|Commercial Property and the HST: What you need to know!|
By: Jayson Schwarz and Aaron Grinhaus
What does it Mean?
On July 1, 2010, the 5% Goods and Services Tax (GST), which normally applies to commercial real estate transactions, will be replaced by the 13% Harmonized Sales Tax (HST), a combination of the former 8% Provincial Retail Sales Tax (RST) and the GST. This change will more than double the amount of tax you will have to pay, or account for when buying a commercial property.
How does it Work?
The HST will work in the same way as the current GST works. A vendor of commercial real estate is not required to collect HST on the sale of commercial real estate to a purchaser is who registered for HST. Instead, the purchaser must self-assess the HST and report it as an amount payable on their HST return for the period when the HST became payable. If the purchaser is eligible to claim an input tax credit, he may do so on the same return such that there is no cash flow impact to the purchaser. It is always a good idea to consult a lawyer and/or accountant to ensure the HST is properly handled.
When does it Kick In?
The HST will apply to commercial property purchases which close on or after July 1, 2010. More specifically, it apples where both ownership and possession are transferred. The date that the purchase and sale agreement is entered into does not affect the application of HST. For example, if a seller offers to sell a mini-mall on June 1, 2010, and an agreement is entered into on June 15 to close July 2, and upon closing both ownership and possession are transferred, the HST applies. Where either ownership or possession (but not both) have transferred before July, only 5% GST will apply.
In circumstances where a property is part residential and part commercial, the HST will apply differently and you need to consult your lawyer and/or accountant for the method of handling the tax.
What to do About It?
Dealing with taxes associated with the purchase of a commercial property can be a tricky ordeal. It will involve legal advice as well as tax accounting in order to manoeuvre through the tax requirements. Once you have a firm offer in place your lawyer and accountant will be able to advise you on how best to deal with the fallout caused by the various taxes associated with your purchase, There are many ways of dealing with commercial properties in order to minimize the tax burden associated with your purchase, and a good real estate lawyer with some tax experience will be able to guide you through the your options and obligations.
Remember generally as an HST Registrant with the right professional assistance you should be able to defer the HST payment and avoid paying HST on Closing. This will assist your cash planning forecasts.
Jayson Schwarz is a Toronto real estate lawyer and partner in the law firm Schwarz Law LLP. Aaron Grinhaus is his Associate. We wish to thank Allen Church CA, TEP of Evans Martin LLP Chartered Accountants for his contribution to this Article.