HST Issues in Commercial Real Estate Transactions: Potential “Bad Bargains”

Published on: February 2019 | What's Trending


The term “affordability crisis” is increasingly used to describe the real estate market. Given that purchase prices of properties in Toronto and Vancouver have been steadily rising, it is more important than ever to understand how the taxman figures into the process of buying real estate.

In the context of commercial real estate transactions, GST/HST issues can become complicated. Vendors may end up getting 13% less than they believe they bargained for if their Agreement of Purchase and Sale has not been properly drafted.

The Concept of “Taxable Supplies” of Services and Property

HST is Canada’s federal consumption tax as imposed under the Excise Tax Act (the “Act”). It stipulates that all supplies of services and property – including real property – in Canada are taxable, unless a specific exemption from the Act applies.[1] For example, when you purchase non-exempt items from a retailer, such as a laptop, your receipt reflects that you were charged HST. In such a scenario, the vendor collects the HST payable to the federal government, and is responsible for remitting it to the government, even though the tax was imposed on the purchaser.

Self-Assessment of HST and Input Tax Credits

Similarly, in the commercial real estate context, the default requirement is that the suppliers (ie. the vendors) of real property must collect the HST applicable to a transaction and are responsible for remitting it.[2] However, there is a very important exception to these collection rules which is commonly misunderstood.

If the purchaser of real property is a GST/HST-registered recipient and is not an individual (eg. a corporation), then the vendor/supplier is not required to collect the tax; instead, the purchaser/recipient is required to self-assess. As long as the property is used primarily for commercial activities, the buyer can account for the tax on its GST/HST return and can also claim an offsetting Input Tax Credit (an “ITC”) on the same return.[3] In this way, there is no need for the purchaser to pay HST first, file the GST/HST return, and then claim an ITC at some point in the future. Rather, the HST is essentially debited and credited on the same return, and this can result in a significant cash-flow benefit if the purchase price of the real property is high.[4]

If the purchaser has a highly-offsetting ITC (eg. where the percentage of property use in commercial activities is 90% or more), then their net HST payment obligation will often be brought down to zero.[5] As a result, there are misconceptions among those involved in the real estate industry and even some lawyers about how and whether HST applies when selling commercial property to a GST/HST-registered purchaser.[6]

“HST Included in Price” vs. “HST in Addition to Price”

The case of Bumac Properties Inc. v. 1221 Limeridge Inc.[7] provides a drastic example as to why this is such a problem. The Agreement of Purchase and Sale (the “APS”) stipulated a purchase price of $920,000, but paragraph 7 of the APS indicated that “if this transaction is subject to Goods and Services Tax (G.S.T.) then such tax shall be included in the purchase price”.[8]

Although the vendor’s lawyer immediately noticed that GST had been included in the purchase price, and even though she organized a conference call with the purchaser’s lawyer and the Canada Revenue Agency (the “CRA”) on how best to proceed in order to lower her client’s tax burden, 7% or $60,186.92 was still listed as a deduction from the balance due on closing on the Statement of Adjustments (the “SOA”).[9] When it came to filing its tax return, the purchaser self-assessed and offset the amount of the deduction with an unclaimed tax credit of $60,865.95.[10]

When the vendor learned that the purchaser essentially double-dipped – by not paying the GST of approximately $60,000 to the CRA due to its offsetting ITC, while simultaneously getting a deduction of approximately $60,000 from the purchase price – he filed a lawsuit on the basis that the realtors had misrepresented the meaning of paragraph 7 of the APS to him.[11]

Counsel for the plaintiff vendor made a variety of submissions in court, such as attempting to invoke the contra proferentem rule by arguing that the words “Goods and Services Tax”, “such tax” and “included in the purchase price” were ambiguous and accordingly should be given a meaning that works against the interests of the party who provided the wording. However, the judge noted that even though the original APS was prepared by the defendant purchaser, the plaintiff vendor made several counter-offers and had the opportunity to change the terms of the agreement but failed to do so.[12] The plaintiff vendor also tried to argue that since no GST was paid, then $60,186.92 had been deducted in error on the SOA so that the amount should be readjusted and returned to the plaintiff. However, the defendant purchaser was successful and the court held that he was legally entitled to its ITC pursuant to the Act, and that the plaintiff vendor’s “attempt to rewrite the contract…must therefore fail now that he realizes he made a bad bargain”.[13]


In Bumac, the plaintiff made a mistake in signing an APS that included GST in the purchase price, whether as a result of the realtors’ misrepresentation or simply because of his own error. Unfortunately, this resulted in his net sale proceeds being reduced by 7% (approximately $60,000), being the amount of the GST payable on the transaction (the case was decided in 1997 before HST was implemented in Ontario). If the case had involved HST, the vendor would have lost 13% of the proceeds, or approximately $106,000. Accordingly, prospective sellers of commercial real estate should take note and ensure they obtain legal advice before signing an Agreement of Purchase and Sale and potentially entering into “bad bargains”.


[1] “Real Property and the GST/HST”, Canada Revenue Agency (2018), online: Government of Canada

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] David Sherman, “How Not to Get Sued Over the HST – Updated for 2016” (2016), online: LAWPRO Magazine.

[7] [2000] OJ No 4676, 101 ACWS (3d) 1033 [Bumac].

[8] Ibid at para 9.

[9] Ibid at para 10, 14-16.

[10] Ibid at para 19.

[11] Ibid at para 20.

[12] Ibid at para 27-28, 60-62.

[13] Ibid at para 55-56, 59.

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