Taxation law

GST/HST-QST issues regarding commercial leases due to COVID-19

Apr 2nd, 2020

By Louis-Frédérick Côté

Since the beginning of the COVID-19 pandemic, a lot of legal experts have discussed some the challenges resulting from this crisis regarding commercial leases. If a landlord suspends the payment of the rent, reduces the amount of rent to be paid, or delays the payment of the rent until the end of the lease, are there sales taxes consequences to consider? The same question can be asked in relation to contracts of successive performance, such as a gym membership, tuition in a private school, etc. and other services subject to sales taxes.

As a reminder, the essence of the rules set out at section 182 of the Excise Tax Act and article 318 of the Act respecting the Québec sales tax provide the following:

  • In the case when, as a consequence of the breach, modification or termination of an agreement for the making of a taxable supply (for example the leasing of a commercial space) by a registrant provider (for example the owner of a commercial building) an amount is paid by the acquirer of the supply (for example if the tenant pays an amount to the landlord) otherwise than as consideration for the supply, directly or indirectly, for example as damages to the landlord, the amount will be “DEEMED” to include the GST and QST.

Before deciding on the the amount to be paid by a tenant to a landlord following an agreement, it is crucial for the parties to consider whether this amount is “deemed” to include the GST and QST, and if so, to determine the amount to which the sales taxes relate, the entire rent or the reduced negotiated rent.

This can have serious consequences. For example, consider the following situation. A tenant pays a monthly rent of $50,000 to a landlord, plus GST and QST. The tenant claim credits for the sales taxes paid on the rent ($7,000 in tax refund). The landlord remits the GST and QST to Revenu Quebec (remittance of $7,000). However, Revenu Quebec believe that the provisions of the rules cited above apply and assess as follows:

  • Pay the claimed credits to the tenant ($7,000);
  • Accept the payment of the landlord ($7,000) for the GST and QST collected by the landlord from the tenant;
  • Increase the amount of input tax credits of the tenant for the “deemed” GST and QST included in the $50,000 monthly rent (increase of $6,522 for the tenant) and;
  • Assess the landlord for the “deemed” GST and QST included in the $50,000 of monthly rent ($6,522).

In this situation, the tenant receives more credits ($6,522) than the amount of sales taxes that they actually paid on the rent, whereas the landlord receives a net amount of $43,478 instead of the $50,000 expected under the lease. In short, before concluding a payment agreement relating to a commercial lease, be careful to take into account the sales tax implications of such a transaction.