Anonymised, illustrative composite. A real property component inside a larger asset deal, a closing mechanic that almost went the wrong way, and a rule that applies whether or not the going-concern election is used.
At a glance
A manufacturer sold its operating business as an asset deal for $3,400,000, structured to include the land and warehouse building it owned and operated from, rather than leaving the buyer to negotiate a separate lease. The building was independently valued at $2,100,000 of the total price, with the balance made up of equipment, inventory and goodwill.
The buyer was an established HST registrant, acquiring the entire operation — building included — for use in its own ongoing commercial activities. Both parties' lawyers had already turned their minds to the federal going-concern election on the business as a whole.
Drafting the closing mechanics, the buyer's lawyer initially built the funds flow the way HST is usually handled on a real property closing between parties who are not using a going-concern election: seller collects HST from the buyer at closing (typically through the standard trust conditions and adjustments), remits it, and the buyer separately claims an input tax credit on its own next return. Applied to a $2,100,000 building at 13%, that would have required the buyer to fund an extra $273,000 at closing, on top of the purchase price, and wait out the filing cycle for the credit to come back.
That mechanic assumes the seller is the party obligated to collect the tax. On a real property component sold to a registrant, that assumption is not automatically correct — and here it was wrong.
Value of the warehouse building within the total deal: $2,100,000. HST at Ontario's 13% rate: $273,000.
As structured correctly, that $273,000 appeared on the buyer's own HST return twice in the same period: once as tax payable under the self-assessment rule, and once as an offsetting input tax credit, for a net cash effect of nil on the tax itself.
Had the original closing mechanic gone ahead unchanged, the buyer would have funded the same $273,000 out of pocket at closing and recovered it only on its next filing — a real, if temporary, cash-flow cost with no offsetting benefit.
ETA s.221(2), marginal note “Exception”, provides that “A supplier… who makes a taxable supply of real property by way of sale is not required to collect tax… where… the recipient is registered under Subdivision D and, in the case of a recipient who is an individual, the property is neither a residential complex nor supplied as a cemetery plot…”. The buyer here was a corporate registrant acquiring a commercial building, squarely inside that exception — the seller was not required to collect.
s.228(4), marginal note “Real property and emission allowance — self-assessment”, then places the obligation on the buyer: “If tax… is payable by a person in respect of a supply of property that is real property… and the supplier is not required to collect the tax… where the person is a registrant and acquired the property for use or supply primarily in the course of commercial activities of the person, the person shall, on or before the day on or before which the person's return for the reporting period in which the tax became payable is required to be filed, pay the tax to the Receiver General and report the tax in that return”.
Read the unit. This is a different mechanism from the going-concern election in s.167. The going-concern election, where it applies, means no tax is payable at all on the elected supplies. The s.221(2)/s.228(4) self-assessment rule applies whether or not that election is made — it is not about whether tax is owed, only about who physically collects and remits it when a registrant is buying real property. On this deal, the parties had elected going-concern treatment on the business generally, but the building's HST self-assessment mechanic is a separate, independent rule that still had to be handled correctly in the closing documents.
It matters that the buyer was a registrant acquiring the property for primarily commercial use — that is what makes s.228(4)(a) the operative paragraph, reporting the tax on the buyer's own return in the ordinary filing cycle rather than under the separate, non-registrant procedure in s.228(4)(b).
The buyer's lawyer caught the point before the agreement of purchase and sale's tax schedule was finalized and rewrote the closing mechanics: the seller would not collect HST on the building at closing, and the buyer would self-assess and claim the offsetting credit on its own return for the period in which closing fell, consistent with s.221(2) and s.228(4). The purchase price adjustment statement at closing reflected this — no HST line item on the building portion changed hands between the parties.
Under the original mechanic, the buyer would have wired an extra $273,000 at closing on top of the purchase price, and only recovered it as an input tax credit on its next HST return — a gap that, depending on the buyer's filing frequency, could run from several weeks to a full quarter. The tax cost would still have netted to zero eventually. The needless draw on the buyer's closing-day liquidity would not have.
The tell was that the closing mechanics were drafted from a template built for the ordinary case — a real property sale where HST is simply collected and remitted — without checking whether the buyer's registrant status changed who was actually obligated to collect it. A large reported number on a return is not the same question as a real cash cost; here the rule produced the first without the second, and only careful drafting kept it that way.
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