Who pays the GST/HST can be tricky to answer on real estate purchases, especially when done “In Trust” for another corporation. A recent court case, 225493 Ontario Limited vs the Queen, provided some direction on this situation, and an expensive lesson learned for the vendor of the property.
Background on buying “In Trust” case
The vendor (225493 Ontario Limited) entered into an Agreement of Purchase and Sale (APS) to sell land to Mayling Holdings Inc. But, on closing Mayling delivered a “Direction re Title” to the vendors saying that 840 Holdings would be the beneficial owner of the land. Mayling wasn’t registered for GST/HST when the offer was made, or at the closing.
840 Holdings was registered for GST/HST and provided an indemnity to the vendors that it was registered and would self-assess the tax. Self-assessing means that the purchaser (840 Holdings) is required to report the tax payable on a taxable real estate purchase if they are registered for GST/HST. So, the vendor didn’t collect GST/HST on the sale since 840 Holdings was registered. But 840 Holdings was incorporated AFTER the APS was signed, and before closing.
The GST/HST implications of buying “In Trust”
The Canada Revenue Agency (CRA) then reassessed the vendor for not collecting GST/HST on the sale. Why? CRA interpreted Mayling as the “recipient of the supply” i.e., purchaser of the land, and therefore the one who was liable under the APS for the GST/HST. Bottom line was that even though 840 Holdings received the property, Mayling was legally liable to pay the GST/HST under the APS. Because Mayling wasn’t registered for GST/HST, then the vendor was responsible for collecting the GST/HST.
When a person enters into a purchase and sale agreement they become the “recipient” of the property and are obligated to pay the GST/HST. It is important to make sure that obligation to pay GST/HST moves to the “in-trust” person. Usually this happens through an assignment, assumption agreement, declaration of trust, or co-execution of the APS between Mayling or 840 Holdings. But, in this transaction none of this happened. Instead, they relied simply on the “Direction re Title”.
What can you do to ensure your deals don’t fall into the same problem with GST/HST?
Watch out for agreements where the purchaser is buying the property “in trust” for a corporation to be established later. Make sure that the beneficial owner is the recipient of the transaction. Simply put, an agreement must be entered into to move the obligation to pay GST/HST to the “in trust” buyer (840 Holdings in this case). Generally the vendor needs to be in agreement as well.
The results of this case also affect the claiming of a New Housing Rebate or New Residential Rental Rebate where a proper assignment has not been executed.
We recommend that you consult with your real estate accountant and your real estate lawyer on sales like these to avoid an expensive GST/HST problem.
Scott Merry, CPA, CGA
Partner, Indirect Tax