Introduction: Tax Uncertainty in the Face of a Global Pandemic

By now, everyone is aware that the current global pandemic of Covid-19 has created complete chaos for businesses big and small. The shutting down of all but essential services has led to a crisis for business’ income and cash flows. In order to cushion some of the blow, commercial landlords and tenants have been entering into rent deferral arrangements, designed to allow businesses such as restaurants to weather the shut down and be ready to get up and running once government restrictions are loosened. While the willingness to enter into these type of arrangements is laudatory, tenants and landlords should be aware of tax issues that can arise under the Excise Tax Act, and make provision for their GST/HST payments and remittances wherever possible. While the CRA does have discretion in how it administers the various taxing statutes, certain rules that are statutory in nature are beyond the scope of CRA to alter. The following are just a few pitfalls that can arise in the context of a commercial rental scenario and the GST/HST issues that follow.

GST/HST Becomes Payable by Statutory Operation

Under section 152 of the Excise Tax Act, a tenant is liable to pay, and a landlord must remit, the GST/HST on the commercial rent on the earlier of the day that the amount is either paid, or as indicated in the written lease agreement. This means that when a tenant pre-pays an amount of rent, that they must also pay the GST/HST portion which must be remitted in that period by the landlord.

At the same time, if the rent is deferred, the rules create a liability pursuant to the express terms of the lease; that is, despite the fact that the parties may agree casually to defer the rental payment, such as in the current case with restricted cash-flows due to Covid-19, the landlord will still be required to collect and remit the GST/HST portion and pay it to CRA.

Rent Deferral Arrangement Should be In Written Form

The problem created by section 152 of the Excise Tax Act can be avoided with careful GST tax planning. In order to do so, the parties should codify their agreement to defer rental payments to ensure that GST/HST is not collectible on payments that are to be made later. GST registrants, be they landlord or tenant would be well advised to speak to an experienced Canadian GST lawyer for tax planning advice with respect to their rights and obligations on modifying a written lease, and to ensure that their rent deferral arrangements are on-side of section 152 before agreeing to a change. As with many GST issues the tax rules are complex and so proper GST/HST tax planning advice is crucial.

Evictions and Accelerations

Not all landlords have great relationships with their tenants. It may also be that a landlord’s bank is not granting mortgage forgiveness and they need the space to be rented to a paying tenant to increase cash flow. Under most written lease agreements, in the case of non-payment of rent, an acceleration clause will be available to the landlord. These clauses normally operate to hold the tenant immediately liable for all remaining rent for all remaining periods of the lease.

However, as above, section 152 deems the GST/HST portion to be collectible and payable by the landlord in these cases. The only way that a landlord can obtain an exemption from this is if they write the amounts off as a bad debt in the period. CRA’s position is that the amount is payable if it is not written off, so in uncertain economic times landlords may actually have more of an incentive to work with tenants and put a written rent deferral agreement in place. However if the rent is uncollectible the landlord can certainly write it off for accounting and tax purposes.

GST/HST Tips: Strong Tax Planning Advice Helps Avoid Later Issues

If the above makes you worried about your GST/HST obligations and you are a landlord or a tenant, we can assist. Our experienced Canadian tax lawyers can review your situation and give you the GST planning advice you need to ensure you do not run afoul of the Excise Tax Act. Not only can we draft deferral agreements in line with the complex GST/HST rules, we can even approach your landlord or tenant to negotiate terms if needed. Simply contact our Canadian tax law firm to find out more about how we can help you during these uncertain times.

FAQ: Commercial Rent Deferrals and Covid-19: Canadian GST/HST Lawyer Analysis

Yes, you need to pay GST on your commercial propertypurchase. It is the general rule that the seller of the commercial property will have to collect the GST/HST from the recepient or the buyer.
The Canada Emergency Commercial Rent Assistance (CECRA) provides forgivable loans to qualifying commercial property owners, whether they have a mortgage on their property or not. The loans cover 50% of monthly rent payments payable by eligible small tenants who are experiencing financial hardship from April to September. The landlord waives the 25%, and the tenant pays the remaining 25%, both comprised the 50% remaining of the total amount of the rent.
Impacted Small Business tenants are businesses, including non-profit and charitable organizations, that pay no more than $50,000 in monthly gross rent per location, generate no more than $20 million in gross annual revenues, and have temporarily ceased operations, or has experienced at least 70% decline in pre-COVID revenues.