LEGAL The HST/GST Trap
By Richard Montgomery
Most real estate purchase contracts provide that the purchaser is to get professional advice regarding HST/ GST, to therefore be satisfied as to whether HST/GST on the real estate transaction is payable or not. Most purchasers assume that if they are buying property from an individual, that HST/GST is not payable. This is not necessarily correct. If a purchaser makes this assumption, they could legally be required to pay HST/GST in addition to the purchase price. Richard Montgomery is a partner at Montgomery Miles Law Firm. His business clients are varied and include proprietorships, partnerships, companies, investors, developers and financial institutions. His real estate clients include lending and mortgage work to conveyancing, leasing and development transactions.
The problem for the purchaser is that the vendor is the only one who knows how they have dealt with the property and therefore the only one who knows whether it is taxable or not. Take for example an individual who buys a lot with the intent of either reselling it or building a home on spec and selling it in order to make a profit. In such circumstances, they would claim their HST/GST back when they acquire the property (as an input tax credit). Once they do this, HST/GST will be payable when they sell it. A similar problem can occur when a person buys property to rent it out for short-term rentals. This often happens at vacation areas such as ski hills or waterfront areas. In such case the original purchaser would claim the input tax credit when they buy the property, thus making it taxable when they sell it to a subsequent buyer. In a perfect world, the seller would determine the HST/GST position of the property in question and disclose it to their purchaser at the beginning of the transaction.
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