GST on tax sales

[Frank]

I have been researching the treatment of GST on sale of tax properties.  You will have noticed that in a number of advertisements the Municipalities are now starting to say that :

'The successful purchaser will berequired to pay the amount tendered plus accumulated taxes, revant land transfer tax and GST if applicable.'
 
It would seem that the Federal Government believes that a sale by a municipality is deemed to be a seizure, or repossession (even though the Municipality never actually becomes the owner), and that the municipality is the deemed supplier (section 183).   The net result is that a property that has been held (for example) for years and was intended (zoned) to be have a cottage built on it, and which would not otherwise be the subject of GST - should actually be charged GST on the sale.

When you see a tax sale add which omits this verbage, it could be argued that the Municipality has elected to sell the property with GST included in the price (no guarantee), however where you see that they will charge it as an extra, be aware that the bid you make will be topped-up and you should base your maximum bid price on that fact.  Remember this is sometimes property that would otherwise be exempt from GST and the market value of it reflects that. 

I would appreciate any insite which can be provided on this issue.

[Frank]

No takers on this one, looks like I will have to answer my own question.   There must be some lawyers or tax accountants in the crowd. 

Firstly, I requested an answer from Revenue Canada and got a long winded dissertation, the meat of which is as follows:

'It is the Agency's position that a supply, by way of a sale, occurs at the time of an action sale pursuant to the definitions of supply and sale in subsection 123(1).

It is also the Agency's position that under subsection 183(10), a sale by a municipality of a previous owner's property is a deemed seizure, or repossession, and the municipality is the deemed supplier.

As a result, pursuant to subsection 183(1) the municipality is deemed to have purchased the property, and the previous owner is deemed to have sold the property for nil consideration at the time of the auction sale.

Accordingly, as the action sale is a supply for GST purposes, and as the municipality is the deemed supplier, the sale by the municipality will be taxable unless the supply is exempt under the provisions of Schedule V of the ETA.

On May 14, 2004 the ETA was amended and municipalities are now entitled to a 100% rebate of GST and the federal portion of HST.  As part of the amendments, changes were made to exclude municipalities from the general exemption for supplies of real property made by public service bodies.

As a result, supplies of real property by a municipality that were formerly exempt under section 25 of Part VI of Schedule V are now taxable.

However, supplies of real property made by municipalities for residential use (e.g., a home) may still be exempt under sections 2 to 8.1 of Part I of Schedule V."


A bit long winded, but in a nutshell it means that in most circumstances tax sale properties are now subject to GST - even though they might otherwise not be, you should consider that when you make your bid. 

The problem is that many municipalities have now caught on yet and are not collecting it as an extra on closing, nor are they making any mention of it in their ads.  My position is that if they didn't say that it would be extra, then they are really saying that it is included in the price, and therefore if Revenue Canada does an audit they will be forced to pay up. 

There is also a ruling regarding a quebec situation (on the Rev. Canada web-site) which also indicates that there is GST involved.   Go to

http://www.cra-arc.gc.ca/E/pub/gl/p-198/p-198-e.htm

[Rob]

Thanks for getting this issue resolved Frank.

So, 7% GST may be applied.  Everyone should begin accounting for this when determing your bid.

[Gmangg]

There is no GST charged on residential tax sales in Ontario that I was informed today. Only commercial tax sales. Thought I would post that.

[Frank]

It's only exempt if there is an existing residential structure on it.  Commercial properties were never exempt.  However, properties that are intended for a future cottage, or are one-off severance from a residential property could normally be declared as 'personal-use' and would be exempt.  Through the tax sale process these latter properties are deemed to be seizures and you are not buying them from the original owner (who would make the personal use declaration), you are buying them from the municipality which must charge GST.