HST Issues in Commercial Real Estate
HST Issues in Commercial Real Estate
Author:
Firoozeh Rose Bahrami
Partner, Realty Care Law
e: rose.bahrami@realtycarelaw.com
In purchase and sale of real estate, knowing whether HST is payable (or collectible) is a very important part of the transaction. This is decided by the type and use of the property being sold. The general rule is that HST is applicable to any sale of property unless it qualifies for one of two exemptions: used residential property or personal use property. This is decided by the seller’s use of the property, and not how the purchaser intends to use the property.
Commercial Real Estate
When buying commercial real estate, HST is applicable at 13% of the purchase price. Special rules apply when the purchaser of commercial property is an HST registrant. This will allow the purchaser to not remit HST to the seller, but rather directly to Revenue Canada. This obligation to pay will be offset by the input tax credit which can be claimed by the purchaser. When purchasing or selling commercial real property, we recommend that you speak with your accountant with respect to your HST options.
HST applies to the sale of most commercial properties in Ontario. This includes:
• Office Buildings
• Retail Spaces
• Industrial Properties
• Vacant Commercial Land
• Mixed-Use Properties: Properties used for both commercial and residential purposes may have different tax treatments for each portion. It is crucial to allocate the purchase price accordingly and apply the appropriate tax rules to each part.
• Rebates and Adjustments: There may be rebates available for certain types of transactions or adjustments if the property is used for exempt activities. Consulting with a tax professional can help identify these opportunities.
Vacant land
If the seller used the property for personal use, no HST will be payable. Personal use property includes property owned by an individual that is not used primarily in a business or sold in the course of a business. If a property has been subdivided or severed, the sale by the individual of one or more of those parts will generally be subject to HST, unless the purchaser is related to the seller and buying the property is for personal use. A sale by a corporation is almost always taxable.
Farmland
Generally, any sale of farmland that has been used by the seller in a farming business is subject to HST. An exemption may apply if the farmer sells the farmland to a relative for their personal use. There can also be an exemption for a portion of the farmland that is a home and yard that has been used for personal use. When purchasing or selling farmland, we recommend that you speak with your accountant with respect to your HST options.
Who Pays the HST?
The responsibility for paying HST typically falls on the buyer. However, the vendor is required to collect and remit the tax unless the buyer is registered for HST. If the buyer is HST-registered, they may be required to self-assess and remit the tax directly to the CRA. This means that the buyer calculates the amount of HST owing and reports it on their HST return. A registered buyer can often claim an input tax credit for the HST paid or self-assessed, effectively recovering the tax paid. However, this is contingent on the property being used primarily in the course of commercial activities.
Election for No HST Payment
On an asset purchase of a Business, HST is due payable on the business being sold. However, if both the Vendor (supplier) and the Purchaser (recipient) have a valid HST Number and are both HST registrants, the parties would be eligible to jointly elect so that the HST does not apply to the supply of the business.
An HST Election can be jointly made by the Vender and the Purchaser if:
• The Vendor sells the business or part of it that was established by the Vendor or was established by another person and acquired by the Vendor.
• Under the Agreement of Purchase and Sale, the Purchaser acquires ownership, possession, or use of all, or substantially all (at least 90% or more), of the property necessary for the Purchaser to be capable of carrying on the business or part as a business.
• Both the vendor and the purchaser are HST registrants with a valid HST number.
The Agreement of Purchase and Sale should indicate whether HST is included in or in addition to the purchase price. You should also get your lawyer’s or accountant’s advice regarding whether HST is payable if you are uncertain.
