This paper has been prepared for the interest and convenience of attendees of the continuing Legal Education Society of Nova scotia Real Estate

Transcription

1 This paper has been prepared for the interest and convenience of attendees of the continuing Legal Education Society of Nova scotia Real Estate seminar to be conducted on Saturday, the 20th day of April, This paper and the accompanying schedules do not constitute legal advice. If legal advice is required in connection with specific factual circumstances, the services of a competent professional adviser should be sought or reference should be made to the original text of the Excise Tax Act (Canada) and the Regulations made thereunder. April 11, 1991

2 TABLE OP CONTENTS I. INTRODUCTION :ba 1 II. OVERVIEW OP THE GST A B General Imposition of GST supply Commercial Activity C o E Liability for and Collection of GST Liability for GST Collection of GST Zero-Rated and Exempt Supplies Zero-Rated Supplies Exempt Supplies Tax Upon Importations III. APPLICATION OP GST TO REAL PROPERTY GBlIERALLY A Taxable Supplies of Real Property options and Rights of First Refual Exempt Supplies of Real Property B C o Timing of GST Liability Calculation of GST Liability Transitional Rules Agreements Before October 14, IV. LIABILITY POR AND COLLECTION OP GST A Obligation of Purchaser to Pay GST 20 20

3 B - ii - Enforcement Against Purchaser Discharge of Purchaser's Obligations Obligations and Liabilities of Vendor to Collect GST 1. Collection of GST Enforcement Against Vendor 2. Special Rules for certain Exempt Supplies 24 Liability Transferred to Vendor Registration of written Statement 3. Direct Remittance by Purchaser Evidence of Purchaser's Registration status 4. Action by Vendor to Collect Tax v. EXBKPT SUPPLIES OP REAL PROPERTY 35 A Introduction to Schedule V, Part I General Definitions 36 Residential Complex Single unit Residential Complex Multiple unit Residential Complex Residential Condominium unit Condominium Complex SUbstantial Renovation Builder Sale Improvement B Specific Exempt Categories 39

4 - iii - 1. Preliminary Considerations 39 Type of Document Facts Justifying Exemption Definition of Terms 2. Section 2, Part I, Scheldule V 3. section 3, Part I, Schedule V 4. Section 4, Part I, Schedule V 5. Section 5, Part I, Schedule V 6. Section 9, Part I, Schedule V VI. SPECIAL RULES AND TRANSACTIONS 53 A B C D E Combined Supplies of Real Property 1. Residential Complex and other Real Property Part of a Residential Complex 2. Supply of Multiple Unit Residential Complex 3. Combined Supply of Real and Personal Property Self-Supplies and SUbstantial Renovations 1. Subsection 191(1) 2. Subsection 191(2) 3. Subsection 191(3) 4. Subsection 191(4) Forfeiture of Deposit Holdbacks Elections Supply of Substantially all Assets Used in a Business 63

5 - iv - Allor Substantially All 2. Supply of Business Assets of Deceased Person 65 VII. PROCBDURAL COBSIDBRATIOBS POR SOLICITORS 66 vzzz. A Acting for Purchaser Drafting Agreement of Purchase and Sale Payment of GST Upon Closing Acting for Self-Remitting Purchaser 68 B Acting for Vendor 69 SCHBDULBS 1. Drafting Agreement of Purchase and Sale Receipt and Remittance of GST 70 Schedule "A": Statutory Declaration to be Used Pursuant to Subsection 221(2) Schedule "B": Statutory Declaration to be Used Pursuant to Subsection 221(2) in Cases Involving Combined Supply of Real and Personal Property Schedule "C": section 194 certificate for Section 2, Part I, Schedule V Exemption Schedule "D": section 194 certificate for Section 3, Part I, Schedule V Exemption Schedule "B": section 194 certificate for Section 4, Part I, Schedule V Exemption (Single Unit Residential Complex) Schedule "P": section 194 certificate for Section 4, Part I, Schedule V Exemption (Residential Condominium Unit) Schedule "G": section 194 certificate for section 5, Part I, Schedule V Exemption (Sale of Multiple unit Residential Complex by Builder) Schedule "H": section 194 certificate for Section 5, Part I, Scheldule V Exemption (Sale of Multiple unit Residential Complex by Builder of an Addition)

6 - v - Schedule "Z": section 194 certificate for section 9, Part I, Schedule V Exemption Schedule "J": GST Form No. 22 (Election to Treat a Supply of Personal Use Real Property as Being Made in the Course of an Adventure or Concern in the Nature of Trade) Schedule "K": Section 194 Certificate for Mixed Supply (Residential Complex and Other Real Property) Schedule "L": GST Form No. 44 (Supply of Substantially all Business Assets) Schedule "X": Deceased) GST Form No. 45 (Supply of Business Assets of Schedule ".": GST Form No. 60 (Self-Remittance Pursuant to subsection 221(2»

7 I INTRODUCTION On December 13, 1990, following lengthy and acrimonious debate, the Senate passed Bill C-62,1 the federal legislation implementing the Goods and Services Tax ("GST"). As a consequence, the GST became effective on the planned implementation date of January 1, The GST was implemented through amendments to the existing Excise Tax Act, R.S.C. 1985, c. E-15 (the "Act"),2 together with consequential amendments to other federal statutes. Essentially, the GST is imposed by Part IX of the Act. Additionally, Bill C-62 enacted a new Part VIII of the Act, which sets out certain transitional measures, including the federal sales tax inventory rebate and a federal sales tax rebate for new housing. 3 Finally, Bill C-62 enacted Schedules V, VI and VII to the Act which provide for, respectively, exempt supplies, zero-rated supplies and non-taxable importations. Each of these concepts are examined to below. Notwi thstanding suggestions from the federal government to the contrary, the GST may be fairly described as a complex tax, and this is Enacted as S.c. 1990, c Unless the contrary is indicated, any reference in this paper to a legislative provision or schedule is a reference to a provision or schedule of the Act. 3 There are two rebates provided for in the Act relating to qualifying new home purchases. One such rebate is provided for in section 121 (the federal sales tax rebate, which expires at the end of June, 1991) and the other in section 254. Neither rebate is examined in this paper.

8 perhaps best illustrated by the detailed rules surrounding the application of the GST to real property transactions. Extensive and cumbersome change of use rules, self-supply rules, exemptions and transitional rules will frequently cause considerable difficulty in attempting to determine whether a particular transaction is taxable. Early experience suggests that Revenue Canada (Excise) officials, although generally well-intentioned and willing to assist, have yet to fully come to terms with the implementation and application of the tax themselves, and one relies upon this particular source of guidance and information at one's own peril. The absence of case law and intrepretation bulletins at this early stage adds to the problem of understanding and applying the GST legislation, a task which will often have to be accomplished in the context of an imminent property closing. The difficulties arising from the application of the GST are exacerbated by the fact that the legislation casts vendors (and other suppliers of taxable goods and services) in the role of tax collector, with the ultimate responsibility for correctly analyzing, interpreting and applying the Act. Consequently, it will typically be the role of the vendor (or his solicitor) to determine whether a particular transaction is exempt from GST, difficult and fraught with risk. a determination that will often be These difficulties will be greatly compounded if one or both of the solicitors are misinformed as to the scope and application of the tax, and with the exception of those property transactions to which the application of GST is clear, it will be vital that the solicitors understand or adequately inform themselves as to the GST consequences arising from the transaction. Although it is not reasonable to expect a busy property practitioner to be transformed

9 into a tax expert, the GST nevertheless represents the new reality with which virtually all lawyers, including property practitioners, will have to cope. II OVEBVIII OF THE GST A. General The GST is a broadly based consumption tax. Many transactions which were previously exempt from consumption or sales taxes will now attract GST, the most notable example being services of virtually every type. The GST will also apply to many real property transactions, representing a significant cost to taxpayers who are unable to recover the tax, and an administrative or cash flow burden to persons who are able to avoid or recover the tax through available tax credits or "roll-overs".5 The GST is a value added tax. In general terms, the object of the legislation is to impose the full burden of the tax upon the final consumer of goods or services. This is accomplished through refundable tax credits ("input tax credits") which may be claimed by intermediate parties who acquire material or service inputs in order to produce a The tax credits referred to are "input tax credits", which are discussed further below. 5 Examples of some non-taxable "roll-overs" which may be elected by the vendor and purchaser are discussed in Part VI(E) of this paper, pages 63 to 66.

10 final product or service. 6.. For example, a manufacturer who pays GST on components which were purchased in order to manufacture a product for resale will, with limited exceptions, be entitled to receive a refund of the tax paid. GST will then be imposed upon the sale of the manufactured product by the manufacturer to its customer. If the customer is the ultimate consumer of the product, he will not be entitled to an input tax credit and will consequently bear the full burden of the tax. If, however, the purchaser acquires the product for resale or for use in providing a product or service which is subject to GST, he will also be entitled to an input tax credit. Generally, the only person who will not be entitled to such a credit will be the ultimate consumer of the goods or services in question (in other words, the person who does not purchase the goods or services for use in providing a further taxable good or service). B. Imposition of GST The GST is imposed by subsection 165 (1) of the Act, which provides that the "recipient of a taxable supply made in Canada" is required to pay a tax equal to 7% of the value of the consideration for the supply. Thus, for the tax to apply there must be a "taxable supply" and it must be made in Canada. It will generally be a question of fact as to whether a particular supply was made in Canada, although there are provisions in the Act which will deem a supply to have been made inside 6 Eligibility for input tax credits is determined pursuant to sections 169 and 170.

11 or outside Canada, depending upon the circumstances. 7 A supply of real property situated in Canada is deemed to be a supply made in Canada. 8 wi th respect to the question of whether there has been a "taxable supply", that term is defined as "a supply that is made in the course of a commercial acti vi ty", other than an exempt supply. 9 The concepts of "supply" and "commercial activity" are examined below. The concept of "exempt supply" is examined in Part II(D} of this paper. supply A supply is broadly defined as the provision of property or a service in any manner, including sale, transfer, barter, exchange, license, rental, lease, gift or disposition. to Thus, a supply will have been made in most cases where, in the course of a commercial activity, title to or possession of goods has been delivered or a service has been provided. For a transaction to constitute a supply, there must be a provision of property or a service. It should therefore be noted that the definition of "property" is extremely broad, including any property, a right or interest of any kind, a share and a chose in action. The sections 142 to 144 Paragraph 142(1} (d). Subsection 123(1}. Ibid.

12 definition does not, however, include money. 11 A "service" means anything other than property, money, or services provided to an employer pursuant to an employment contract. 12 co... reial Activity The term "commercial activity" also has a wide meaning, including any business or any adventure or concern in the nature of trade carried on by a person, and any activity involving a supply of real property. 13 The definition of "business" in the Act also has quite a large scope,14 and the inclusion within the concept of "commercial activity" of an adventure or concern in the nature of trade will encompass many one-time profit-oriented ventures or transactions which, because of their isolated or non-repetitive nature, would not constitute a "business" of the person. "Commercial activity" does not, however, include exempt supplies, activities engaged in by an individual ls without a reasonable expection of profit, or services performed pursuant to an employment contract Ibid. 12 Ibid. 13 Ibid. The application of the definition of "commercial acti vi ty" in the context of a real property transaction is examined in Part III (A) below. 14 Ibid. IS It should be noted that, contrary to the rules which apply in respect of the Income Tax Act, a trust is not an individual for GST purposes. 16 Ibid.

13 As a result of the definition of commercial activity, many private transactions between individuals will not be taxable. For example, the sale by an individual of his or her used car will not typically attract GST, unless the individual was in the business of trading in used cars; however, is examined below, 17 many pri vate transactions between individuals involving real property will be subject to GST due to the connection between the concept of commercial activity and supplies of real property. C. Liability for and Collection of GST Liability for GST The recipient of a taxable supply made in Canada is liable for the tax. 18 It should be noted that the word "recipient" means the person who pays or agrees to pay consideration for a supply or, if no consideration is to be paid for the supply, the person to whom the supply is made. 19 Thus, if the consideration for the supply is to be paid by a person other than the person who actually receives the supply, the person paying the consideration will be liable for the tax. Notwithstanding the foregoing rule, there are some circumstances in which the person making a taxable supply can be liable See Part III(A), pages 10 to 16. Subsection 165(1). Subsection 123(1).

14 for GST. These situations, which arise when the person fails to discharge his obligation to collect the tax, are examined below.~ Collection of GST with limited exceptions, every person making a taxable supply is required to collect GST as an agent of the Crown in right of Canada,21 and is deemed to hold the tax in trust for the Crown. n As is noted above, a supplier who fails to collect GST and remit the tax to the Receiver General as required is potentially liable for the amount of the uncollected or unremitted tax. D. Zero-Rated and Exempt Supplies Zero-Rated supplie. A zero-rated supply is a taxable supply which is notionally taxed but at a rate of zero percent D Thus, although it is not correct to say that zero-rated supplies are tax-exempt (in fact, as will be seen below, the classification of a supply as zero-rated is preferable for both the supplier and the recipient, compared to an exempt classification), there will be no tax liability arising from the making n D See Parts IV(B) (2), (3) and (4), pages 24 to 34. Subsection 221(1). Subsection 222(1). Subsection 165(2).

15 of zero-rated supplies. Addi tionally, any person making zero-rated supplies remains entitled to input tax credits for all GST paid in respect of purchases made in the course of making the zero-rated supply. categories of supplies which qualify as zero-rated are listed in Schedule VI to the Act. bempt Suppli Supplies which qualify as "exempt" supplies are listed in Schedule V to the Act. As is noted above, exempt supplies do not fall wi thin the def ini tion of a commercial acti vi ty consequently, an exempt supply does not attract GST because it does not satisfy the definition of a "taxable supply". Although the description "exempt supply" suggests that this would be a preferred category of supply, persons making exempt supplies face a serious disadvantage. Specifically, such suppliers are not permitted to claim input tax credits in respect of GST incurred by them in the course of making an exempt supply. The ineligibility for input tax credits arises due to the fact that such credits are only available in respect of tax paid by the claimant in the course of a commercial activity,n and the making of an exempt supply does not qualify as a commercial activity. As a result, persons making exempt supplies are essentially treated as the ultimate consumer of taxable supplies received by them. N Subsection 169(1).

16 Although persons making exempt supplies may attempt to recover their GST expenses from their customers, this will not always be possible. For example, residential rents are GST-exempt, and consequently a residential landlord will not be permitted to claim an input tax credit in respect of GST arising from goods or services acquired for his apartment building. Furthermore, any attempt to recover the additional tax burden from tenants would be subject to the provisions of the Rent Review Act. Supplies of real property which are GST-exempt pursuant to Schedule V are examined in greater detail in Part V below. E. Tax Upon Importations Division III of Part IX of the Act provides for a tax of 7% on the value of goods which are imported into Canada and which attract duty pursuant to the customs Act. Consequently, goods which are the subject of a supply made outside Canada (and which are therefore not subject to GST) will generally attract the Division III upon importation, unless the goods are rendered non-taxable by Schedule VII to the Act, which specifies certain non-taxable importations. III APPLICATION OF GST TO REAL PROPERTY GENERALLY A. Taxable Supplies of Real Property As is noted above, GST is payable whenever there has been a

17 "taxable supply", and that term is defined as a supply made in the course of a commercial acti vi ty, other than an exempt supply. The definition of supply is examined in Part II (B) above, and it will suffice at this point to recall that the term is extremely broad, including the provision of property in virtually any manner whatsoever. The definition of "commercial activity" is also examined above, and at this point it would be instructive to revisit this definition with a particular emphasis upon the interaction between real property and the concept of commercial acti vi ty specifically, the definition of "commercial activity" includes: "Any activity engaged in by a person that involves the supply of real property or of a right or interest in respect of real property by that person." Specifically excluded from the concept of commercial activity, however, are: 1. any acti vi ty engaged in by a person to the extent that it involves the making of an exempt supply by the person; and 2. any activity engaged in by an individual without a reasonable expectation of profit. Finally, it is important to note that the definition of "real property" includes, in respect of property located in any place in Canada other than the Province of Quebec, messuages, lands and tenements of every nature and description and every estate or interest in real property,

18 whether legal or equitable.~ As a result of the foregoing definitions, it may be concluded that every activity engaged in by a person that involves the provision in virtually any manner whatsoever of: (a) real property; (b) any legal or equitable interest in real property; or (c) a right or interest in respect of real property will constitute a supply made in the course of a commercial activity (and hence a "taxable supply") unless: (d) (e) the supply is specifically rendered exempt by Schedule V to the Act; or in the case of a supply made by an individual, it can be regarded as having been made in the course of an acti vi ty engaged in by the individual without a reasonable expectation of profit. Thus, subj ect to the question of whether a particular supply is specifically exempt, or whether the "reasonable expectation of profit" test is applicable and satisfied, the following transactions will constitute taxable supplies: any sale, transfer, gift or other disposition of Subsection 123(1).

19 real property; any barter or exchange of real property; any lease or rental of real property, or provision of a license to use real property; any conveyance of a right or interest in or in respect of real property. Options and Riqhts of First Refusal It seems clear that the granting of an option to purchase real property will generally constitute a taxable supply, as an option is an interest in real property. Furthermore, although this may not have been contemplated by the legislation's drafters, the foregoing definition of "commercial activity" appears to be broad enough to encompass the granting of a right of first refusal. Although a right of first refusal does not constitute an interest in property itself, it does satisfy the portion of the definition which refers to the supply of a right "in respect of" real property, as a right of first refusal is a contractual right enforceable between the parties and is in respect of real property. Thus, unless rendered exempt by Schedule V, transactions creating options or rights of first refusal in respect of real property will constitute taxable supplies, and tax will be payable by the recipient at a rate of 7% of the price of the option or right of first refusal. The various exemptions relating to real property are

20 summarized below, and selected exemptions are examined in greater detail in Part V of this paper; however, it should be noted at this point that although some of the exemptions apply to supplies by way of sale of certain types of real property or an interest therein, there are no exemptions which expressly or by necessary implication apply to transactions involving supplies of an interest in respect of real property. In some circumstances, this will create the anomolous si tuation that, whereas the sale of a particular property would be exempt for GST purposes, the granting of a right of first refusal between the same parties relating to the same property would constitute a taxable supply in respect of which no exemption is available. 26 Similarly, as most real property exemptions apply to supplies by way of sale, it is unlikely that the granting of an option to purchase would qualify for an exemption. Exempt supplies of Real property As is noted above, the principal exemptions relating to supplies of real property are set out in Part I of Schedule V to the Act. Additionally, Part VI of Schedule V (and in particular section 25 thereof) sets out exemptions which may be applicable in circumstances involving supplies of real property made by public service bodies (i.e., non-profit organizations, charities, municipalities, school authorities, hospital authorities, public colleges or universities). The principal exemptions arising from Part I of Schedule V 26 See also Part V(B) (2), pages 42 to 43.

21 include the following: 1. sales of used residential dwellings (unless the sale takes place in the course of a business involving the ~urchase, substantial renovation and resale of the dwelling); 2. some sales of non-residential personal-use real property (i. e. vacant land or recreational property) by individuals or certain qualifying trusts;28 3. long term (i.e., one month or longer) residential rents;~ 4. short term, low-cost (i.e., not exceeding $20.00 per day or $ per week) rentals of residential accommodation;~ 5. certain transfers of farmland;31 6. a supply of land by way of lease, license or similar arrangement for the purpose of occupying thereon a mobile home or other residential unit;32 7. a supply of a parking space where the supply is incidental to an exempt supply of real property. 33 The application of categories 1 and 2 of the exemptions are examined in greater detail in Part V of this paper. Special rules and considerations are applicable in respect of such issues as self-supplies of property, deemed dispositions arising upon changes of use, forfeitures of deposits and the release of T1 sections 2 to 5 of Part I of Schedule V. 28 section 9 of Part I of Schedule v. ~ Paragraph 6(a) of Part I of Schedule v. ~ Paragraph 6 (b) of Part I of Schedule V. 31 Sections 10 to 12 of Part I of Schedule V. 32 section 7 of Part I of Schedule V. 33 section 8 of Part I of Schedule v.

22 holdbacks. Some of these issues are examined in Part VI below. B. Timing of GST Liability The general rule concerning the timing of GST liability is that GST is payable by the recipient of the taxable supply upon the earlier of: 1. the day upon which the consideration for the supply is actually paid; and 2. the day upon which the consideration for the supply becomes due. 34 It should be noted, however, that special rules apply in cases involving supplies of real property by way of sale and supplies of property (including real property) by way of lease, license or similar arrangement. In the case of a sale of rea 1 property (other than a condominium unit), GST is payable on the earlier of: the date upon which ownership of the property is transferred to the recipient; and the date upon which possession of the property is transferred to the recipient under the agreement of purchase and sale.~ 34 3S Subsection 168(1). Paragraph 168(5) (b).

23 In the case of a sale of a condominium unit, GST is payable on the earlier of: 1. the day upon which ownership of the unit is transferred to the recipient; and 2. the day that is 60 days after the condominium complex is registered as a condominium.~ In the case of a lease of real property, the consideration (or any part thereof) shall be deemed to become due on the day upon which the recipient is required, under the terms of the written lease, to make the payment, and GST arising in respect of that particular lease payment will be due at the same time. 37 C. Calculation of GST Liability The principal consideration arising from the calculation of GST on a real property transaction will be whether deed transfer tax which is payable in respect of the conveyance is included as part of the consideration upon which the amount of GST is calculated. section 154 of the Act reads as follows: "For the purposes of this Part, the consideration for a supply includes any tax, duty or fee (other than the tax payable under this Part by the recipient in respect of the supply or a prescribed tax, duty or fee) imposed under an act of Parliament or of the legislature of a province on the recipient or the supplier of the supply in respect of the supply, production, importation, consumption or use of the property or service supplied that is payable by the recipient ~ Paragraph 168(5) (a). 37 Subsection 152(2).

24 or the supplier." Thus, other taxes which are payable in respect of the supply are included in the consideration, unless they are prescribed by regulation not to be included in the consideration. The Taxes, Duties and Fees (GST) Regulations 31 prescribe the various taxes which are not taken into consideration in computing the GST arising in respect of a taxable supply. Those Regulations prescribe, among other taxes, those which are imposed pursuant to: 1. An Act to Incorporate the City of Sydney; 2. The Halifax County Deed Transfer Tax Act; 3. The Halifax City Charter; 4. The Dartmouth City Charter; 5. Bedford By-Laws Act; 6. Deed Transfer Tax Act (Nova Scotia). Thus, any deed transfer taxes arising pursuant to any of the above-noted statutes will not be included for the purpose of calculating GST; however, practitioners should be wary of potential amendments to the Regulations, as an appropriate change could result in the inclusion of such taxes in the consideration for the supply, thereby increasing the amount of GST payable and the amount which a vendor will be required to collect. 38 SOR/91-34

25 D. Transitional Rules The various transitional rules are set out in Division IX of Part IX of the Act, and section 336 sets out the transitional rules which apply in respect of real property. The general rule is that GST applies only to sales of real property where both ownership and possession of the property are transferred to the purchaser after December 31, As a result, if: 1. title is transferred on or before December 31, 1990; or 2. the purchaser goes into possession of the property under the agreement for that supply on or before December 31, 1990; no GST will arise in respect of the transaction. It is important to note that, for the second part of the transitional rule to apply, the purchaser must be in possession of the property "under the agreement for that supply" (i.e., the agreement of purchase and sale), and consequently a purchaser who was permitted to take possession of the property before 1991 even though the agreement did not expressly provide for that right will not be entitled to take advantage of the transitional rule. Aqreaments Before October 14, 1989 Subsections 336(2) to (4) set out additional transitional rules which are applicable only in cases where an agreement was entered into before October 14, 1989, and consequently these rules should be examined by anyone involved in a closing arising pursuant to such an

26 agreement. VI LIABILITY loa ARD COLLECTIQI or GIT The GST is a consumption tax, and as such is imposed upon the recipient of a taxable supply. Consequently, in the context of a taxable supply of real property by way of sale, the purchaser is, in general terms, ultimately liable for the taxi however, there are several ways in which a vendor can be exposed to liability for GST arising upon a sale of real property. Consequently, parties to a sale of real property should be aware of their respective obligations and liabilities, and the ways in which these liabilities can be deliberately or inadvertently shifted from one party to another. A. Obligation of Purchaser to Pay GST As is noted above, GST is imposed by SUbsection 165(1) upon the recipient of a taxable supply. Assuming (as will normally be the case) that the purchaser pays the purchase price, the purchaser will be the recipient, and consequently will be liable for the tax. The purchaser will normally pay the GST at the time of closing to the vendor, who will be required in most cases to collect the tax as an agent of the Crown in right of Canada. Enforcement Against Purchas.r The Act includes various enforcement provisions which can be brought to bear against a purchaser who has failed to payor remit GST.

27 Pursuant to subsection 313(1), all taxes, interest, penalties, costs and other amounts payable under Part IX of the Act are debts due to Her Majesty in right of Canada, and the Crown may maintain an action against a party who has failed to payor remit such an amount. Thus, the Crown may sue either the purchaser who has failed to pay the tax, or (as will be examined further belo~9) the vendor who has failed to collect GST from the purchaser and remit the tax to the Receiver General for Canada. As an alternative, in cases where a vendor has not collected GST from the purchaser, but has nevertheless remitted to the Receiver General from his own funds the amount of tax which is payable, section 224 permits the vendor to bring an action against the purchaser to recover the tax. The circumstances under which such an action may be brought by the vendor are examined in Part IV(B) (4) below.~ Discharge of Purchaser's obligatiods As is noted above, the vendor is generally required to collect GST as an agent of the Crown, and consequently the purchaser's obligations pursuant to the Act will be discharged when the tax is paid to the vendor or the vendor's agent (usually his solicitor). As the Act simply requires the purchaser to pay the tax to the vendor, with no additional obligation to ensure that the tax is remitted by the Vendor to the Receiver General, it is my view that the purchaser is not required to take additional steps to ensure that the tax is ultimately 39 ~ See Part IV(B) (1). See pages 32 to 34.

28 remitted. Thus, for example, there is no need for the purchaser to seek from the vendor an undertaking or similar commitment to remit the tax in accordance with the vendor's statutory obligations. 41 The purchaser may discharge his obligations pursuant to the Act in a limited number of ways other than through the payment of GST to the vendor. For example, under limited circumstances the purchaser may directly remit GST to the Receiver General, and this procedure is reviewed in Part IV(B) (3) below.~ Additionally, in some circumstances the purchaser may seek from the vendor a written statement or certificate confirming that the transaction is GST-exempt, with the resul t that any GST which is subsequently determined to have been payable on the transaction will be borne by the vendor. This matter is discussed in Part IV (B) (2) below. 43 Finally, a failure by certain vendors to adhere to statutory requirements concerning disclosure of GST may jeopardize their right to bring an action against the purchaser for any GST which is payable on the transaction, with the result that the vendor will be unable to recover the tax from the purchaser but will still be required to remit the GST. This situation is further examined in Part IV(B) (4) below.~ 41 For a further discussion of certificates and additional documentation to be exchanged upon closing, see Part VII below. 42 See pages 28 to See pages 24 to 28. See pages 32 to 34.

29 s. Obligations and Liabilities of Vendor to Collect GST 1. collection of GST It has been occasionally suggested that the "principal" or "primary" liability for GST lies upon the purchaser. such a view is dangerously misleading, and vendors should take care not to derive a false sense of security from it. Although it is true that the legislation is intended to impose the tax upon recipients of taxable supplies, I am unaware of any policy statement or unofficial suggestion that Revenue Canada will look first to the purchaser for the tax in the case of non-payment by the purchaser to the vendor. Certainly, there is no requirement in the Act that the Department attempt unsuccessfully to collect from the purchaser before prevailing upon the vendor to pay the tax, and in fact some Revenue Canada literature suggests that the vendor may be the first target. 4S The vendor's obligation to collect GST is imposed by subsection 221(l} of the Act: "Collection 221.(l} Collection of tax - Every person who makes. a taxable supply shall, as agent of Her Majesty in right of Canada, 4S For example, Revenue Canada's Completion Guide for the General Rebate Application states at page 5 that, if a recipient feels that he has paid an amount of tax in error to a GST registrant, the recipient should seek a refund from the supplier rather than from Revenue Canada. This suggests a "hands off" approach by the Department, requiring purchasers and vendors to sort out their respective liabilities between themselves. Attempts by Revenue Canada to collect unpaid GST from vendors would be consistent with this approach.

30 ... collect the tax under Division II payable by the recipient in respect of the supply." Thus, the vendor collects the tax as the agent of the Crown. The vendor is deemed to hold the tax in trust for the Crown," and is required to remit the tax to the Receiver General on or before the day upon which that person I s return is required to be filed. 47 Bnforc.. ent Again.t Ven40r Pursuant to Subsection 313(1), the Crown may bring an action to recover any taxes or net taxes which are payable to the Crown pursuant to the GST legislation. Furthermore, in calculating the amount of tax which must be remitted to the Receiver General, a vendor must take into consideration all amounts of tax which became "collectible", and not simply taxes which were actually collected. Thus, the vendor must remit taxes which were collectible pursuant to subsection 221(1), even if the tax was not actually collected, and the Crown can enforce payment of that amount by the vendor. 2. Special Rule. for certain Bxempt supplie. As is noted in Part II (D) above, Schedule V to the Act designates certain supplies as "exempt", with the result that no GST is payable in respect of such transactions. Part I of Schedule V itemizes the real property transactions which are exempt, and a more detailed " 47 Subsection 222(1). Subsection 228(2).

31 analysis of these provisions are set in Part V below; however, at this point it is important to note that section 194 of the Act establishes particular rules which are applicable in respect of some exempt property transactions, and which may have the effect of shifting GST liability in respect of such supplies from the purchaser to the vendor. section 194 of the Act reads as follows: "statement as to Use of Real Property 194. Incorrect statement - For the purposes of this Part, where a supplier has made a taxable supply by way of sale of real property and has incorrectly stated or certified in writing to the recipient of the supply that the supply was an exempt supply under any of sections 2 to 5, 8 and 9 of Part I of Schedule V, except where the recipient knew or ought to have known that the supply was not an exempt supply under those sections, (a) the tax payable in respect of the supply shall be deemed to be equal to the tax fraction of the consideration for the supply; and (b) the supplier shall be deemed to have collected, and the recipient shall be deemed to have paid, that tax on the earlier of the day ownership of the property was transferred to the recipient and the day possession of the property was transferred to the recipient under the agreement for the supply." The "tax fraction" referred to in paragraph 194 (a) is equivalent to 7/107, and is the formula used to break a GST-included price into its tax and non-tax components. Thus, the net effect of section 194 is, in applicable transactions where a satisfactory written statement or a certificate has been provided to the purchaser, to effectively deem the purchaser to have discharged his obligation to pay GST to the vendor if

32 it is ultimately determined~ that the transaction was not exempt. An overview of the exempt transactions to which section 194 applies, and sample certificates which may be employed by a purchaser in order to secure the protection provided by section 194, are set out in Part V below. Liability Transferred to Vendor. Essentially, a certificate given by the vendor which falls within the scope of section 194 amounts to a guarantee that the purchaser will not be required to absorb any GST burden arising from the transaction. This may be particularly critical in the case of a sale of undeveloped land, as it will frequently be difficult to determine with certainty whether the transaction is or may be subsequently found by Revenue Canada to be taxable. 49 The effect of section 194 should cause one to consider very carefully whether any certificate should be provided by the vendor to the purchaser upon closing. In making this decision, the parties should bear in mind that, as is noted above, the GST is essentially a purchaser's tax, and in the absence of any circumstances which shift the burden of that tax from the purchaser to the vendor, the purchaser will continue to be liable for the tax. The provision of a certificate under ~ After a reassessment by Revenue Canada, for example. 49 The applicability of this exemption will depend upon, among other things, whether the vendor used the property as capi tal property in a business, or sold the property in the course of a business. As these concepts are rather broad for the purposes of the Act, such a determination will often be difficult.

33 section 194 is one such burden-shifting event, and the vendor should carefully consider whether he is prepared to accept that burden. In my view, unless the agreement of purchase and sale explicitly states that the transaction is GST exempt, and requires the vendor to deliver a suitable certificate upon closing, the vendor is under no legal obligation to provide such a certificate, and should not provide such a certificate. This does not mean that the vendor should collect GST at the time of closing, and in fact if both parties are of the understanding that the transaction is exempt the vendor will not do so; however, if it is subsequently determined that the transaction was in fact taxable, Revenue Canada may, at its option, attempt to collect the tax from either the vendor or the purchaser. If Revenue Canada prevails upon the vendor, and the vendor has not provided a certificate as to the exempt status of the transaction, the vendor will be entitled to recover the tax from the purchaser; however, if the vendor has provided a certificate at the time of closing, the vendor will be precluded by section 194 from recovering the tax from the purchaser. ThUS, unless the agreement of purchase and sale specifically calls for such a certificate, it would be unwise for the vendor to gratuitously provide one to the purchaser at the time of closing. Furthermore, the vendor's solicitor should take care to avoid the inclusion in any correspondence with the purchaser's solicitor of a statement which may satisfy the requirements of section 194.~ ~ Examples of recommended phraseology in correspondence exchanged upon closing are set out in Part VII(B), pages 66 to 72.

34 aeqistratiod of WritteD Stat.. edt Another question which has frequently arisen with respect to section 194 is whether the written statement should be included in the matrimonial property affidavit and registered with the deed itself. As the GST does not, in the absence of the registration by the Department of National Revenue of a certificate,si create a lien or encumbrance upon real property, there is no advantage to be gained by registering the statement with the deed, other than to create a permanent record in case the files of the purchaser's solicitor are destroyed. The fact that the GST does not constitute a lien on real property means that a subsequent purchaser will not have to review the statement in order to satisfy himself that the previous transaction did not result in the creation of an interest in the property in favour of the Crown in right of Canada. Furthermore, the examination of a certificate by a subsequent purchaser will not assist that purchaser in determining whether his transaction is taxable, as any number of events may have occurred since the previous sale which would subject his purchase to GST. S2 Consequently, it is not necessary to incorporate the certificate into the matrimonial property affidavit and record it with the deed. 3. Direct aeaittadce by Purchaser Subsection 221(2) permits the purchaser to directly remit any 51 Subsection 316(4). 52 For example, the vendor may have, since his purchase of the property, changed his use of the property, thereby triggering a deemed supply, or may have undertaken a SUbstantial renovation of the property, hence making the subsequent sale taxable.

35 GST payable as a result of a taxable supply of real property by way of sale if: 1. the vendor is a non-resident person (or is resident in Canada by reason only of subsection 132 (2), which deems a nonresident to be a resident in respect of, but only in respect of, activities of that person carried on through a permanent establishment in Canada); 2. the purchaser is a GST-registrant and the transaction is not a supply of a residential complex made to an individual; ~ 3. the purchaser is a prescribed recipient. 53 If any of the three circumstances above are present, the purchaser may remit any GST arising upon the transaction directly to the Receiver General for Canada. Subsection 228 (4) of the Act outlines the procedure to be followed by the purchaser who self-remits. Essentially, the purchaser is required to file a prescribed form and remit the tax to the Receiver General for Canada. If the purchaser is a registrant, the form and GST are to be filed and remitted no later than the day on which the purchaser's return for the reporting period in which the tax became payable is required to be filed. Assuming that the purchaser is entitled to claim an input tax credit in respect of the GST which became payable,~ he will also be entitled to claim the input tax credit at that time, and consequently no net GST will be remittable in respect of 53 As of the date of this paper, no recipients have been prescribed by regulation for the purposes of subsection 221(2). ~ Pursuant to SUbsection 169 (1), the purchaser would be entitled to claim an input tax credit if the property was purchased exclusively for use in a commercial activity of the purchaser.

36 the transaction. Thus, the ability to self-remit by registrant purchasers will usually be quite beneficial, as it will minimize the cash flow implications arising from a taxable purchase of real property. In circumstances where a non-registrant purchaser is entitled to self-remit (i.e., purchases from a non-resident vendor), the form and tax must be submitted on or before the last day of the month following the month in which the tax became payable. 55 Subsection 221(2) provides that a non-resident vendor is "not required" to collect GST arising upon a sale of real property. It does not say, however, that the vendor cannot collect the tax, nor does it say that the purchaser cannot pay the tax to the non-resident vendor. Consequently, it would appear that a purchaser who pays the GST to a non-resident vendor has discharged his obligations pursuant to the Act, and I am unaware of any provision in the legislation which creates a possible liability on the part of a purchaser who does so. avidence of Purchaser's Registration status A vendor who chooses not to collect GST due to a belief that the purchaser is a GST registrant will typically wish to see some evidence confirming that the purchaser is a registrant; however, there is a critical distinction to be made between certificates obtained pursuant to section 194 and a certificate or affidavit obtained as proof of the registration status of the purchaser for the purposes of 55 Paragraph 228(4) (b).

37 subsection 221(2). Specifically, a purchaser who relies upon a certificate provided by a vendor pursuant to section 194 is exonerated from any further liability pursuant to the Act, and any GST liability arising from the transaction is transferred to the vendor. The same cannot be said, however, in respect of evidence provided by the purchaser to the vendor concerning the application of subsection 221(2). The vendor is relieved of his obligation to collect GST if the purchaser is a registrant, but not if the vendor proceeds upon the reasonable but mistaken belief that the purchaser is a registrant. Thus, a vendor who declines to collect GST as a result of a mistaken belief that the purchaser is a GST registrant will remain liable for the tax if the purchaser fails to self-remit in accordance with the Act. consequently, the vendor should take care to ensure that he is satisfied of the registration status of the purchaser.~ It should also be noted that the Act is unclear as to what will occur if a vendor insists on collecting GST even if the purchaser is a GST-registrant. This consideration may become relevant for two reasons. First, as is noted above, a vendor may be assuming some risk when he declines to collect GST from a person who claims to be a GST- ~ As an example of the form of confirmation which is sometimes required, the Sheriff for the County of Halifax is requiring from registrant purchasers at Sheriff's sales an affidavit confirming that the purchaser is a registrant, disclosing the purchaser's registration number and confirming that the purchaser will remit GST in accordance with subsection 228(4). In my view, it is not necessary for the vendor to seek an undertaking or a confirmation from the purchaser that the purchaser will remit GST in accordance with subsection 228(4), as the vendor is essentially relieved of any obligation to collect or otherwise secure payment of the tax if the requirements of subsection 221(2) are satisfied. Sample statutory declarations which may be employed in cases where subsection 221(2) applies are appended as Schedules "A" and "B" to this paper.

38 registrant. Second, if the vendor is also a registrant, it will typically be to the vendor's advantage to collect GST at the time of closing, and to use the GST so collected for the purpose of funding any GST arising upon purchases made by the vendor in the course of his business. Although the legislative provisions are unclear on this point, it should be remembered that the vendor is required by subsection 221(1) to collect the GST, unless he is permitted by subsection 221(2) to decline to collect the tax. Payment of the GST by the purchaser to the vendor will fully discharge the purchaser's obligations, even if subsection 221(2) is applicable, without exposing the vendor to the risk (albeit a minimal or even negligible risk) resulting from a decision not to collect the GST from a person who claims to be a registrant. Thus, on balance it is my view that a vendor may insist on collecting the tax at the time of closing, unless the parties have agreed to the contrary. Accordingly, if the purchaser is a registrant and places some importance on being able to self-remit, this issue should be explicitly addressed in the agreement of purchase and sale. 4. Action by Vendor to Collect Tax As is noted above, the Act expressly gives a vendor the right to bring an action against a purchaser to collect GST which is payable but is yet to be paid by the purchaser to the vendor. The provision in question is section 224, and the following conditions precedent must be satisfied before the action can be maintained: