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COVID-19: Implications on GST/HST and Real Estate

Posted by on in Commodity Tax Blog
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Many will remember the almost hysteric approach that some professional advisors took to “Y2K” (e.g., the one conference topic that burned deep into my brain was “The Commodity Tax Implications of Y2K”) – which ultimately proved to be either entirely alarmist, or just good marketing or both. 

While Y2K was a bit of a strawman in terms of “tax issues”, it appears that the economic realities of the COVID-19 pandemic have in fact already given rise potential indirect tax issues for those in the real estate sector.

Two areas of particular concern are commercial rent deferrals and conversions of short-term Airbnb accommodations into long-term residential rentals.

Commercial Rent – With much of the economy continuing to be affected by some remaining lockdown orders and more recent softness in demand, many businesses have been struggling with significant loss of revenues, leading to calls for rent relief, including rent deferrals.  Landlords that have negotiated rent deferrals with commercial tenants are now finding potential problems from a GST/HST perspective.

Under the Excise Tax Act (ETA), the general rule is that GST/HST on commercial rent is payable by the tenant and collectible by the landlord on the earlier of (1) the day the rent is actually paid, or (2) the day the rent is due under a written agreement. 

This could mean that certain deferred rent agreements may not alter the obligation on the landlord to collect and remit GST/HST – perhaps exacerbating cash flow issues in an already challenging economic situation.

While the CRA had provided some relief (allowing all businesses to defer certain GST/HST payments or remittances), this relief was only available until June 30, 2020 and was not extended past that date.  As a result, landlords and tenants who have agreed to longer deferrals may still be affected by this issue – in which case the landlord would have no relief until the tenant pays the GST/HST or until the tax is ultimately written off as a bad debt.

Some solutions may exist here, but legal advice, planning and structuring is generally required.

Airbnb Conversions – Another area of exposure occurs in the B2C context with overall reduction in global travel decimating the Airbnb industry.  This has led many Airbnb owners to move (at least temporarily) into the longer-term residential rental space.

The issue this generates for indirect tax purposes is as follows:  former short-term Airbnb rentals were generally taxable supplies and subject to GST/HST – meaning they would be considered commercial activity under the ETA, giving rise to ITCs.  Long-term residential rentals are exempt supplies, and would technically involve a whole host of re-capture rules that could force self-supply and remittance on the part of the owner/landlord of GST/HST on the full value of the properties being used for the Airbnb.

The take-away here is that commercial rent deferrals and Airbnb conversions are currently resulting in GST/HST problems for landlords, and legal advice is being required to resolve them!   If you find yourself in either of the above situations, given the complexity of the issues, legal advice is highly recommended to avoid unexpected GST/HST liability!

Do you require assistance in this area?  If so, contact us here.

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