Beware of GST on assignments

by Paul Cowhig, Advisor, Professional Standards

I had a call from a buyer the other day and what she told me made my hair stand straight up. So I’m passing it along to you so your hair will stand up!

The seller she was buying from bought a pre-sale a while back and prior to completion listed it for sale as an assignment for a certain amount, plus GST. The buyer who called me tried to buy it but couldn’t sell her place so the deal died.

Meanwhile the market slowed down and the seller had to complete on the original contract. He then re-listed it at a higher price calculated to re-coup the GST and in the listing it was noted that the GST had been paid.

The same buyer had a deal on her place by then, so she came back and wrote an offer on the same unit at the new price with the understanding that the GST was paid. It was essentially the same price as before when taking the GST into account. Everyone was happy. That is until two days before closing when the conveyancer called asking for another $38,000 for the GST!

Apparently, Revenue Canada found that because the seller had no intention of moving into the property, GST was payable. Needless to say this news made the buyer very unhappy.

I have been trying to get a hold of her again to find out what the final outcome was but have not been able to reach her as yet.  But I just didn’t want to wait any longer before I brought this to your attention.

Exemptions to GST

Regardless of the eventual outcome of that situation, this is a simple ‘heads up.’

As I understand it, Revenue Canada’s point is that the seller had never had any intention of buying this property for his own use. It was a flip from the beginning, a commercial venture and, as such, GST applicable.

Below is from Council’s Professional Standards Manual regarding GST;

Exemptions may include but are not restricted to the following: residential rents, sales of used residential housing other than substantially renovated property, sales of personal-use land by an individual or an estate, certain sales of farmland to related individuals where the farmland is for personal use, and most sales and rentals of real property by charities, non-profit organizations and other public-service organizations.

Licensees are not typically tax experts and we need to be very careful what we say and the advice we give.

The standard contract of purchase and sale we use says in the boiler plate print (Clause #6 ADJUSTMENTS) that “the buyer will assume and pay all taxes…. etc.” So, unless the GST is referenced somewhere else in the contract, the buyer is on the hook, if the tax is deemed to be applicable to the sale.

Assignment Listings

We need to be very careful with all the assignment listings and in particular with assignments of new properties.

With the market slowing there will be more people completing on deals they never planned to close on so we may see this GST issue come up again. Remember who your client is and be sure to protect them. There are clauses to protect your client, whether buyer or seller, that you can use to do just that.

Above all, don’t make representations or give advice on anything you are not 110% certain of. Insist your client get professional tax advice and document that you provided that recommendation.

This is a perfect example of a surprise that should never happen to a client at closing and a perfect example of the sort of transactional detail that using a REALTOR® should ensure doesn’t happen.

Maybe CREA should make a TV ad from this example to illustrate the tangible value a Realtor brings to a transaction when they do their job well.  Just a thought!