In every real estate transaction, there are tax considerations the Seller and the Buyer will need to address. One of the most important, and often most confusing to deal with, is whether GST is or not applicable. Before entering into a listing agreement or presenting an offer on a piece of property, every buyer or seller should be aware of any GST implications. Failing to deal with GST in advance can easily lead to transactions collapsing and potential litigation.
As a starting point, one must assume that GST applies to every real estate purchase and sale. It also applies to any lease of property, and an option to purchase a property. The only time GST does not apply, is if the property in question falls under one of the specific exemptions outlined in the Excise Tax Act. These exemptions generally depend on how the seller has used the property in the past.
The most common exemption is for most “used” residential properties. GST is payable on new residential property only once, and a “used residence” up for resale is generally exempt. Vacant land that is used only for recreational, and not commercial purposes, is often also exempt. However, there are nuances to the application of these rules which can cause issues.
When selling a piece of farmland with a residence on it, the portion that falls under the exemption for a “used residence” is only the house itself, and the land around the house that is reasonably necessary for the use and enjoyment of the home. In general, Canada Revenue Agency will only allow 2-4 acres as a GST “exempt” residential portion of the overall acreage. The remainder of the farmland, because it had been used for a commercial purpose, would be subject to GST. Therefore, it is vital to determine and document in the purchase contract how the purchase price will be apportioned between the “used residence” portion of the land, and the remaining acres, so GST is properly assessed for the whole transaction.
One common issue arises when dealing with acreage properties. Take for example a 20-acre parcel of land with a residence on it – the home and up to 4 acres would be considered the GST “exempt” residential portion of the land. The remaining 16 acres, however, could still be subject to GST, particularly if any agricultural or other commercial activity took place on the land, or if the acreage owner ever applied for GST input tax credits. This issue would most certainly arise when the 20 acres and residence in question were recently subdivided from a larger quarter section of farmland as a “first parcel out”, and then sold. Then GST would apply to the non-residential portion.
When farmland or other commercial property is being purchased, the individual or entity acquiring the property may account for GST and recover the same through their business as an input tax credit. The purchaser would need to be a GST registrant at the time the land was transferred. If the purchaser will be self-assessing the transaction to Canada Revenue Agency in this manner, their GST registration number and agreement to do so should be documented in the purchase and sale agreement.
If you have any questions regarding the GST implications of your property transaction after consulting with your Realtor®, please seek out advice from your accountant and/or lawyer before signing any listing or sale agreements.
In this, the eighth instalment of our series with Dan Hawkwood, an Associate Lawyer at Beaumont Church LLP in Calgary, Dan discusses the basics of GST as it relates to real estate. Dan comes from a long line of farmers and ranchers in the Calgary area and brings the experience of his rural upbringing to his practice.