Whether generally or in real estate deals, taxes are horribly complex.
Real estate deals can require GST, PTT and additional PTT (foreign buyer’s tax), vacancy tax, speculation tax, taxes on commissions and legal fees and on other services.
Over the last five years, there have been approximately 50 tax-related claims reported to E&O. The most frequent claims made against licensees in relation to taxes are:
- Claims relating to the misrepresentation of GST, the applicability of GST and its treatment in the contract, and
- Claims relating to PTT and foreign buyer’s tax.
This article will focus on GST.
Under the Federal Excise Tax Act (ETA), the sale of real property is a taxable supply and subject to GST, unless an exemption applies. The typical exemption is when the property is used residential real estate. This means that the property is not brand new or substantially renovated, and it’s been used as a primary residence for the owner or a tenant.
Ultimately, GST must be collected and remitted by the seller of property (if the seller is non-resident, then the buyer typically remits the GST). Practically, most sellers have the buyer pay it and it is handled at adjustments and remitted by the seller. To avoid ambiguity and potential claims, the treatment of GST should be clearly set out in the contract: is there GST payable, is it included in the price or extra, and who pays it?
The BCFSA’s Knowledge Base recommends that when confronted with tax issues, a licensee should recommend, in writing, that their clients get legal or accounting advice and/or advice from the CRA.
It’s great advice.
Issue spotting on GST
Licensees are not expected to be tax lawyers or accountants (I am not, either, by the way!). Rather, licensees should be able to spot issues when it comes to GST.
Licensees should know that certain facts may give rise to GST. Some examples:
- A vacant lot (may be different if sold by an individual vs. a company)
- An operating farm property (some parts of the land may be exempt but not others)
- A commercial property
- A newly constructed property
- A property that has been used for a commercial purpose such as a nightly rental or vacation rental
- The re-sale of a new unit that has not been occupied
- Substantially renovated property
- Pre-sale assignments
- Change in use
Ask questions and investigate each property and its use. When one of the above conditions exist or you suspect it may exist, that is the time to recommend the client get proper professional advice concerning taxes. That is not the time for licensees to dispense tax advice.
Remember it is not the end of the inquiry if the seller has paid GST in the past or if the buyer and seller are GST registrants. Each transaction is unique – the best rule with GST is, if in doubt check it out… Why roll the dice when you can recommend professional advice?
It’s best to recommend your clients retain a legal advisor early in the relationship, so that they can get timely legal advice on the deal and any thorny tax issues and ensure the contract reflects the agreement they made.
In these claims, the licensee is alleged to have misrepresented the applicability of GST. Examples include advising a client that GST did not apply to:
- Any used properties
- Properties where GST was paid in the past by the seller
- An operating vacation property, or
- A pre-sale condo.
In those cases, the buyer objected when charged with paying the GST and did not close the deal, and a battle ensued over payment of the GST they were not expecting to pay.
These are the most common claims involving GST and can be avoided by recommending the seller get professional advice before representing that no GST is payable, having buyers get professional advice on whether GST applies, and documenting that advice. If you do not know, say so.
Unless you are a tax expert, do not give advice about taxes. It isn’t always as clear as you may think.
Silence on GST
In some claims, there is no discussion about GST and it isn’t mentioned in the contract. Case law suggests that in these situations, the buyer will pay the GST, if it applies. However, on completion date, a battle is likely to ensue between the buyer and seller as to whether GST applies, who pays it, whether the contract price is inclusive or exclusive of the tax, and for any related damages should someone refuse to complete the deal.
These claims can be avoided by asking questions up front about the property’s occupancy and use and recommending your client obtain tax advice. The contract should indicate who pays GST, if applicable, and should be clear if it is part of the agreed price or extra. This helps bring certainty to the deal.
Purchase price inclusive or exclusive of GST
In other claims, the promotional materials, discussions, and contract indicate GST is payable. In those cases, the price is agreed at X, but it isn’t clear if X is inclusive or exclusive of GST. Each side takes the view that benefits them and claims that they cannot pay it or wanted to net a certain amount and — you guessed it — a battle ensues.
Avoid these claims by clearly indicating if the price on the contract includes GST or if the tax is on top of the price. Again, this avoids uncertainty.
The BCFSA’s Knowledge Base provides several GST clauses for you to use.
The GST clauses cover where GST is included in the price or not included in the price, confirming the seller and the buyer had the opportunity to get professional advice on GST, and dealing with credits, rebates and their assignment.
I am not a tax expert. As a licensee, you are likely not a tax expert. If your issue spotting raises a question of the applicability of GST, or any tax issue, you should advise the client in writing to get professional tax advice to help with the contract. Ensuring the contract is clear as to who pays GST, if applicable, will also avoid unhappy surprises on completion day.