Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
GST/HST Rulings Directorate
Place de Ville, Tower A, 5th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 245056
[Client]:
Subject: GST/HST INTERPRETATION
Application of the GST/HST on a rescission fee
Thank you for your correspondence of [mm/dd, yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to a rescission fee.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand the following:
1. On July 21, 2022, the British Columbia Minister of Finance announced a 3-day rescission period for contracts for the purchase and sale of residential real property in British Columbia.
2. The 3-day rescission period for contracts for the purchase and sale of residential real property rules in British Columbia were enacted by Bill 12 – Property Law Amendment Act, 2022 and Order in Council (OIC) 2022/436 creating the Home Buyer Period Regulation.
3. Bill 12 – Property Law Amendment Act, 2022 amended The Property Law Act, R.S.B.C 1996, c. 377 (the PLA), by adding the following sections:
Residential real estate – right of rescission
42 (1) A purchaser of residential real property may rescind the contract of purchase and sale for the property by serving written notice of the rescission on the seller within the prescribed number of days after the date that the acceptance of the offer was signed.
(2) Subsection (1) does not apply to a contract of purchase and sale to which section 21 of the Real Estate Development Marketing Act applies.
(3) Subsection (1) does not apply if title to the residential real property has been transferred from the seller to the purchaser.
Regulations for section 42
43 The Lieutenant Governor in Council may make regulations for the purposes of section 42, including regulations as follows:
(a) respecting waivers of the right of rescission and the circumstances in which that right may or may not be waived;
(b) respecting service of a notice of rescission;
(c) respecting an amount to be paid by the purchaser to the seller if the purchaser exercises the right of rescission;
(d) respecting the timing of the payment of the deposit under a contract of purchase and sale despite any provision of the contract to the contrary;
(e) establishing procedures for the payment of the deposit under a contract of purchase and sale;
(f) respecting the return of the deposit paid under a contract of purchase and sale if the purchaser exercises the right of rescission, including
i. establishing whether
(A) all of the deposit is to be returned, or
(B) a portion of the deposit is to be returned and the remaining portion is to be paid to the seller,
ii. providing for the calculation of the portion of the deposit to be returned, and
iii. establishing a dispute resolution process in relation to the return of the deposit;
(g) exempting, from the application of section 42(1), with or without conditions,
i. a class of residential real property,
ii. a class of purchaser, or
iii. a class of contract of purchase and sale;
(h) defining a word or expression used but not defined in section 42;
i. for any other matter for which regulations are contemplated by section 42.
4. OIC 2022/436, effective January 1, 2023, the Property Law Amendment Act, 2022, S.B.C. 2022, c, 12, is brought into force, and the Home Buyer Recission Period Regulation is made.
5. Relevant provisions of the Home Buyer Rescission Period Regulation include:
Definitions for PLA
2. In section 42 of the PLA “residential real property” means any of the following:
(a) a detached house;
(b) a semi-detached house;
(c) a townhouse;
(d) an apartment in a duplex or other multi-unit dwelling;
(e) a residential strata lot, as defined in section 1(1) of the Strata Property Act;
(f) a manufactured home that is affixed to land;
(g) a cooperative interest, as defined in section 1 of the Real Estate Development Marketing Act, that includes a right of use or occupation of a dwelling.
Exemptions
3. The following are exempt from the application of section 42(1) of the PLA:
(a) residential real property that is located on leased land;
(b) a leasehold interest in residential real property;
(c) residential real property that is sold at auction;
(d) residential real property that is sold under a court order or the supervision of a court.
Length of rescission period
4. For the purposes of section 42(1) of the PLA, the prescribed number of days is 3 business days.
Service of notice of rescission
Section 5 outlines the service of notice of rescission
Amount payable on rescission
Section 6 outlines the amount payable on rescission. If a purchaser rescinds a contract of purchase and sale under section 42(1) of the PLA, the purchaser must promptly pay to the seller an amount that is equal to 0.25% of the purchase price for the residential real property that is set out in the contract.
Right of rescission not waivable
Section 7, the right of rescission under section 42(1) of the PLA cannot be waived.
6. Subsection 42(2) of the PLA exempts from the application of section 42(1) a contract of purchase and sale to which section 21 of the Real Estate Development Marketing Act (REDMA) applies. Section 21 of the REDMA allows a purchaser of a development unit to rescind the purchase agreement by serving written notice of rescission on the developer within 7 days after the later of two specified dates. Developer, development property, development unit and purchaser are defined terms under the REDMA.
INTERPRETATION REQUESTED
You would like to know whether a rescission fee that is payable pursuant to section 42 of the PLA is subject to GST/HST and if so, whether vendors are small suppliers?
INTERPRETATION GIVEN
Subsection 182(1) applies where, as a consequence of the breach, modification or termination of an agreement for the making of a taxable supply (other than a zero-rated supply) of property or a service in Canada by a registrant to a person, an amount is paid or forfeited to that registrant otherwise than as consideration for that supply.
Where subsection 182(1) applies, the person is deemed to have paid, at the time the amount is paid or forfeited, an amount as consideration for the supply determined by the formula set out in paragraph 182(1)(a) as follows: (100/105) x the amount that was payable in respect of the supply. In addition, the registrant, in accordance with paragraph 182(1)(b), is deemed to have collected, and the person is deemed to have paid, tax in respect of the supply calculated at the rate of 5% on the value of the deemed consideration calculated under paragraph 182(1)(a). (Footnote 1)
Based on the information provided, subsection 182(1) may apply to a rescission fee that is paid by a purchaser of residential real property to the seller in order to rescind the contract of purchase and sale for the property in specific situations – i.e., the rescission (termination) of the contract of purchase and sale of a taxable supply of real property that was made by a registrant.
The payment of a rescission fee on the termination of a contract of purchase and sale for an exempt supply of real property or a taxable supply of real property made by a non-registrant would not fall within subsection 182(1).
Where subsection 182(1) does not apply, generally a damage or penalty payment is not consideration for a supply, as it is compensatory or punitive in nature, and not given in exchange for a supply of property or services by another party. Such a payment would not be subject to GST/HST, even if the payee agrees to release the payer from further liability.
Small supplier
Every person who makes a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada is required to register for GST/HST purposes except where the person is a small supplier or the person’s only commercial activity is the making of supplies of real property by way of sale otherwise than in the course of a business.
A "commercial activity" of a person includes a business carried on by the person, or an adventure or concern of the person in the nature of trade, except to the extent it involves the making of exempt supplies by the person. It also includes making a supply (other than an exempt supply) of real property, including anything done by the person in the course of or in connection with the making of the supply.
In general, a person is a "small supplier" if the total amount of revenues from their worldwide taxable supplies and any associates is $30,000 or less in any single calendar quarter and in the last four consecutive calendar quarters. In determining the total amount of revenues from taxable supplies (including zero-rated supplies) of property and services made inside and outside Canada, revenues from supplies of financial services, sales of capital property, and goodwill from the sale of a business are not included.
A person must make a determination at the end of each calendar quarter as to whether they continue to qualify as a small supplier. A person who no longer qualifies as a small supplier is required to register and must apply for registration before the thirtieth day after the day the person first makes a taxable supply in the course of the commercial activity in Canada otherwise than as a small supplier.
A person who makes taxable supplies and who qualifies as a small supplier may choose to become a GST registrant, pursuant to subsection 240(3) of the Act.
A GST/HST registrant (that is, a person who is registered or required to be registered for GST/HST purposes) is responsible for collecting the GST/HST on all taxable supplies (other than zero-rated supplies) of property and services in Canada.
As previously mentioned above, subsection 182(1) may apply on the rescission fee when the vendor who made the taxable supply is a registrant (or required to be registered for GST/HST). Subsection 182(1) would not apply when the vendor is a small supplier.
Real property
Generally, a supply of real property situated in Canada, including residential property, is taxable unless it is exempt.
It will be up to the supplier/seller to determine if the contract of purchase and sale is for a taxable supply and whether the supplier is a registrant. For additional information on transactions of real property and for a list of exemptions that may apply, see GST/HST Memorandum 19.2.1, Residential Real Property – Sales.
Taxpayers can request a ruling or interpretation if they want certainty as to how these provisions would apply to a specific transaction. Relevant facts and supporting documents may be sent by mail, facsimile or electronically through the Submit documents service in the My Business Account or Represent a Client portals.
DISCLAIMER
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, the interpretation(s) given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 343-553-3972. Should you have additional questions on the interpretation and application of the GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Sincerely,
David Phoenix, CPA, CGA
Senior Rulings Officer
Services and Intangibles
General Operations and Border Issues
GST/HST Rulings Directorate
FOOTNOTES
1 The payment would not be subject to tax under subsection 165(2) as British Columbia is a non-participating province.
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