GST on Farmland & Acreage Purchases

Saskatchewan farmland and acreages are an increasingly hot commodity. While price and possession date make up much of the discussion between the vendor and the purchaser, there are a number of less obvious issues that the parties must address, one being Goods and Services Tax (“GST”).

GST applies to every supply of real property, unless exempted under the Excise Tax Act. These exemptions include used residential property, personal use properties and transfers of farmland by farmers to relatives for personal use. (the “Act”)

It is important to note that it is the vendor’s use of the real property that will determine whether GST will be applicable to a given sale, not the intended use of the real property by the purchaser.

While the GST is aimed at the ultimate purchaser, it is the vendor’s responsibility to determine whether GST will apply to the sale of real property, and then to collect and remit the tax to the Receiver General. It is also the vendor’s responsibility to establish whether the purchaser is a GST registrant. If the purchaser is registered, then there is no further obligation on the vendor. When this is the case, the purchaser will self-assess for the GST rather than pay the GST to the vendor. The GST payable is then offset against the purchaser’s corresponding input tax credit.

To ensure the purchaser is a GST registrant, a Certificate should be completed by the purchaser well before the vendor provides the transfer documents to the purchaser’s solicitor. The Certificate not only provides the proper assurances to the vendor, but also authorizes the vendor’s solicitor to contact Canada Revenue Agency (“CRA”) for confirmation of the purchaser’s GST registration. Previously, the registration status of a purchaser could only be confirmed with CRA by telephone. Amendments to the Act have created an on-line registry so confirmation of the purchaser’s registration number can be easily obtained by the vendor. To do this, the vendor’s solicitor must have the GST registration number and the exact name of the purchaser.

The Certificate also provides an indemnification to the vendor for all costs, expenses and charges in the event that CRA reassesses the GST applicable to a given sale.

Once it is established that GST is payable in a given transaction, the question becomes: what portion of the real property does GST apply to? Where the real property is strictly agricultural farmland (no buildings or fixtures) the GST usually applies to the entire value of the parcel.

Where there are buildings and/or fixtures present, as in the case of a home quarter/acreage (“Acreage”), a portion of the sale may attract GST and a portion may not. Where a portion of the real property or its buildings were used by the vendor for business purposes, a price allocation must take place to determine the value of the land, buildings and fixtures used for residential or personal uses, and the value of the land, buildings and fixtures used for business purposes. These business purposes are not limited only to farming. Any business use of the real property, or its buildings and fixtures, may attract GST.

The vendor and purchaser may be tempted to place a large value on the Acreage residence to reduce the total GST payable. This can be dangerous. The price allocation agreed between the parties may have sizeable tax implications with respect to income tax for the vendor. Where farm buildings are depreciated over a given term, recaptured depreciation to the vendor may result from the current sale. Recaptured losses may also result from a future sale by the current purchaser. This recaptured depreciation is taxable in its entirety. There is also the risk that CRA may reassess the allocation if it is not a true representation of the value of the real property, and the residence and fixtures located thereon.

When selling farmland or acreages, it is very important to discuss these issues surrounding the applicability of GST early on in the process. Not doing so may result in delays in the completion of the transaction, or in some cases, the loss of the sale altogether.