You’re buying a commercial building for $1 million. Your offer is accepted, you’re arranging financing, and then someone mentions HST. Suddenly your $1 million purchase might cost $1,130,000 in Ontario or $1,150,000 in Nova Scotia.
That extra $130,000 or $150,000 is significant. It affects how much you need to borrow, your cash requirements, and whether the deal even makes financial sense.
But here’s the thing: in many cases, you can recover this HST. Understanding how GST and HST work on commercial property purchases can save you from nasty surprises and help you structure your deal properly.
The Basic Rules
GST or HST applies to most commercial property sales in Canada. The rate depends on the province:
5% GST in Alberta, where there’s no provincial sales tax.
13% HST in Ontario, combining 5% federal GST with 8% provincial tax.
15% HST in the Atlantic provinces, combining 5% federal with 10% provincial.
Other provinces have varying combinations of GST and PST, though PST typically doesn’t apply to real estate.
The seller charges this tax on top of the purchase price and remits it to the Canada Revenue Agency.
When HST Applies and When It Doesn’t
Not all property sales are taxable. Here’s what you need to know:
Sales of new or substantially renovated commercial buildings are taxable. The seller must charge HST.
Sales of used commercial buildings are usually taxable, but the seller can elect to make the sale exempt in certain circumstances.
Sales of residential rental properties with long-term tenants are typically exempt from HST.
Sales of bare land can be taxable or exempt depending on whether the seller is in the business of selling land.
The seller’s status and intentions matter. A developer selling commercial properties they built is definitely charging HST. An individual selling a single property they’ve owned for decades might not.
The Self-Supply Rules
Here’s where things get complicated. Even if the seller doesn’t charge you HST, you might owe it anyway under the self-supply rules.
Self-supply happens when you buy a property that’s HST-exempt from the seller, but you convert it to a use that would have been taxable. You’re deemed to have supplied the property to yourself and must pay HST on the fair market value.
Let’s say you buy a residential rental building for $2 million, HST-exempt. Then you convert it to commercial use by leasing it to businesses. You trigger self-supply and owe HST on the building’s value.
The self-supply rules are complex and catch many buyers by surprise. Work with an accountant who understands these rules before closing any property purchase.
Input Tax Credits and Recovery
Here’s the good news: if you’re using the property for commercial purposes and you’re registered for HST, you can likely claim input tax credits to recover the HST you paid.
Let’s work through an example. You buy a commercial building in Ontario for $1 million plus $130,000 HST. Your total cost is $1,130,000.
You’re registered for HST and will use the building entirely for commercial purposes. You can claim a $130,000 input tax credit on your next HST return.
This means the HST cost is temporary cash flow, not a permanent cost. You pay it at closing, then recover it from the CRA within weeks or months.
The Cash Flow Impact
Even though ITCs let you recover HST, you need to fund it at closing. This creates a cash flow timing issue.
Using our example, you need $1,130,000 to close, even though you’ll recover $130,000. That extra $130,000 needs to come from somewhere.
Some options:
Borrow the full $1,130,000, including the HST. When you recover the ITC, use it to pay down the mortgage or fund other needs.
Use a line of credit or short-term financing to cover the HST, then pay it off when you receive the ITC.
Save extra cash to cover the HST temporarily.
Lenders understand this timing issue and will typically finance the HST portion along with the rest of the purchase. They know you’ll recover it, but you need to pay it first.
When You Can’t Recover HST
You can only claim ITCs if you’re registered for HST and using the property for commercial purposes. You can’t recover HST if:
You’re not registered for HST because your business income is below the registration threshold or you’re in an exempt business.
You’re using the property for exempt purposes like long-term residential rentals.
You’re buying the property for personal use, not business use.
You’re using the property partly for commercial and partly for exempt purposes, in which case you can only recover the commercial portion.
If you can’t recover the HST, it’s a real cost that increases the effective price of the property.
The Election to Sell Exempt
In some situations, the buyer and seller can jointly elect to make a sale exempt from HST. This is called a GST/HST election or section 167 election.
The election is available when:
The property was used primarily for commercial purposes before the sale.
The buyer will use it primarily for commercial purposes after the sale.
Both the buyer and seller are registered for HST.
Why would you elect to make the sale exempt? It avoids the cash flow impact of the HST. The buyer doesn’t pay HST at closing and doesn’t need to wait to recover it through ITCs.
The election must be filed with the CRA within specific timelines. Work with your accountant to complete the election properly if you’re using this option.
The New Housing Rebate
If you’re buying residential property you’ll rent out, you might qualify for the new housing rebate or new residential rental property rebate. These rebates provide partial recovery of HST paid on new or substantially renovated residential rental buildings.
The federal rebate recovers 36% of the federal portion of HST, up to a maximum rebate. Provincial rebates vary by province.
These rebates are complex with specific qualification criteria. You need to apply for them separately; they’re not automatic ITCs.
If you’re buying residential rental property, understand the rebate rules and factor them into your economics.
Substantially Renovated Property
HST applies to substantially renovated buildings as if they were new. But what counts as substantially renovated?
The CRA defines substantial renovation as renovation where 90% or more of the interior of the building is removed or replaced, leaving essentially just the exterior walls and roof.
A complete gut renovation where you rebuild the interior typically qualifies. Regular renovations, even extensive ones, often don’t meet the 90% test.
If you buy a building the seller claims is substantially renovated, verify this carefully. If the renovation doesn’t actually meet the definition, the HST treatment might be wrong.
Allocation Between Land and Building
HST applies to buildings but not to land. So when you buy a property with both land and buildings, the price needs to be allocated between them.
Let’s say you buy property for $1 million: $300,000 allocated to land and $700,000 to the building. HST applies only to the $700,000 building portion.
In Ontario, you’d pay 13% on $700,000 = $91,000 in HST, not 13% on the full $1 million.
The allocation between land and building needs to be reasonable and supportable. The CRA will look at appraisals, property tax assessments, and other evidence to verify the allocation is fair.
Don’t artificially inflate the land portion to reduce HST unless you have legitimate support for the allocation.
HST and Agricultural Property
Farm property sales have some special rules. The sale of farmland used in farming is typically exempt from HST.
But farm buildings can be taxable, depending on the circumstances. If you’re buying a farm with a barn, shop, and house, part of the purchase might be exempt and part taxable.
The exempt status depends on who’s selling and what they’ve been using the property for. A farmer selling their farm typically makes an exempt sale. A developer selling farm property might need to charge HST.
Work with an accountant who understands agricultural property HST rules if you’re buying or selling a farm.
The Impact on Financing
HST affects how much you need to borrow and how lenders assess your deal.
If you’re paying $1 million plus $130,000 HST but can recover the HST, lenders consider the property value as $1 million, not $1,130,000. Your loan-to-value ratio is based on the $1 million, not the HST-inflated price.
But you still need to borrow the full $1,130,000 to close (or fund the HST from other sources). So your absolute debt amount is higher, even though LTV is based on the pre-HST value.
When you recover the ITC, you might use it to pay down the mortgage, improving your LTV. Or you might use it for other business purposes, keeping the full mortgage outstanding.
Talk to your lender about how they handle HST in their underwriting. Understanding their approach helps you plan your financing.
HST on Closing Costs
It’s not just the purchase price. HST also applies to many closing costs:
Legal fees, appraisal fees, environmental assessments, and other professional services are subject to HST.
Real estate commissions are subject to HST.
Some government fees and land transfer taxes don’t include HST.
If you’re registered for HST and these costs relate to commercial property, you can usually claim ITCs to recover the HST on closing costs too.
Budget for HST on your professional fees, not just on the purchase price.
Accounting for HST
When you pay HST on a property purchase, it doesn’t become part of the property’s cost for accounting and tax purposes if you recover it through ITCs.
In our example, you buy property for $1 million plus $130,000 HST. You claim ITCs for the $130,000. Your property’s cost base for depreciation and capital gains purposes is $1 million, not $1,130,000.
If you can’t recover the HST, it becomes part of your cost. A building that cost $1 million plus $130,000 non-recoverable HST has a $1,130,000 cost base.
This affects depreciation deductions and capital gains when you eventually sell.
Provincial Variations
HST rules are federal, but provinces have variations in their portion of HST and in specific rules.
Quebec has its own QST in addition to federal GST, with slightly different rules.
British Columbia returned to separate GST and PST, with PST generally not applying to real estate.
Manitoba and Saskatchewan have GST plus PST, but PST doesn’t typically apply to commercial real estate sales.
Work with advisors in your province who understand local rules.
Timing of ITC Claims
You can claim ITCs in the reporting period when you’re entitled to them, which is typically when you’ve paid the HST and received the property.
If you close on January 15 and file HST returns monthly, you’d claim the ITC on your January return filed in February. You’d receive your refund within weeks.
If you file quarterly or annually, you might wait longer to claim the ITC. Consider filing more frequently if you’re making large ITC claims, so you recover the cash sooner.
Large ITC claims might trigger CRA review, especially if you don’t normally file HST returns or have large refunds. Be prepared to provide documentation about the purchase if asked.
HST on Deposits
If you pay a deposit before closing, HST might be payable on the deposit depending on the terms of your purchase agreement.
Usually, deposits are HST-included in the total purchase price. If you’re buying property for $1 million plus HST and pay a $100,000 deposit, the deposit is part of the total consideration, and HST is sorted out at closing.
But if the agreement treats the deposit differently, HST implications can vary. Have your lawyer review the HST treatment of deposits in your purchase agreement.
What to Do Before You Buy
Before you commit to buying commercial property, take these steps regarding HST:
Confirm whether the sale is taxable or exempt. Ask the seller directly and have your lawyer verify.
If taxable, confirm the amount of HST you’ll need to pay.
Determine whether you can claim ITCs to recover the HST. If not, factor the HST into your real purchase price.
Plan how you’ll fund the HST at closing. Will you borrow it, use savings, or arrange short-term financing?
File any necessary elections with the CRA if you’re making an exempt sale by election.
Verify the allocation between land and buildings and the HST calculation.
Don’t leave HST as a last-minute surprise. Understanding the HST implications early lets you plan properly.
Working with Professionals
HST on commercial real estate is complex enough that you need professional advice. Work with:
An accountant who understands HST and commercial real estate. They’ll advise on ITCs, elections, and planning opportunities.
A real estate lawyer who reviews the HST provisions in your purchase agreement and ensures they’re correct.
A mortgage broker who understands how HST affects financing needs and can structure loans appropriately.
The cost of this professional advice is small compared to the amounts involved and the costly mistakes you’re avoiding.
The Bottom Line
HST on commercial property purchases is significant, but it’s manageable with proper planning. Understand whether the sale is taxable, whether you can recover the HST, and how you’ll fund it.
Don’t let HST derail your purchase. In most cases, it’s a timing issue, not a real cost. But you need to plan for it from the beginning.
At Creek Road Financial Inc., we understand how HST affects commercial property financing. We structure loans to include HST amounts when needed, and we work with your accountant to ensure the financing supports your HST recovery strategy.
We’ve helped hundreds of clients navigate the HST aspects of commercial property purchases. We know the timing issues, the cash flow challenges, and how to structure financing that works.
Contact Creek Road Financial Inc. today to discuss your commercial property financing needs. We’ll help you understand not just the mortgage, but all the financial aspects of your purchase, including HST implications.