GST Special Rules

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(Monday, December 28, 2009)

Normally, insurance, property taxes, and municipal utilities are all exempt from GST. This all changes, however, when these items are re-billed by a GST registrant. When that happens, GST now applies on the re-supply of exempt supplies.

The most common place where this occurs is in commercial rentals, but it can also happen in other types of businesses under the right circumstances.

Commercial rentals and short term accommodation (hotels, private campgrounds, etc.) are subject to GST, and the landlord must charge GST on all rentals. This often creates confusion about items other than the base rent that the landlord charges the tenants. As a rule, almost anything re-billed by the landlord is subject to GST, even if the landlord did not pay GST.

Most commercial leases specify a base rent, either a flat monthly rate or a percentage of the tenant’s sales, or a combination of the two, plus common area costs and other overheads. Landlords charge GST on this base rent, and usually if they are audited by Canada Revenue Agency there is no adjustment to this GST amount. GST auditors often find adjustments in the area of the overhead costs that are re-billed to the tenants.

Because many of these overhead costs (property tax, insurance, utilities) are exempt from GST, some landlords fail to charge GST when they re-bill these costs to the tenants. However, Canada Revenue Agency’s position is that all these payments to the landlord are considered to be rent. Overhead costs do not retain their character when they are re-billed by the landlord.

This treatment also applies to rentals of short term accommodation, such as hotels and private campgrounds. Canada Revenue Agency recently stated with regard to private campgrounds that even where the tenant pays property taxes directly to the municipality, the landlord still has to collect GST on the property taxes and remit the GST to CRA. This would also apply to commercial rentals.

The reason that the Excise Tax Act requires GST to be charged on these re-billed amounts is that the landlord is not the entity supplying the insurance, property taxes, or utilities. The landlord is put in the same position as if the rent was higher to cover these expenses. In the case of finance charges such as late payment fees or NSF cheque charges, the landlord is the entity making the exempt supply, so GST is not applicable.

Similarly, if any GST registrant re-bills their expenses to their customers, they are required to charge GST on these amounts, even if the original expense did not include GST. An example would be a consultant who re-billed travel expenses for ferry fares or highway tolls that did not originally include GST. The consultant is required to charge GST on the re-billed amounts. Similarly, if a registrant charges a per diem charge for accommodation and meals to their client, the per diem is subject to GST, even the registrant did not pay GST.

If you are not sure whether or not you should be charging GST, talk to your tax accountant and find out before that GST audit happens.