Here is part two of a dozen unusual GST and HST rules from the Excise Tax Act (ETA) — some less well-known than others — that might affect your business. (Click here to view part one.) Note that while the GST and HST are administered by the CRA across Canada, they are administered in Quebec by Revenu Québec (RQ).
- If you acquire a service or intangible property (e.g. a consulting service or downloaded software) from outside Canada, and you are not charged GST/HST, you generally have a legal obligation to self-assess and pay the GST or HST to the Canada Revenue Agency, unless the purchase is for a business that can claim full input tax credits anyway. This is called an “imported taxable supply”. The CRA does not in practice assess consumers for this, though legally it could. But if you acquire an imported taxable supply for your business, and you are not able to claim input tax credits (e.g. because your sales are exempt), the CRA or RQ may find this on auditing your business and assess you.
- If a GST-registered agent sells goods for a principal who is not required to collect tax, the agent is considered to have bought and sold the property from the principal, and must collect GST or HST on the full price charged to the customer. For example, suppose you have a used boat (which you used for your own pleasure) that you want to sell. You leave it with a boat dealer, who sells it for you and takes a commission. The dealer must collect and remit GST or HST on the full sale price (not just the commission), even though you would not have to do so if you sold the boat yourself.
- If your business collects a “deposit” from a customer, no GST or HST applies until you apply it as “consideration” for the purchase. However, based on a Tax Court case (Tendances et Concepts Inc., 2011), what you think is a “deposit” might actually be a “payment on account”, in which case the GST or HST applies as soon as you have collected the deposit. As well, once you have invoiced an amount, the entire GST or HST on that amount is normally “payable” and must be remitted for that reporting period.
- If you are selling commercial real property to a GST-registered purchaser, the purchaser normally accounts for the GST or HST and usually claims an offsetting input tax credit, so that the purchaser doesn’t actually pay any amount in tax. However, the sale is still “taxable” for GST/HST purposes. As a result, if your purchase and sale agreement says that any GST or HST is “included” in the sale price, you will only get 100/105ths, 100/113ths or 100/115ths of the sale price (depending on the province) when the deal closes. Be careful about how the agreement is worded!
- The sale of vacant land is often exempt when sold by an individual, but there are many exceptions. For example, if you have previously severed the land into more than two parts, it will be taxable. If you have been renting out the land, it may be taxable. A sale by a corporation is always taxable. If a farm has a farmhouse on it, the farmhouse portion (plus one-half hectare of land) is usually exempt. Again there are lots of special rules and exceptions, and you should get professional advice to make sure you’re getting it right.
- If your business sues another person for breach of contract, and the original contract bore GST or HST, any amount you receive as damages or in a settlement will normally be considered to be GST- or HST-included, so that you must remit tax out of the total and the defendant may be able to claim an input tax credit. Make sure to “gross up” for the GST or HST in any claim or settlement in such cases. But you may have already recognized and remitted GST/HST when you first billed the client. To the extent you have to write off some of the amount originally owing, you can likely use the “bad debt” or “credit note” rules in the legislation (ETA sections 231 and 232) to recover from the CRA or RQ the GST/HST that you weren’t able to collect.
How We Can Help
Contact your DMCL advisor today and let them help you determine which GST and HST quirks might affect your business.
Contributed by Marcil Lavallee. This document was written for our quarterly bulletin, Canadian Overview, published by Canadian member-firms of Moore North America.