Jan 26th, 2023
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:
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:
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.