the seller’s liability to collect and remit HST from the buyer. Section 221(2) lists situations in which the recipient, and not the supplier of taxable supply is required to assess and remit the HST exigible.
Specifically, subsection 221(2)(b) provides in part, that a supplier of taxable supply of real estate property (for consideration) is not required to collect and remit the tax payable by the recipient where the recipient is registered for GST/HST and the supply is not of a residential complex made to an individual. In these circumstances, the recipient is required to assess and remit the tax payable directly to the Canada Revenue Agency (CRA).
Subsection 228(4) deals with tax payable on the acquisition of real estate property from an individual who is not required to collect tax pursuant to subsection 221(2). Where a registrant purchased the taxable property for use or supply otherwise than primarily (more than 50%) in the course of its commercial activity, the registrant is required to assess, report and ultimately remit the tax exigible on the acquisition and pay it directly to the Canada Revenue Agency (CRA). There no elections available under the act to remove this liability and thus it is not a privilege, but an obligation.
228(4) Self-assessment on acquisition of real property
(4) Where tax under Division II is payable by a person in respect of a supply of real property and the supplier is not required to collect the tax and is not deemed to have collected the tax,
(a) where the person is a registrant and acquired the property for use or supply primarily in the course of commercial activities of the person, the person shall, on or before the day on or before which the person’s return for the reporting period in which the tax became payable is required to be filed, pay the tax to the Receiver General and report the tax in that return; and
(b) in any other case, the person shall, on or before the last day of the month following the calendar month in which the tax became payable, pay the tax to the Receiver General and file with the Minister in prescribed manner a return in respect of the tax in prescribed form containing prescribed information.
The advantages of self-assessment and remittance of HST on such a significant expense subject to HST is clear as it allows the registrant/recipient to account for HST collected in its course of business.
It is the right and obligation of an HST registrant purchasing new property to self-assess and self-remit the HST exigible in these transactions. The vendor will usually extend this option only after a formal request is made and not of its own volition.