Is GST applicable on the sale of this property? I get asked all the time and do not usually know the answer. GST can be complicated. Here is an article from BCREA bulletin.
REALTORS® should be aware of the pitfalls involved in whether Goods and Services Tax (GST) is payable in a real estate transaction. Unless a REALTOR® is absolutely certain—and willing to take
the risk, if wrong—they should not advise on whether GST is payable.
The REALTOR® should pay special attention to the Canadian Real Estate Association’s (CREA) Code of Ethics and Standards of Business Practice, which states that a “REALTOR® shall encourage parties to a transaction to seek the advice of outside professionals where such advice is beyond the expertise
of the REALTOR®” (Article 10); and note that outside professional advice includes,
“without limitation, lawyers, appraisers, home inspectors, surveyors, accountants, insurance agents or brokers, mortgage consultants, land use planners and environmental consultants”
REALTORS® should carefully consider the implications of GST in the sale of a property and ensure that their clients seek expert advice as to whether GST will be payable at the time of purchase.
The prudent starting point is that, generally, GST is payable on ALL real estate transactions. Because the re-sale of residential real estate is frequently exempt from payment of GST, there is a
common, mistaken perception that GST is not always payable. A REALTOR® who
assumes that GST is not payable, does so at his or her peril. A prudent REALTOR®
makes sure that GST is explicitly dealt with in the contract. If after a Contract for the Purchase and
Sale of real estate is entered into, it is unexpectedly discovered that GST is payable, unhappy results can follow: the purchaser failing to complete, the purchaser suing the seller or the REALTOR®, or the REALTOR® being asked to reduce commission to allow the deal to proceed by partially covering the GST liability. Leaving GST as a “detail” to be analyzed later can result in unexpected liability to the seller, buyer or even the REALTOR®.
Below is a scenario that illustrates how REALTORS® can be caught unaware by the application of GST.
The used Residential exemption Mary builds a home as part of her home construction business and pays GST on labour and materials. She uses her GST number from her construction business
to claim credits on the GST paid and is subsequently reimbursed for the GST by the Canada Revenue Agency (CRA). Mary then lives there for three years before selling the home. Neither the purchaser, Mary, or the REALTOR® expect GST to be payable because it is a “used residential” situation. However, a GST liability arose when Mary changed the use of her home from being part of her construction business to her personal home. As a result, when Mary is requested to sign the “used residential” form, she can’t state that she didn’t claim the GST credits, so the expected exemption is not available to the buyer. Ultimately, all the parties are presented with potential accounting, tax and legal issues. As the above scenario demonstrates, when advising purchasers and sellers of property, REALTORS® should always keep in mind that the effect of not determining at the outset whether GST must be paid can have major financial implications for all parties, including the REALTOR®.
Senior Associate at Stikeman Elliot LLP
Bruce Woolley “Copyright British
Columbia Real Estate Association. Reprinted with permission.”
So how can we make sure that you are not going to get stuck with a bill for GST on your new Salt Spring home? Here is the clause I like to add to the contract of purchase and sale; The Seller will pay any GST in connection with this transaction and the Buyer will assign any rebate entitlement to the Seller. It’s simple but to the point. I sleep better at night with this in the contract of purchase and sale. With new homes, vacation rentals, new lots, and some farms, and businesses subject to GST one never knows for sure and it’s better safe than sorry. It’s wise to deal with GST in the contract, not after the fact.
Scott & June Simmons
The Salt Spring Team