To Charge Or Not To Charge

Questions2

The Tax Issue

The place of supply rules that govern the rate at which the GST/HST should be charged contains a specific rule with regard to services performed that relate to real property situated in Canada.

The rule stipulates that the GST/HST rate that applies to services performed with respect to real property is determined by the location of the property.

This begs the question: what type of service is considered to be “in respect of” real property?

More specifically, this question comes from an accountant who performs the service of preparing tax returns on behalf of non-resident owners of real property situated in Canada. Every non-resident who earns rental income from real property in Canada must file a Canadian income tax return on which only income from the Canadian property is reported.

Are the services of an accountant to prepare tax returns on behalf of a non-resident subject to the GST/HST?

The Answer

Generally, services rendered to a non-resident person are considered to be zero-rate (not taxable) under the GST/HST. The rule relating to services in respect of real property is an exception.

The CRA describes a service as being in respect of real property in the following circumstances:

(a) the service is physically performed on the real property (e.g., construction and maintenance);

(b) the direct object of the service is the real property; that is, the service enhances the value of the real property, affects the nature of the real property, relates to preparing the real property for development or redevelopment or affects the management of the real property, or the environment within the limits of the real property (e.g., engineering, surveying, management services);

(c) the purpose of the service is: (i) the transfer or conveyance of the real property or the proposed transfer or conveyance of the real property(ii) related to a mortgage interest or other security interest in the real property; or(iii) the determination of the title to the real property.

The relationship between the service and the real property must be more direct than indirect in order for the service and the property to be considered “in respect of” each other. The direct object of the service is the real property in the sense that the service enhances the value of the property or affects the nature of the property.

Based on the above, the CRA has stated that accounting and tax services relating to the reporting of rental income from real property situated in Canada has an indirect relationship to the property, but is not directly in respect of the property as described above.

Therefore, the provision of these accounting services is zero-rated.

Harmonized Sales Tax

Confession: I’ve never really paid much attention to the HST. Here in Quebec, we have the GST and our very own QST, and that’s been enough for us to handle so far.

Simon, Garfunkel, Ontario and B.C. - All harmonizing these days.

But things are about to change drastically, and unless you’ve just come over on the boat from PEI, you must be aware that most of us now have to pay closer attention to the HST.

First of all, Ontario and B.C. are about to implement the HST. The provincial retail sales tax systems, therefore, will be eliminated, and one tax rate will apply to their goods and services. Ontario’s rate will be 13% and B.C.’s is 12%.

There will be new “place of supply” rules that will determine whether, and at what rate, suppliers located outside a particular province must charge the HST to their customers.

For example, if you are a lawyer residing in Quebec, and you provide a service to a person who is resident in Ontario, you may now have to charge 13% HST as opposed to just the 5% GST on your services. This does not mean that you will have to register in for the HST in Ontario. Anyone who is registered for the GST will have the obligation and the ability to charge the full HST where it applies, in lieu of the GST. No new HST registration number is required.

Place of Supply Rules for Tangible Goods

In the case of a sale of tangible goods, the place where the goods are delivered, or made available to the recipient will determine the tax rate. If you make arrangements to deliver goods, for example from your warehouse in Ontario to a customer in Nova Scotia, then their 15% rate of HST will apply, even if title passes in Ontario. These rules have been in place since the beginning of the HST.

New Place of Supply Rules for Services and Intangible Personal Property (“IPP”)

The biggest change will be seen by registrants who supply services or IPP  to customers in HST provinces. Generally, under the new rules, HST on services will be charged based on the address of the customer. If the customer has more than one address, then the charge is based on the address that is most closely related to the service. If no address is obtained, then the we must look to where the service is performed.

There are many exceptions to the above rules. Services that relate to real property or tangible personal property must bear tax based on the location of the property or goods at the time the services are performed.

Personal services (other than consulting, advisory or professional services) that are performed in the presence of the recipient are taxed where the services are performed.

The new HST rules will come into effect for services provided and goods delivered on or after July 1, 2010, but there are a number of complex transitional rules to be navigated.

The CRA’s website has plenty of information on the transition for Ontario and B.C., and the Department of Finance is where you will find the regulations concerning the new place of supply rules. I would strongly suggest that anyone who does any business with customers in an HST province take the time to prepare for the changes.

GST and Real Estate

Transactions involving real estate seem to attract hectares of GST questions. Surprisingly, the basic rules are fairly straightforward. Unfortunately, there are many “out of the ordinary” situations that complicate matters. Happily, those will not be covered here. The rules discussed below deal with most transactions practitioners will ever encounter.

Before purchasing real estate, make sure to check the GST rules

What is Taxable?

Real estate transactions fall into two main categories: Supply by way of “lease or licence” (i.e., “rentals”), and supply by way of sale.

Generally, as is the case with all GST questions, the first rule is that every supply is taxable unless it qualifies for an exception. Thus, most commercial real estate transactions involving businesses will be taxable. The major GST exemptions will involve supplies of residential property.

The long-term rental of residential property is generally exempt.

A sale of property is exempt if it qualifies under the definition of “used residential” property. Generally, a residential property is considered used if it was previously occupied or intended for use by an individual as a personal residence.

New Residential Property

A sale of a new residential property is taxable. Generally, it is a “builder” who will make such a sale. Since the builder is himself carrying on a commercial activity, he will be claiming input

tax credits (“ITC”) on his construction costs, and then charging the GST when he sells the property.

The purchaser of a new home will be eligible for a “new housing rebate”. This rebate is equal to 36% of the GST paid up to purchases of $350,000. Between this amount and $450,000, the rebate is reduced, and is eliminated thereafter (for the QST, the dollar limits are $200,000 to $225,000).

Self Supply of Residential Property

If a builder, rather than selling a completed residential complex, decides to retain it as a rental property, the “self supply rules” will apply. He will be deemed to have sold himself the property. He will self-assess and remit GST based on the fair market value of the property, including the land. This tax is not eligible for an ITC, since it is an acquisition of a residential property. It will, however, qualify for the residential rebate. If the complex is an apartment building with many units, its value will likely exceed the $450,000 limit. However, these limits will apply to each unit based on its square footage. Accordingly, if a builder completes a 5 unit apartment whose value is $1 million, each unit might be valued at $200,000 and will qualify for the full rebate.

These self-supply rules will apply equally to a “substantial renovation” of a residential property.

Input Tax Credits

Generally, any GST registrant carrying on a commercial activity is entitled to an ITC for expenses. If the activity of the purchaser is part commercial and part exempt or personal, then the ITC must be apportioned in a reasonable manner.

For capital property other than real estate, if the property is used more than 50% in commercial activities, it will be eligible for a full ITC.

A purchase of real property is subject to unique rules. Generally, the ITC must be apportioned based on commercial use. If the purchaser is an individual, no ITC is available at all if the property is used primarily (>50%) as a residence. Thus, an accountant who uses 20% of her home as an office cannot claim any ITC on the real estate purchase.

Who Collects

Generally, a vendor of real property is responsible for collection and remittance of the GST. However, this is not the case where the purchaser is a GST registrant. In this case, the purchaser will self-assess the GST and simultaneously claim any eligible ITC. The vendor should verify the purchaser’s registration number with the government.

If the sale of real property is exempt, it will be because of the vendor’s history with the property. The purchaser should insist on a written confirmation of exempt status from the vendor. Otherwise he will be liable for the tax if such status is subsequently denied for any reason.

GST Rebates for Non-Profit Organizations

One of the most asked questions in the area of GST concerns the rebate available to non-profit organizations (“NPO”). In general, where a GST registrant makes taxable supplies, it is entitled to a full input tax credit on purchases that relate to its commercial activities.

All of an NPO’s activities that are not commercial are in the realm of “non-profit”. All supplies of goods or services that are not for profit are considered exempt supplies under the Excise Tax Act (“the Act”). Exempt supplies are supplies on which the NPO may not charge GST and is not entitled to any ITC on expenses that relate thereto.

In the case of expenses that may relate to both the commercial and exempt operations of the NPO, these expenses must be apportioned on a reasonable basis to determine what percentage of the total is used in commercial activities in order to determine their ITC entitlement. For example, if 40% of the NPO’s activities involves the supply of taxable goods and services, then 40% of its office supplies may be allocated to the commercial activity and an ITC may be claimed for that portion.

The tax on the portion of the NPO’s expenses used in exempt activities may qualify for a special rebate under section 259 of the Act, which provides for a rebate of GST for certain NPO’s.

The rebate is available to the following organizations:

  • Charities
  • Qualifying NPO’s; and
  • Selected public Service Bodies

Each of the above has its own definition:

Charity: is a registered charity or registered Canadian amateur athletic association as defined in the Income Tax Act;

Qualifying NPO: is an NPO that receives at least 40% government funding;

Selected public service body: is:

(a)    a hospital;
(b)   a non-profit school authority;
(c)    a non-profit university;
(d)   a non-profit public college or
(e)    a municipality.

The current GST (QST) rebate rates available to these organizations are as follows:

(a)          Charities and qualifying NPO’s: 50%
(b)         Hospital: 83% (55%)
(c)          School authority: 68% (47%)
(d)         University or public college: 67% (47%)
(e)          Municipality: 100% (0%)

To make the claim in Quebec, separate forms for the federal and Quebec governments must be filed as follows:

  • Federal: form FP-66-V
    (Guide: form FP-66.G-V)
  • Quebec: form VD-387-V

The above forms may be found over at Revenue Quebec.

If an NPO is not registered for GST purposes, there is no requirement to do so to claim a rebate. For current registrants, the claim must be made within four years from the deadline date for the GST/QST return for the period in question. For non-registrants, the claim must be made within four years from the end of the year in question.

Non-Resident Vendors and the GST

The Goods and Services Tax (“GST”) is a Canadian sales tax of 5% levied on all goods and services (“supplies”) made in Canada. Anyone making a supply in Canada must register for the GST, collect the tax from its customers, and remit the tax to the government.

Now, I hear what you’re saying: What about me? I’m a non-resident of Canada. Surely, I don’t have to comply with this nonsense.

If you cross the border to sell that snake oil, you may have to charge the GST.

Well, perhaps you do. Any non-resident who carries on a business in Canada must register.

Are you carrying on a business in Canada? The law here is not simple. The answer is, it depends on your level of activity. You must have a substantial presence in Canada, and your income-earning activities must be located here.

What do the courts and the CRA look for to make the determination? The CRA has outlined 12 factors:

1. The place where agents and employees of the non-resident are located;
2. The place of delivery;
3. The place of payment;
4. The place where purchases are made or assets acquired;
5. The place from which transactions are solicited;
6. The location of assets or an inventory of goods;
7. The place where business contracts are made;
8. The location of a bank account;
9. The place where a non-resident’s name and business are listed in a directory;
10. The location of a branch or office;
11. The place where the service is performed; and
12. The place of manufacture or production

The weight given to any one factor depends on the type of activity. For example, in the case of a leasing business, the location where the contract is signed and the location of the goods to be leased are two of the more important factors.

Carrying on business in Canada has income tax consequences as well, as we discussed in an earlier post.

Also, depending on the province, you may have to collect the HST (Harmonized Sales Tax), which combines the 5% GST with the province’s rates.

If your activities in Canada are on the rise, and you want to remain in good standing with the Canadian tax authorities, contact a Canadian tax advisor to ensure you don’t run in to any problems down the road.