Canada: Mind the GST: Yoshizawa v. Beaton
09 October 2014
Posted by: Author: Perry J. Kiefer
Author: Perry J. Kiefer (Felesky Flynn LLP)
In many instances, the inclusion of GST provisions in a purchase and sale agreement is an afterthought, and little or no attention is given to the provisions’ potential implications. The recent decision of the British Columbia Supreme Court in Yoshizawa v. Beaton (2014 BCSC 360) is a cautionary tale for prospective purchasers about the dangers of inserting poorly conceived GST provisions in a purchase and sale agreement.
Pursuant to a contract made on May 18, 2009, the plaintiff agreed to sell a parcel of land (the target property) to the defendants, who were non-registrants for GST purposes. The target property consisted of a residence parcel (2.31 acres), a ravine parcel (2.48 acres), and a business parcel on which the plaintiff carried on a nursery business (5.74 acres). An addendum added to the contract on May 30, 2009 provided that the purchaser would pay "any GST.” This addendum was included even though the vendor had represented that the supply of the target property was an exempt supply and a GST certificate to this effect was prepared by the vendor’s solicitor two days before closing. On the basis of the certificate and the agreement of both the vendor’s and the purchaser’s accounting and legal advisers about the suitability of the GST provisions in the contract, the sale proceeded on the basis that the target property was an exempt supply.
While preparing her GST return in April 2010, the vendor learned that GST may have been collectible in respect of the supply of the business parcel. Presumably, this discovery was based on a subsequent determination that (1) under ETA subsection 136(1), the supply of the business parcel was deemed to be a separate supply, and (2) the separate supply of the business parcel was a taxable supply of commercial real property. ETA subsection 221(2) was not applicable because the purchasers were non-registrants; therefore, the vendor remitted $23,829.28 in GST that should have been collected on the supply of the business parcel.
Relying on the GST clause inserted into the contract before closing, the vendor commenced an action against the purchaser to recover the GST and a small late payment penalty. The purchasers put forth a number of defences, only two of which the court explored in any depth: (1) that the vendor’s claim was subject to estoppel based on the purchasers’ reliance on the certificate, and (2) that ETA section 194 deemed the vendor to have collected GST when the vendor incorrectly certified that the supply was an exempt supply. Although the court did not rule on how the GST should have been reported, it ultimately held in favour of the vendor.
First, the court rejected the purchasers’ estoppel argument because the certificate was not executed until closing was imminent, and because the purchasers could not establish that they had relied on the certificate. The fact that there was explicit wording in the contract stating that the purchasers were relying on the certificate was of no consequence if the evidence did not establish reliance.
Second, the court dismissed the purchasers’ argument relating to ETA section 194. In contrast to the situation in Manoussi c. Davis (2006 QCCS 1631), the vendor did not misrepresent the nature of the target property. Furthermore, the purchasers ought to have known that the sale of the business parcel represented a taxable supply, given the involvement of legal and accounting advisers and their knowledge of the vendor’s business activities.
Because none of the arguments advanced by the purchasers was accepted, the clearly worded term of the contract obliging the purchasers to pay "any GST” prevailed. Judgment was given for $23,620 of GST remitted by the vendor, along with the late-filing fee of $439.86. Costs in an undetermined amount were also awarded against the purchasers. Fortunately, the supply was made prior to the effective date of British Columbia’s short-lived transition to HST on July 1, 2010, so the purchaser was not required to pay the 7 percent provincial portion of the HST that would have been payable in respect of the supply if the supply had been made while the HST was in effect.
This decision in Yoshizawa highlights a number of key considerations that advisers should keep in mind when drafting the GST provisions of a real estate contract and completing the transaction. If a vendor represents that a supply is exempt, the purchaser should not agree to pay any GST resulting from a mischaracterization of the supply. Furthermore, a GST certificate should be obtained as early as possible so that the purchaser can demonstrate reliance on the certificate, as opposed to merely pointing to the words of the contract. Finally, retaining accounting and legal advisers may make it more difficult to establish reliance on the vendor’s representations about the character of the supply; therefore, the purchaser should ensure that its advisers are familiar with the relevant provisions of the ETA.
As always, if the purchaser is acquiring the real property for use in its commercial activities, it is to the benefit of both the vendor and purchaser for the purchaser to become a registrant prior to closing. Not only will registration permit the vendor and the purchaser to rely on ETA subsections 221(2) and 228(4) in lieu of the vendor collecting and remitting GST, but it will ensure that the purchaser is able to claim any available input tax credits relating to the self-assessed GST on the supply of the real property.
Yoshizawa may have a silver lining (albeit a tarnished one) for the purchasers. The GST paid by the purchasers should be added to the "basic tax content” of the target property as defined in ETA subsection 123(1). In the event that the purchasers become GST registrants and make a taxable supply by way of sale of the target property in the future, it may be possible for them to recover the basic tax content through an ETA subsection 193(1) input tax credit. Alternatively, if the purchasers do not become GST registrants but do make a subsequent taxable supply by way of sale of the target property, it may be possible for them to recover the basic tax content paid through an ETA section 257 rebate. That said, the ability to potentially recover the GST on a future sale is likely to be of little comfort to an unsuccessful litigant who must write a cheque for $24,000 (plus costs).
This article first appeared on ctf.ca.