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Self-assessment of GST/HST collected on the sale of real property

The Excise Tax Act (ETA) outlines specific rules regarding the reporting of GST/HST collected on sales of real property used in commercial activity. The ETA requires self-assessment of GST/HST payable on a transaction by the purchaser, rather than collection and remittance by the vendor. Instead of immediately remitting the GST/HST to the vendor, the buyer is required to declare GST/HST collected and GST/HST paid (if the expense is eligible for an input tax credit) on their own return.

The Excise Tax Act (ETA) outlines specific rules regarding the reporting of GST/HST collected on sales of real property used in commercial activity. The ETA requires self-assessment of GST/HST payable on a transaction by the purchaser, rather than collection and remittance by the vendor. Instead of immediately remitting the GST/HST to the vendor, the buyer is required to declare GST/HST collected and GST/HST paid (if the expense is eligible for an input tax credit) on their own return.

This approach comes into play for transactions on all commercial real property unless the purchaser is not a GST/HST registrant or the real property purchased will be used in a GST/HST exempt activity such as a doctor's office used in a medical practice, used residential property owned by a business or sales of real property by a residential rental business.

Cash flow efficiency

This legislation was created to ease the cash flow requirements on qualifying real property transactions due to their high dollar value. If this self-assessment mechanism didn't exist and a vendor sold a piece of property for $1 million, the purchaser would pay $50,000 GST/HST on this sale to the vendor at the time the transaction closed. The vendor would then remit the tax owing to the Canada Revenue Agency (CRA) and the buyer would claim an input tax credit for the GST/HST paid on their next return. This means the purchaser would unnecessarily fund ?–? often through expensive financing ?–? significant tax that would be returned to them when their next GST/HST return is filed.

Refund delay

In the absence of this legislation, there is often a lag between the transaction date and the date when the purchaser can claim the ITC, which means a significant amount of time might pass before the purchaser receives a refund of the tax paid. For example, an annual GST/HST filer purchasing land in the first month of the fiscal year would not file their annual GST/HST return until the following year. As a result, they would not see the associated refund until at least 12 months later.

Qualifications

For these rules to apply to a qualifying transaction, the purchaser must be a registrant, who intends to use the property primarily in the course of a commercial activity. The term “primarily” is generally considered to mean greater than 50 per cent.

The vendor's responsibility

When a real property transaction takes place, the purchaser reports the transaction on their GST/HST return, so people will often interpret this to mean the purchaser is responsible for establishing the taxability of the transaction. However, it is still the vendor's responsibility to determine whether there should be tax charged on the transaction. They must also inform the purchaser and confirm they are a GST/HST registrant.

The protective clause

As a protective measure, the vendor should ensure the signed purchase and sale document for the transaction indicates both parties are aware of the self-assessment nature of the transaction and note the GST/HST number of the purchaser. This will provide proof the purchaser is the responsible reporting party in the event the CRA reviews the transaction.

Timing

Reporting for the transaction should be done in the first reporting period following the transaction. If you're a quarterly filer and you complete this transaction on the first of the prior quarter, you will report in the following quarter. On the other hand, if you are an annual filer and the transaction took place on Jan. 1, you will only be able to declare it on the GST/HST return due on Dec. 31st for the fiscal year, even if it took place almost a year before. In cases where a registered purchaser does not intend to use the real property primarily in commercial activity, they are required to directly remit GST/HST to the CRA. The purchaser must submit their payment along with a separate form known as the GST 60, and this should happen no later than the month following the transaction.

 

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