Avert Penalties, Confirm Customer GST Registrations

When your company sells a commercial property, one party must pay a Goods and Services Tax (GST). And occasionally, the burden of responsibility can create a problem. If the buyer isn’t registered for GST, it’s your company’s responsibility to collect the GST on the sale and remit it to Canada Revenue Agency (CRA).

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The GST Advantage

Even if your company qualifies as a small supplier that may not have to register for GST, it can make economic sense to get a number.

Generally, a business doesn’t have to register for GST if it is a sole proprietorship, partnership, or corporation whose total taxable revenues before expenses are $30,000 or less annually ($50,000 for such public service bodies as charities, non-profit organizations, municipalities, or universities.)

However, registration may give your company a tax advantage: It can claim tax credits for the GST/HST paid on such operating expenses as commercial rent, utilities, office supplies, as well as meal and entertainment expenses, reimbursements to employees or partners and capital property. And that can lead to a GST refund.

But if the buyer is registered, the responsibility shifts to the buyer who must report the tax and can claim any available Input Tax Credits to offset the GST (see right-hand box). On the face of it, this is an uncomplicated transaction and your company is in the clear.

But a Tax Court ruling suggests that you might want to double check the accuracy and validity of GST numbers to avoid an unpleasant surprise.

In the court case, the buyer of a commercial property claimed the company was registered for GST and provided a number. During an audit of the sale, however, the number was discovered to be invalid. The CRA had cancelled the purchaser’s registration.

But it wasn’t the buyer who wound up having to pay the GST — it was the seller. The Tax Court ordered the seller not only to pay the tax that should have been collected, but also to pay penalties and interest, despite the buyer’s misrepresentation in the deed of the sale about the validity of its GST number. (Lee Hutton Kaye Maloff & Paul Henriksen v. The Queen)

In theory, of course, the seller could bring a civil court action against the buyer to recover the GST it was forced to pay. In practice, however, that would mean incurring more expenses for legal fees. Moreover, the seller would still be liable for the penalties and interest. The Excise Tax Law doesn’t provide for the recovery of those costs.

A simple way to avoid this problem is to request CRA confirmation of a purchaser’s GST registration status.

There are other tax and GST issues involved in the sale of real estate and other commercial goods, so consult with your professional advisor before your company completes a major sale to make sure everyone understands the consequences of the transaction.

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