THE G.S.T. and REAL ESTATE PRACTICE: THE NEED FOR A UNIFORM APPROACH The Continuing Legal Education by: Society of Nova Scotia Real Estate Seminar Taylor April 20, 1991 presented Donald S. Taylor Walker and 1
INTRODUCTION It is my purpose to examine the way in which real property lawyers in Nova Scotia should approach the Goods and Services Tax as it applies to the transactions we handle for Vendors and Purchasers. I would like to begin by stating that it is not the purpose of this paper to set out in detail how the portions of the Excise Tax Act, R.S.C. 1985, c. E-15, as am., respecting the Goods and Services Tax (GST) apply to real estate transactions. In a very simplistic way, one can, however approach the matter of GST and real property somewhat in the same way as the Liquor Control Act of this province. In that Act, it is an offence to possess liquor unless you fit within an exception (5.78(1)). Similarly, unless your purchaser can fit within an exception, he or she will pay the GST on the purchase of real property. A basic understanding of the provisions of the Excise Tax Act is assumed. The papers presented by my learned colleagues will address this matter fully. In addition, I would refer you to several sources. First, an excellent book on the topic by the Ernst & Young accounting firm, details are set out in the Schedule "A" attached, the GST information line, (free for those of you with a modem, 1-800-267-4500), and, finally, the GST Memorandums issued by Revenue Canada, some of which are detailed in the attached Schedule But. My final caution is that in attempting to simplify or paraphrase the Excise Tax Act, I may have taken liberties with the complex subject matter. I urge you to keep a copy of the part of the Act on your desk, and in particular Schedule V, Part I, respecting exempt supplies of real estate. Finally, I am not here as an "expert". The experience with the GST legislation is in its infancy and experts do not exist. I am here to put forward my ideas and those of several law firms with whom I have discussed the matter and attempt to stimulate discussion. THE NEED All lawyers with whom I spoke agreed that most of the assurances lawyers or their clients will seek respecting the GST in a transaction should come from the Vendor, as he or she will know whether the "supply" is a taxable one. All lawyers also agreed that the best and easiest time for obtaining these assurances is at the signing of the agreement of sale. However, these same lawyers agreed that: 2 1. We never see clients until after the agreement is signed. 2. All that some real estate agents seem to know about the GST is that they have to make sure that they now put at the bottom of the agreement for sale the words "plus GST" immediately after the words "a commission of six per cent". In a perfect world, realtors would approach the matter in a way similar to UFFI, receiving assurances such as; "Vendor warrants that there is no GST payable upon this transaction." or stipulate that it is payable, if such is the case. Unless we convince the real estate association and all agents to include such clauses, the responsibility is ours to deal with the matter. WHY SHOULD I CARE? Simply put, because no one else will worry about it.
Most clients will rely upon their lawyer to figure out if the GST applies. Sophisticated clients will likely be registrants, such as developers, and will be well aware if they must pay, or collect, GST. It is those who are not registrants, such as the new home buyer, and the buyer of vacant land who will seek our advice. This type of client will not be satisfied by being told to see an accountant or by giving him or her the GST toll free number. While Section 221(1) of the Act imposes a duty upon the Vendor to collect the GST (except in certain stated circumstances), Section 165(1) requires the person receiving the supply, to pay the tax. This recipient is the purchaser, our client. As noted, in most cases, the purchaser will have limited knowledge as to whether or not GST is payable. This of course, overlooks simple situations, such as the purchaser of a new home from a reputable developer, who has told the purchaser up front that GST will be due. THE INQUIRY If it is accepted that inquiries must be made to gather information so that the lawyer can advise his client if GST must be paid, what form should these inquiries take? Some lawyers felt that a telephone inquiry of the other solicitor was adequate. These lawyers better memorize the telephone number of our insurer. Most lawyers that I conferred with agree that the responses or assurances should come from the vendor him or herself, not the lawyer for the vendor. The assurance should be in writing. There is statutory authority for this requirement. 3 Section 194 of the Excise Tax Act provides: "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 {meaning 7/107) 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." All of this means that if the Vendor of real property has indicated in writing to the Purchaser that the purchase is exempt, or that there is less GST payable than should be the case, then, if the Purchaser can bring him or herself within the exemptions of Schedule V named, then the Vendor will have to be responsible for the tax. As stated in the section quoted, if the Purchaser should have known the sale was not exempt, the Purchaser cannot rely on this section. The types of transactions to which this section refers are basically sales of used residential housing and sales of vacant real property by an individual or certain type of trust. It is interesting to note that no such statutory protection is afforded a Purchaser by this section if relying on a statement, written or not, in many other circumstances, such as buying farmland, or a new house.
4 THE TYPE OF WRITTEN ASSURANCE 1. THE AMENDED MATRIMONIAL AFFIDAVIT Some lawyers favour amending the Matrimonial affidavit to provide the assurance that the transaction is an exempt one. No details of why the transaction is exempt are provided. An affidavit of this type suggested by one practitioner in a large firm is as follows: The conveyance of this property is exempt from the Goods and Services Tax by virtue of the provisions of Part I of Schedule V of the Excise Tax Act (Canada). The proponents of this approach say that we only need to have a short and easy way to meet the protection requirements of Section 194. Indeed, what we do not really need, after last summer's Provincial Deed Transfer Tax affidavit, is another separate paper to complete or have to remember to have a property assistant collect on closing if acting for a purchaser. If the assurance is in the deed, it is apparent for all to see, and not subject to being lost. Those against this approach say that it calls for the vendor to swear to a legal conclusion, rather than swearing to the truth of a set of facts. Also, this group of lawyers want to be able to see the facts that apply to create the exemption. 2. THE SEPARATE AFFIDAVIT Those of this school of thought want to see a separate detailed affidavit sworn to by the vendor. I must confess my bias to this approach and enclose with this paper most of the standard form affidavits I have prepared (schedules "C" to "K"). Some in this camp want to see this GST affidavit attached to the deed, and some want it separate. I take comfort in an affidavit that sets out the facts in the transaction, so that a purchaser or his lawyer can see why an exemption is claimed. However, it must be admitted that this approach does require more effort, as the facts must be ascertained and the vendor's lawyer must select and prepare the proper form. 3. THE CERTIFICATE This group of lawyers fit somewhere between groups one and two. The certificates that I have seen (I attach a sample as Schedule "L"), give basically the same information as the affidavit, but are not sworn. Adherents of this approach point out that Section 194 requires only a written statement, not a sworn one. The other reason for using only a certificate is that, as the GST does not of itself constitute a lien on real property, subsequent purchasers do not need to see if it was paid and therefore the assurance is important initially, but not in subsequent transactions and so the certificate or affidavit need not be included in the deed. The Standards Committee of the New Brunswick Bar has released a memorandum containing draft precedents of the four certificates which they recommend be used. I attach these as Schedule "M". I have added a cover page to the same, quoting from their instructions as to when each form is used. 5
SUMMARY There is a need for a standardized approach that will be accepted and followed by real estate lawyers in Nova Scotia. It is up to us to define that practice. The ideal approach will be accepted and followed by all the bar, and must be easily understood and applied. Having reviewed many of the precedents in use, my thoughts are: 1. We ask the Real Estate Association of Nova Scotia to address the matter in all agreements of purchase and sale. The agreement should indicate if GST is to be paid by the purchaser, or if the property is exempt. 2. Lawyers acting for vendors should supply certificates, not affidavits, on closing. A draft copy should of course be provided the other lawyer early in the transaction. In the event that the purchaser is a registrant, a certificate similar to the New Brunswick form Appendix "D" would be supplied to the vendor's solicitor. 3. The certificates be standardized. The New Brunswick models are a good start, but they do not cover all situations. For example, the Section 167(1) sale of all or substantially all of a business, or the farm exemption. 4. The CBA Real Property subsection be requested to develop and circulate, through the Bar Society, draft precedents to be used. I would like to see a discussion here today of the thoughts of the practitioners present. I do not expect that, if the group favours a set of forms, they be developed today. I do hope that the views of those here as to my suggestions will be noted and that thereafter the Real Property Section take the matter in hand. I would be glad to lend my assistance. 6