A buyer must pay the GST on any taxable purchase, even if the parties did not think that any GST was payable, according to a recent decision of the B.C. Supreme Court.
Under the GST legislation, when GST is payable, the buyer is generally responsible to pay it, while the seller is responsible to collect it from the buyer and remit it to the Crown. The property in this case was a used residential and commercial building. The residential portion of the building was exempt from GST. The commercial portion was taxable, but the seller assumed that the buyer was registered for GST, relieving her of her duty to collect and remit the tax. As a GST registrant, the buyer would have been responsible to remit the tax himself, but would have been able to offset the GST payable against the GST collected on the commercial rents of the tenants.
Unfortunately for everyone, the buyer did not register for GST. When Revenue Canada discovered that the sale went through, it assessed GST, penalties and interest of over $20,000. Although the tax was payable by the buyer, Revenue Canada demanded payment only from the seller, because she should have collected it from the buyer.
The seller eventually paid the tax and then sued the buyer to recover the amount paid. However, the Excise Tax Act (the GST legislation), only allows a seller to recover GST from a buyer if the seller has notified the buyer by an invoice, receipt or in the sale agreement that GST is either included in the purchase price or in addition to it. The sale agreement did not specify whether GST was included in or in addition to the purchase price.
The seller therefore tried to meet the requirements of the Excise Tax Act by providing an invoice to the buyer (2 ½ years after the sale completed!) stating that GST was in addition to the purchase price. The judge, however, concluded that the seller met the requirements of the Act because of a clause on the reverse side of the Real Estate Board’s standard form Contract of Purchase and Sale. The clause requires that each party must comply with the Excise Tax Act. Under the Excise Tax Act, if GST is payable, the buyer is required to pay it.
Accordingly, the clause on the reverse side of the contract, by requiring the parties to comply with the Act, meant that the buyer would be required to pay any GST. The judge concluded that this clause was sufficient notice to the buyer that GST was in addition to the purchase price, and the seller was able to recover the GST she paid from the buyer. This case illustrates the pitfalls that can arise for buyers and sellers of real estate, and the importance of receiving legal advice.