If a couple buys a unit/condo in a hotel resort are they subject to GST in the following situation… Which parts of the GST act apply to this?
The sellers (individual couple) had the unit in the rental pool of the hotel and were collecting rent up until 2021. At that point they took it out of the rental pool and were using it personally. I have a note from their accountant that they were supposed to remit GST on the FMV upon disposal/change of use in 2021 but that they didn’t. The CRA may apparently come back and assess them GST on the change in use but has not as of yet. The buyers had a clause in the purchase contract that said the offered price of $600k was inclusive of any GST that may be due. This was crossed out in the accept version of the contract. While I am fairly certain there is no GST upon the sale in 2023 my question is if the CRA could/is likely to assess tax on the 2021 change in use (I am not sure I agree with their accountant) and if they do are they going to go after the sellers who should have paid it in 2021 or the buyers who own the property in 2023 onwards and with no clause that says that the sellers must pay any GST due.
Is this a real estate deal that should still be okay or should the buyers walk away from it as they may be charged an extra $30k at some undetermined point in the future? Conditions do not have to be lifted until July 20th. Am I missing something?
Normally, residential rental property is exempt from GST on sale, except when it is newly constructed (in which case there is a GST rebate available).
Not sure if the type of rental use makes a difference - if it was used for short-term rentals, like a hotel or Airbnb, maybe there IS GST applicable on the sale (or change in use).
Are the new owners planning to use it personally or as a short-term rental business? That may affect whether GST applies to their purchase. Then, it depends whether either the buyers or sellers are GST registrants - if neither are registrants, and there is GST applicable, the buyers must remit the GST directly to CRA. If the seller is a registrant and the buyer is not, then the seller is supposed to collect GST from the buyer (like most GST transactions, though there is a special form to report it).
The sellers were using it for short term rentals before 2021. After much reading last night it appears that they could be liable for GST if they were registered but not if they weren’t? I found that confusing but it appears that with GST registration being optional for under $30,000 in taxable sales per year they may or may not have been registered as it was probably less than that a year. If they were registered then they definitely owed GST on the change of use to personal but it’s not so clear if they weren’t registered. I am on hold with the GST dept to ask questions… The buyers will be using it for personal and it was used for personal in the last year so I am fairly certain the sale does not attract GST but the change of use probably did but was never paid. So if they don’t pay it and get assessed later is the CRA going to chase the buyer or the seller? I hope I get an agent that knows what the rules are.
Whether GST is due on the sale of property depends on whether the original owners paid it on their initial purchase of that property. GST is only charged on the first purchase of new property UNLESS the purpose is for commercial use (ie short term rental) and the buyer is a GST registrant. In this case, the seller doesn’t charge GST on the sale and the buyer needs to self assess GST on the property on their first GST return. The ITC would cancel out any GST owing. However if that owner has a change in use at any point, the prorated amount of the ITC they took on initial purchase needs to be paid back. So the seller’s accountant was correct.
If no GST was ever paid on this unit in the history of its ownership, then yes, your buyers should have paid GST on purchase. However it’s the seller’s obligation to file and report that. If CRA catches on, they will go after the seller for the GST on the sale to your client (likely not on the change in use). And then since the contract does not clearly state that GST was included in the consideration, the sellers have legal recourse to come after your buyers for the money. So yes there is an exposure here.