The sale of vacant land can be taxable or exempt for purposes of GST/HST under the Excise Tax Act. Generally, vacant land sold by individuals is exempt, subject to certain exceptions.
Exempt sales of vacant land typically include:
- personal use land sold by an individual or personal trust;
- land previously used in a farming operation acquired for personal use and enjoyment by someone related to the farmer (includes a former spouse or common-law partner) or kept by the retired farmer for their own personal use and enjoyment;
- a parcel of land created from subdividing another parcel of land and sold to a related person includes a former spouse or common-law partner) for their personal use and enjoyment,
- a parcel of land created from subdividing another parcel of land into two parts, where the original parcel was not previously subdivided by the individual, the settlor or the trust.
However, the following are some situations where GST/HST would be applicable to the sale of vacant land:
- If the land was used primarily (more than 50 per cent) in a business carried on by the individual with a reasonable expectation of profit immediately before the sale, then GST/HST must be charged on the sale. Appendix A of the Canada Revenue Agency’s (CRA) GST/HST Memorandum 19.5 ─ Land and Associated Real Property provides guidelines for determining if the land is used primarily in a business. Appendix A states that “capital real property must be used, or held for use, for one or more purposes at all times. In other words, capital real property of an individual or personal trust cannot be regarded as having no use.” If there is no evidence of personal use then this would suggest business use and conversely, if there is no evidence of business use, this would suggest personal use. If there is evidence of business use and personal use, the vendor must determine which is the primary use of the property. Appendix B of Memorandum 19.5 provides guidelines for determining whether there is a reasonable expectation of profit, and lists numerous factors to be considered.
- If the sale of the land was made in the course of a business of the individual, then GST/HST must be charged on the sale. The CRA will consider the amount of time and resources spent by the individual and the frequency or regularity of similar transactions. If the property was acquired without the primary or secondary intention of resale (e.g., inherited property acquired solely for personal use), the sale will be considered an adventure or concern in the nature of trade and GST/HST need not be charged. Further information to determine whether the property was held in the course of a business or an adventure or concern in the nature of trade is provided in Appendix C of Memorandum 19.5.
- The sale of vacant land will be taxable if the land has been severed into more than two parts and is being sold to a non-related individual. When determining the number of times a parcel of vacant land has been subdivided, the expropriation of land by a municipality or utility commission is not a factor.
- GST/HST may be applicable to a deemed sale when an individual changes the use of property from business purposes to personal use and enjoyment. The individual must self-assess the GST/HST on the fair market value of the property at the time of the deemed sale.
Reporting the GST/HST on the sale
A GST/HST registrant selling a taxable parcel of land will normally collect and remit the GST/HST to the CRA using Form GST34 (Goods and Services Tax/Harmonized Sales Tax Return for registrants) for the period in which the sale occurred. Non-registrant sellers will collect the GST/HST and remit to the CRA using Form GST62 (Goods and Services Tax/Harmonized Sales Tax Return (Non-personalized)). Non-registrant sellers are not required to register for GST/HST, and the amount of tax collected must be remitted by the end of the month following the date of the sale.
Where the purchaser is a registrant, the burden of collection flips from the seller to the purchaser, resulting in the purchaser self-assessing the tax and remitting to the CRA on their GST/HST return for the period in which the sale occurred. The purchaser may be able to claim an input tax credit to offset some or all of the GST/HST self-assessed.
Since the burden of collection and remittance is borne by the seller in situations where the purchaser is not a registrant, when the purchaser is a registrant, the seller should confirm that the purchaser’s GST/HST number is valid before allowing the purchaser to self-assess and remit the GST/HST. As well, the seller should require the purchaser to attest to being a registrant and to indemnify the seller.
Determining whether a sale of vacant land is taxable or exempt can be a complicated process with many factors to be reviewed. Contact your Baker Tilly representative to determine the tax status of your transaction, ideally before the agreement is executed.