HST errors result in disastrous problems for vendors in commercial real estate transactions because they are costly, as they invariably involve 13% of the purchase price. When the purchase price is relatively low (such as $300,000.00), a potential HST mistake has a correlatively lessened monetary effect (of $39,000.00).
However, in a 2017 case before the Tax Court of Canada, 2252493 Ontario Limited v. The Queen,[1] the purchase price of the property was $3,200,000.00 and an HST mistake was made. The vendor ended up being penalized, paying the sum of $416,881.83 to the Canada Revenue Agency (“CRA”) after closing. This post will explain how the vendor’s solicitor could have avoided the HST error by insisting on an assignment rather than accepting a purchaser’s direction regarding title (a “Direction Re: Title”).
How Was a $416,881.83 HST Mistake Made?
In a previous post,[2] I explained that vendors (as suppliers of commercial real property) are required to collect and remit HST to the CRA under the Excise Tax Act[3] (the “Act”), unless an exception applies such as the purchaser being a GST/HST-registered recipient that will self-assess. In 2252493 Ontario Limited, the analysis turned on the question of determining the correct identity of the GST/HST-registered recipient.
An Agreement of Purchase and Sale (“APS”) was signed with the boilerplate section 7 HST clause[4] that is typically included in Ontario Real Estate Association (“OREA”) forms, and the purchaser on the APS was listed as Mayling Holding Inc. (“Mayling”).[5] However, on closing, the purchaser’s solicitor delivered a Direction Re: Title indicating that the deed or transfer should be engrossed as follows: 840 Yonge Street Holdings Inc. (“840 Yonge”);[6] indeed, this Direction Re: Title appears to be the only document signed by Mayling other than the APS. Almost all of the other signed documents for the transaction referred to 840 Yonge as the purchaser, including the operative closing documents executed by the vendor,[7] despite the fact that 840 Yonge was not incorporated until after the APS was signed in the first place.[8]
The vendor’s solicitor testified that no collection of HST was listed on the statement of adjustments, since he believed that the Direction re: Title was sufficient to make 840 Yonge the GST/HST-registered recipient of the supply of real property.[9] He also obtained a statutory declaration containing 840 Yonge’s HST registration number and an HST Registry Search confirming 840 Yonge’s registrant status, so the vendor’s solicitor believed 840 Yonge “was legally required to self-assess and remit the HST on the sale of the Property”.[10]
The problem with the vendor’s solicitor’s analysis is that section 123(1) of the Act defines “the recipient of a supply of property…[as] the person who is liable under the agreement to pay” monetary consideration for that supply of property.[11] Thus, as per the APS, the recipient for HST purposes is still Mayling (and not 840 Yonge) according to the Act.
As a result, the Minister of National Revenue reassessed the vendor less than one year later and concluded that since Mayling was not an HST registrant on closing despite being the recipient, the vendor was required to have collected and remitted the HST of $416,881.83 with respect to the transaction.[12]
How Could an Assignment Have Helped the Vendor’s Solicitor?
“Where the ostensible recipient, the person obligated to pay the consideration, is named in the APS as “purchaser”, then something more concurrent with closing than a one page unilateral direction regarding title is necessary to dislodge the countervailing, mutual agreement, patent facts, logical conclusions and legal obligations in the APS”.[13]
One key word used by the judge here is “unilateral”. As a general rule, as affirmed by the Ontario Court of Appeal in Rodaro v. Royal Bank of Canada, a party can only unilaterally assign its ‘benefits’ or rights under the APS but will still remain liable for its ‘burdens’ or performance obligations.[14] Instead, contractual performance obligations can only be completely transferred and assumed with the consent of all parties to the APS, including at least 2252493 Ontario Limited and Mayling as original vendor and purchaser,[15] respectively (and preferably also including 840 Yonge as assignee). However, the judge does go on to state that such documentation need not be “onerous or complex [and a] one or two page assignment and assumption agreement” would be sufficient.[16]
At times, however, vendors are reluctant to allow for an APS to be assigned for other reasons. For example, if a purchaser has given significant representations, warranties, covenants, and indemnities, the vendor may be concerned that such an assignment could be construed as an express or implied release of the purchaser’s performance obligations and overall liability under the APS. To that end, an APS sometimes contains a negative covenant prohibiting assignments so that the vendor will always retain their right to sue the original purchaser if a problem arises.
A possible solution to protecting the vendor’s litigious interests while simultaneously avoiding making HST mistakes is to amend the APS, removing a negative covenant prohibiting assignments if necessary, but more importantly including a condition whereby the vendor’s solicitor shall only allow an assignment from the original purchaser to a third party upon receiving all of the signed closing documents, the entire balance due on closing, and any other requisite deliveries. In this way, a vendor only has to accept an assignment when the deal is practically closed anyway, while still obtaining the requisite documentation needed should the CRA ever try to reassess them for an additional 13% of the purchase price.
[1] 2017 TCC 20 [2252493 Ontario Limited].
[2] “HST Issues in Commercial Real Estate Transactions: Potential Bad Bargains” (2019), online: Pallett Valo LLP.
[3] RSC 1985, c E-15 [Excise Tax Act].
[4] “7. GST/HST: If the sale of the property (Real Property as described above) is subject to Goods and Services Tax (GST) or Harmonized Sales Tax (HST), then such tax shall be in addition to the Purchase Price. The Seller will not collect GST or HST if the Buyer provides to the Seller a warranty that the Buyer is registered under the Excise Tax Act (“ETA”), together with a copy of the Buyer’s ETA registration, a warranty that the Buyer shall self‑assess and remit the GST or HST payable and file the prescribed form and shall indemnify the Seller in respect of any GST or HST payable. The foregoing warranties shall not merge but shall survive the completion of the transaction. If the sale of the property is not subject to GST or HST, Seller agrees to certify on or before closing, that the transaction is not subject to GST or HST. Any HST on chattels, if applicable, is not included in the purchase price” [emphasis added].
[5] 2252493 Ontario Limited, supra note 1 at para 4.
[6] Ibid at para 5.
[7] Ibid at para 6-9.
[8] Ibid at para 18.
[9] Ibid at para 13.
[10] Ibid.
[11] Excise Tax Act, supra note 3 at s.123(1).
[12] 2252493 Ontario Limited, supra note 1 at para 15, 40.
[13] Ibid at para 38.
[14] Rodaro v Royal Bank of Canada, [2002] 59 OR (3d) 74, 157 OAC 203 at para 33.
[15] 2252493 Ontario Limited, supra note 1 at para 26.
[16] Ibid at para 39.