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.

What’s Your Tax Issue?: Sale of Canadian Real Estate

The Tax Issue:

I own one third of a country home (located in Canada) together with my two siblings and I recently moved to the Bahamas. Do I have to pay tax in Canada on my share when the property is sold, since I have no tax to pay in the Bahamas?

The Answer:

First, when you leave Canada to become a non-resident, there are certain rules to consider. The big one is that you have a deemed disposition of all capital property at fair market value as of the date you left. I would seek professional advice in this regard.

But there are exceptions, one of which is real property located in Canada. The taxation of your share of the country home, therefore, is deferred until you actually sell it. At that point, it’s fully taxable in Canada regardless of where you live, because it falls into the category of  “Taxable Canadian Property”.

At the time of the sale, you will have to provide the CRA with information and withholding taxes will likely apply to your share of the proceeds under section 116 of the Income Tax Act. You will have to file a Canadian income tax return to report the disposition and the taxes withheld will go as a credit against the actual taxes payable on the tax return. This issue was discussed in an earlier post. Again, at this point, a tax professional should be able to guide you.