Is HST Included in Ontario Commercial Lease Rents?

When the Ontario legislature met on December 9, 2009, they agreed to the sales tax reform that was proposed in the 2009 Ontario budget. The single harmonized sales tax (HST), which is set to start in Ontario on July 1, 2010, will combine the Ontario Retail Sales Tax (RST) and the federal Goods and Services Tax (GST) into a single value-added sales tax called the HST. This means the HST rate will be 13%, which is made up of the federal part (5%) as well as the provincial part (5%).

Commercial real estate landlords and tenants will both be affected by the new HST rules. At least one of the following things will happen:

• The cost of running a business may go up.
• The cash flow will be impacted.

Landlords may want to: 

• They include in their net leases the HST they have paid and can’t claim an Input Tax Credit (ITC) for; 
• HST on the rent and the new rent by their tenants;
• Plan the timing of the costs of certain capital properties based on how these costs are treated under the current RST regulations;

Tenants may also want to

Renters can work out a deal with their landlord so that they’re responsible for some of the cost of the real property they’re renting. This means that the cost of renting real property can be lower as a result.

If you want to keep your cash flow costs down, you should plan when to spend money on certain capital properties based on how the current RST regime and the new HST regime will treat these expenses. You should also file the HST on time to keep your cash flow costs down.

Background

There is a rule that the RST applies to most sales of tangible personal property and some services related to tangible personal property and technology. Users of these goods and services can’t claim an ITC because of a single-stage retail sales tax.

In contrast, the HST is a multi-stage, value-added tax that is meant to be paid by the end-user. People who run businesses will, in most cases, be able to get back some of the money they paid in HST through an ITC. The HST, on the other hand, will apply to the property of almost all kinds of goods and services, unlike the RST, which only applies to real property and services. Until the rules below change, the HST will be charged on all amounts paid in connection with the supply of real property, except for:

• rents and surcharges for commercial leases;
• Real estate commissions and legal fees are examples of service fees.
• capital goods costs, such as equipment and supplies;

Most landlords and tenants will be able to get back the HST they paid on things like equipment and supplies, rents, and real rents by claiming ITCs. This is because the HST will be added to the property of commercial real property that is leased or licensed. When it comes to both landlords and tenants, the new HST is usually neutral. The only thing that makes it different is how it affects each of them with cash flow.

However, the HST may have a big impact. This is most important for commercial landlords and tenants who provide HST-exempt goods, are financial institutions, or have taxable sales of more than ten million dollars in twelve months.

The reason is either that ITCs aren’t available to them for the supplies they make, or that certain restrictions are put on the ITCs that they can claim for the commercial real estate they make available.

The Rules for When Things Change

On October 14, 2009, the government of Ontario released rules for transactions that happen before or after July 1, 2010. The rules decide whether the RST or HST will be charged on a certain transaction. In commercial leasing, the HST is usually charged on payments for the part of the lease that starts after July 1, 2010.

• There is an exception for leases that began before July 2010 and ended before July 31, 2010. 
• In these cases, the HST will not be charged on the property in question, no matter when the payment is made. 
• People who rent a parking space for their business must follow the same rules as those who buy a parking space.

These are some important dates:

• It doesn’t matter if you paid or got paid for something before October 14, 2009. The HST doesn’t apply to things that happened before this date. If some businesses and public service bodies don’t pay or don’t pay the provincial part of the HST on money that comes in after this date and before May 2010, This applies to property and services provided after July 1, 2010. Large businesses also need to do this kind of self-assessment on limited inputs, like the one above.
• There is a general rule that the HST will apply to property that is paid or comes in on or after May 1, 2010, for goods or services that were sold or given away after July 1, 2010.
• It’s October 31, 2010: Any outstanding RST is due on this date, and the RST regime ends on this date.

Get Ready

Commercial real estate landlords and tenants aren’t going to be affected by the new HST in a big way. They can pass on the extra-provincial portion of HST to their customers, so they won’t have to worry about cash flow. Landlords and tenants should think about becoming monthly filers if they can. When the cash flow costs become too high, they should think about becoming monthly filers.

Leases should try to change existing leases that don’t mention the HST so that they can collect the correct amount of HST from the tenant. The tenant is legally obligated to pay HST on these amounts, even though there is no mention of this in the contract. The landlord is also legally obligated to pay these amounts. In other words, if there is a clear contract that says that the tenant must pay these HST amounts, the landlord will be able to get back the money that has been paid.

A landlord who can’t make changes to its leases because of HST should still invoice its tenants and pay the extra amount of HST. The landlord should also account for or pay the extra amount of HST to the government. Then, and only then, can a landlord file a lawsuit against its tenants to get back what they owe.