GST on Acquisition of Real Property – Things To Remember

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Community green, RestonIn Canada, you must report and pay Goods and Services Tax (GST or GST/HST) when you acquire taxable real property such as land and buildings in the following situations:

1) You are registered for the GST/HST and the use or supply of the property in your commercial activities will be 50% or less, use the GST/HST Return For Acquisition of Real Property (Form GST60). Do not use this return if you are registered for the GST/HST and the taxable real property will be for use or supply primarily (more than 50%) in your commercial activities. Use your regular GST/HST return (Form GST34) to report and pay the tax.

2) You are not registered for GST/HST and you acquired the property from a non-resident, or from a person who is deemed to be resident only because of the person’s permanent establishment in Canada.

If you are not sure if this applies to you and your situation, contact Canada Revenue Agency or talk to your accountant – your lawyer might not be the right person to answer this correctly!

Generally, for two commercial businesses, both registered with GST and the transaction involves a commercial property .. this is like any other sale transaction: The purchaser pays the tax and seller collects the tax, and remits it to the Government. The purchaser can deduct this tax against other GST taxes they collected as the seller in their own business.

PREVIOUSLY … when a lawyer would do all the paperwork, it was often common to see a clause in the purchase/sale agreement to forego the collection and remittance of the GST on the transaction – or, try to word the agreement that there was no GST due at all. The theory being – one pays, other collects – it washes out. But, Canada Revenue Agency (CRA) did not like that. They want you to report the acquisition of real property because (hypothetically based on no research or facts) probably, one day CRA will tie in these purchases with the sellers info and make sure everybody is reporting everything okay.

CURRENTLY … CRA actually recognizes that this can be a big burden to both the buyers and seller. For instance, if the transaction is a property worth $1,000,000 selling price, the seller may collect 5% or $50,000 GST but, after the lawyer gets through with the transaction, mortgagors are paid off, utilities and other expenses are covered .. there may not be enough to remit to CRA (or the seller just decides not to remit). Likewise with the purchaser, it is additional cash that may not be available or included in pre-approved mortgage or loan financing, and is an extra cash burden to a business or person trying to well, participate in the economy.

CRA now allows that the seller (vendor) and buyer (purchaser) can elect to have the PURCHASER file the required forms and PAY the GST directly to CRA by recording this as a collection (Line 205 on your return called “GST/HST due on acquisition of taxable property and as a GST Registrant deduct the GST Input Tax Credit. This way, there is no real financial burden to either party and it is a wash on the purchaser’s next GST Return filed.

A Situation That I Have Come Across Recently

An interesting thing happened that I am now aware of, that I would like to share. This isn’t a real transaction, or have an specific direct reference to any of my clients and could even be a fictitious story altogether to illustrate a point! (I’m not tellin’)

* An offer to purchase was made and there was an acceptance in writing, stating that the ‘Purchase Price’ will be $1,000,000 plus applicable taxes

* The lawyers prepared a “Certificate” and made it part of the purchase/sale agreement, and was signed by a notary public, and the corporations involved. It went something like this:

Certificate:

Re: Sale of property

I, the purchaser of the property hereby certified on behalf of the Purchaser and not in my personal capacity that:

1) THAT the Purchaser is registered with Canada Revenue Agency under the Excise Tax Act for the purposes of collection and remitting Goods and Services Tax (GST)
2) THAT the Purchaser’s registration number for GST purposes is RT-xxxxx-xxxx-0001
3) THAT the Purchaser undertakes to make all filings under the Excise Tax Act in respect of the purchase and sale transaction and to be responsible for any GST to be remitted thereunder as a result of the purchase and sale transaction
4) THAT in consideration of the conveyance of the Property and for other good and valuable consideration, the Purchaser hereby indemnifies and holds the Vendor harmless in respect of any assessment against the Vendor arising out of the failure of the Purchaser to report and/or remit GST, together with all interest, costs, and penalties in respect thereof, as may be required in respect of the above noted purchase and sale transaction.

Now .. I showed this document to an acquaintance who works at Canada Revenue Agency and I not only did he laugh and claimed that would not hold up with Canada Revenue Agency GST Rulings, but in fact some inexperienced non-tax lawyer probably drafted that letter up and passed it in a newsletter and now lawyers all across Canada are using a variation of that same form! Needless to say, he suggested that I warn future buyer/sellers of real property to take greater care with respect to the GST transaction and other compliance issues.

This Is What Happened

The purchaser filed its GST Return with the additional figures for lines 205 to report the collection of the GST on the transaction (self-assess with respect of the GST thereby relieving the Vendor of any obligation to collect and remit GST on the sale of the Property) and then included the GST amount with other GST ITC’s paid on line 105, such as follows:

Canada Revenue Agency, after receiving the GST Return, requested documentation:

a) Calculation (proof) of the $1,000,000 value on this self-assessment
b) A copy of the vendor invoice with its GST Registration number on it.

Nowhere on the sale documents did it mention the other Corporation’s GST Registration number, and to make matters worse, the seller left the country and moved back to his homeland in Europe and not available to be reached. The purchaser, decided (NEVER DO THIS!!) to ignore CRA’s requests for information.

If you recall – the GST Guidelines for situations state if you are registered for the GST/HST and the use or supply of the property will be for your commercial activities, you are to pay GST. That was not the problem.

The problem was with respect to the “Invoice Requirements” of CRA that exist before you can claim a GST ITC.

Invoice requirements

You have to give customers who are GST/HST registrants specific information on the invoices, receipts, contracts, or other business papers that you use when you provide taxable goods and services. This information lets them support their claims for input tax credit (ITCs) or rebates for the GST/HST you charged. Similarly, when you make business purchases, the invoices from your suppliers will substantiate your claims for ITCs or rebates.

When there is no invoice available, see Exception to invoice requirements to verify what type of information you need to claim an ITC. If your customers ask you for an invoice or receipt to claim an ITC, depending on the amount of the sale, you are required by law to give them the following information:

Information required Total sale under $30 Total sale $30 to $149.99 Total sale $150 or more
Your business or trading name, or your intermediary’s name (person with whom you have an agreement to help you supply your goods or services) X X X
Invoice date or, if you do not issue an invoice, the date the GST/HST is paid or payable X X X
Total amount paid or payable X X X
An indication of the total amount of GST/HST charged or that the amount paid or payable for each taxable supply (other than zero-rated supplies) includes GST/HST at the applicable rate.   X X
When you supply items taxable at the GST rate and the HST rate, an indication of which items are taxed at the GST rate and which are taxed at the HST rate.   X X
Your Business Number or your intermediary‘s Business Number (registrant with whom you have an agreement to help you supply your goods or services)   X X
The buyer’s name or trading name or the name of their authorized agent or representative     X
A brief description of the goods or services     X
Terms of payment     X

Bottom Line

Because the purchaser couldn’t find the Vendor in a reasonable amount of time to provide a copy of this “invoice”, CRA came in and disallowed the GST Input Tax Credit of $50,000. Interest had been accruing, since the month following the date of the transaction, and accumulating. It was, I believe, almost a year later that the lawyer of the Purchaser finally got the Vendor’s lawyer to draft up and include as an attachment in the original sale agreement an invoice that included their GST registration number.

All interest and penalties were reversed, and the GST return amended back to what was originally filed, but I’m sure there must have been some “GST collection agent Blues” during the time for the Purchaser. I mean .. when was the last time you owed GST monies? IT’s not your money – like your balance due on income taxes – it’s TRUST money and they mean business!

Conclusion and Moral of this Story

If you are buying a real property for commercial use, and you are registered for GST .. make sure that the paperwork includes everything necessary to satisfy both your legal concerns .. and any TAX concerns which includes GST! If you need reference, check out Joanne Heffernan’s book (from Pricewaters Cooper) GST/HST and Real Property in Canada … or at least get your lawyer to read it!

Comments

john Renato says:

Very interesting. I’m not a lawyer or an accountant and that letter makes me laugh! And when CRA asks for addition info you better make should you contact them at least to explain the situation.

I am trying to learn things to better understand business and taxes and have a question with ITC and cost of the asset that you list on the GIFIs. In the GIFI you have a Asset section for Capital property, what is the value do you put for the asset if you have a ITC against it? Lets keep it very easy and said you bought the above property for $1M plus GST. So the total cash spent to buy it is $1,050,000. You claim the $50k as ITC and include it as revenue. Now do you report the value of the asset as $1M or $1,050,000?

John .. the value of the asset would still be only $1,000,000 in your G/L and on the T2 GIFI and the ITC would be either entered as you suggested (as revenue GST Collection for bookkeeping simplicity) if booked at all to offset the self assessment ITC.

john Renato says:

Ok got that, but you kind of lost me near the end ‘if booked at all to offset the self assessment ITC.’
I am looking at the T2 GIFI and adding in the numbers and doing the calculations, I keep coming up short! I would ask an accountant at the company I work at but the finance department is at the head office.
I know I am missing something but can not figure it out and it is bugging me. Currently looking at the CRA site GIFI short here at work. In the revenue section
line 8000 = $2M
line 8230 = $50k (guessing you add the GST ITC here)
Thus Total line 8299 = $2.05M

Operating Expenses
line 9367 = $500k
Net line 9369 = $1.55M.

so now line 3640 = $1.55M

The $1.55M is now your retained earning line 3849 and 3600 (lets say we pay no tax to keep it simply).

line 1000 = $450k (cash in the bank $2M revenue – $1.05M for the property – $500k for operating expenses)
line 1060 = $50k (GST ITC)
thus line 1599 = $500k.

line 1600 = $1M (cost of property as you mentioned)
thus line 2599 = $1.5M. But line 3640 is $1.55M. So the delta between them is the $50k GST ITC.
Chemistry is so much easier to understand, especially since I am a chemist 🙂 But always looking to learn new things.

The problem lies in Line 8230 – Other Revenue on the GIFI IS ..

This isn’t a revenue item – it’s a collection (liability) item.

If you bought property..
DR Assets $1,000,000
CR Bank/Mtge/Etc ($1,000,000)

Self Assess GST would be
DR GST ITC $50,000 (to recognize what you would pay)
CR GST Collections $50,000 (to recognize you owe to CRA)

Had you not have an election or need to self-assess .. the entry would have been ..

DR. Assets $1,000,000
DR. GST ITC $50,000
CR. Bank/Mtge/Etc ($1,050,000)

>> and the recipient/vendor would have submitted and remitted the gst to CRA

john Renato says:

But what lines would the DR and CR by on? By the way you lost me after the ‘election…’ statement, but searching I found some stuff on the CRA site about it looked specifically in the Quick Method for Accounting for GST/HST because I found something on another site talking about a ‘mythical trombone player’ and a reference to the Quick method. Reading it I know that this only is for <$200k and not the way big businesses run but looks interesting.
Basically the site stated that he collects GST and remits a portion back to CRA less ITC, etc and claims the differences as income?? so I did the same thing as before and still end up at the same point
line 8000 = $10k
line 8230 = $ 437 (for the GST and ITC income I assume this becomes taxable)
Thus Total line 8299 = $10437

Operating Expenses
line 9367 = $5k
Net line 9369 = $5437.

so now line 3640 = $5437

The $5437 is now your retained earning line 3849 and 3600 (lets say we pay no tax to keep it simply).

line 1000 = $2860 (cash in the bank $10k revenue – $2140 total paid for the instrument – $5k for operating expenses)
line 1060 = $437 (GST + ITC)
thus line 1599 = $3297.

line 1600 = $2k(cost of instrument, same line for comparison)
thus line 2599 = $5297M. But line 3640 is $5437. So the delta between them is the $140 GST ITC!!

Never thought simple adding and subtracting was so hard.:)

PS: Now I know what CR and DR mean!!

DR = debit xxxxx
CR = credit (xxxxx)
B/S = balance sheet
I/s = income statement

GST Is not income … Let’s assume you are in Alberta with no PST .. just GST = which is 5% (If you are in a province paying GST, I can redo with GST and PST if you would like)

If you sell $10,000 you should have $10,500 cash in bank – because you added GST 5% $500 to your sales and GST paid by customer

Journal entry:
DR: (B/S) bank $10,500
CR: (I/S) sales ($10,000)
CR: (B/S) gst collected ($500)

If you have operating expenses of $5,000 you still have to pay GST 5% = $250 on them (assuming they are not wages or gst exempt items)

Journal Entry:
DR: (I/S) Operating expenses $5,000
DR: (B/S) gst itc $250
CR: (B/S) bank ($5,250)

If you buy equipment for $2,000 you have to pay GST 5% = $100

Journal Entry:
DR: (B/S) Asset $2,000
DR: (B/S) gst itc $100
CR: (B/S) bank ($2,100)

Trial Balance:
I/S
Sales: ($10,000)
Expenses $5,000
Net Income and Retained Earnings ($5,000)

B/S
Bank: +10500-5250-2100 = $3,150
Asset: $2,000
>> Total Assets $5,150

GST Payable: -500+250+100 = ($150)
Retained earnings ($5,000)
>> Total Liabilities and Retained Earnings ($5,150)

===========================

If you are using the GST Quick Method .. (see http://www.cra-arc.gc.ca/E/pub/gp/rc4058/rc4058-e.html#P100_5211)

Journal Entry:
DR (B/S) Bank $10,500
CR (I/S) Sales ($10,500)

DR (I/S) Expenses $5,250
CR (B/S) Bank ($5,250)

DR: (B/S) Assets $2,100
CR: (B/S) Bank ($2,100)

The quick method concept is (if eligible) you don’t keep track of gst you paid except on asset purchases (products for own use) and you remit on your gst
(1) GST paid on assets for own use
(2) Percentage of gross sales+gst collected ..// let’s say it’s 1.8%

So – you would owe $10,500 x 1.8% = $189 plus itc paid on asset $100 = $289

DR: (something) $289
CR: (B/S) Bank ($289)

The something – is what you must be thinking that it is “income” but it’s actually an expense – and, if you haven’t noticed = is more costly to you if you use the quick method than the REAL (use actual numbers) method.

On the very small occasions that I do accounting for a business for income tax purposes, I would have an additional expense called “GST Recovered” .. and Income Statement would look like this:

INCOME
Sales (collected 10,500 less gst 500) $10,000

EXPENSES
Operating expenses (paid cash) $5,250
GST Recovered (-500 from sales + paid to CRA) ($311)
> total expenses $4,939

NET INCOME (10000-4939) $5,061

Hopefully that makes sense. You should learn to report GST properly and you will save money in most cases, over the quick method.

john Renato says:

Got it. Love the web.:)

thanks for the help!

M Ali says:

Hi, i have a question for you.
If i buy a brand new property for $100 (its a preconstruction condo)
in my business name and the builder says that 100 includes HST, that means actual price is 100/113 x 100 = $88.50

So when the property is built, i take out my mortgage etc, do i get 11.50 (100 minus 88.50) from the govt? (lets assume for this example thaT NO INCOME was made in that year so no HST was collected to offset.

Thanks.

HART says:

M Ali … I’m not really sure I understand the question. Are you referring to the housing rebate? http://www.servicecanada.gc.ca/eng/goc/gst_new_housing.shtml … or, how to prepare a GST Return?

Your question differs from the post in question as it sounds as you are would be paying GST and the builder who collects it, remits it. Because you paid it, you should normally be able to deduct the GST/HST portion from other GST/HST portions you collect from other business activities.

Are you in New Brunswick?

M ali says:

Hi
Thanks for your response.
I am in Ontario. Usually when I bill my clients,
I charge gst( soon to become hst).

Let’s assume that for year 2010 I charged my clients
100$ so 13$ was collected extra as hst. In 2010
suppose my only expense was 1.13 of which 1$ is expense
and .13 is hst. So At the end of the year,
I would have collected 13$ in hst and paid .13 in hst
so would return 12.87 back to govt.

Question is what if I buy a condo? The condo sale price
include hst. So if the condo is for 100000, then hst component is a about 12,500. Now if this was my only expense, and I billed my clients
exactly 87500 for the year, I would have also collected 12500 in the year as well so at the year end filing, they 12500s would balance out
and I would not owe anything.

Take the above example one notch above. Suppose the condo is for half a million and mysales are still 87500

so hst collected from clients is 12500. Hst paid is aprox 62250.

So the ultimate question, do i get 62250 minus 12500 back from the govt???

I would contact your own accountant for specific information. As far as I know (being in Manitoba) that you guys are switching to HST on July 1, 2010 and there are some transitional rules but I’m not really following the details.

These sites suggest some exemptions and limitation but you can obtain a rebate up to a maximum amount ..
http://www.taxtips.ca/gst/onhst.htm
http://www.kpmg.ca/en/services/tax/tnf/tnfc0920.html

My first inclination is to suggest that the above situation and that you describe could be totally different – but, I do not know your circumstances. For instance – is this condo your permanent residence? Owned by a corporation used 100% for business? Just because you pay taxes doesn’t mean you are entitled to always claim it – if it’s not used for business.

I’m not sure if my answers are making this worse for you or not 😀

I know I would be about 85% sure sure I was entitled to obtain a refund of (62250-12500) $49,750 before filing and 100% sure before I went ahead and spend the refund….

Although it might seem prudent to follow the “never hurts to ask or try” rule when dealing with CRA and compliance reporting .. sometimes it can just open up a can of worms. You can call their business line 1-800-959-5525 during business hours and see what they say

M Ali says:

thanks for the responses. It would be used as an office so 100% business related. I wonder if there is a limit to how much u can get back. afew years ago i bought a car in the business name for business , and i got all the GST back for it.. so technically, there shud be no reason my scenario would not work.

Mina says:

Hi,

I hope you can respond to my question soon. My husband and I are in the process of purchasing a vacation property that is going to be part of a rental pool. I understand that the greatest majority of owners are GST registrants. Given the impending introduction of HST, I wonder if it wouold be better that we pay GST on the purchase and not become GST registrants. The cost would be some $6,000. From what I understand, this could be advantageous in the future if we decide to sell the property and the buyer wants to purchase it for their own use.

Thanks so much in advance! We need to decide about this within the next couple of days.

Yes you are telling quite interesting things but the main thing which serves me a lot of confusion is how can Canada government verify that Tax of the same he will got or not. So what are the basic policies behind this which can define this for me? Please tell me those policies.

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