GST- Buyer Able to Offset GST Included in the Purchase Price; Home Inspection Condition - Test of Buyers Refusal to Remove It #343

By Gerry Neely
B.A. LL.B

The Ontario standard form of purchase and sale dealt with the Good and Services Tax (GST) by providing, in a clause, a blank space in which the parties would state whether GST was to be included in the purchase price or added to it. The seller of property valued at $920,000, who acted without accounting or legal advice, agreed that if the transaction was subject to GST it would be included in the price.

At closing, the purchaser promised to indemnify the seller against any GST liability and disclosed his GST registration number. He also provided a certificate which confirmed the sale was subject to GST of $60,186. That was deducted from the sale price but the purchaser, instead of paying that sum to the Canada Customs and Revenue Agency, utilized input tax credits in excess of the GST to avoid payment.

The seller sued unsuccessfully when he discovered this arguing that, among other claims, the real estate agent had misrepresented the meaning of the clause. The judge said it was clear that, while the GST was due on the purchase of this taxable real property, the Excise Tax Act allowed the purchaser to apply his unused input tax credits in this manner. ¹

How far must a conditional buyer, whose offer is subject to a home inspection, go to justify his decision not to remove the condition, when the typical conditional clause gives the buyer the "sole and absolute" discretion to satisfy himself with the results of the inspector's report?

That was the question in a case where conditional buyers of a new $1,510,000 home refused to waive the condition when they reviewed the home inspector's report, and sued the agent and developer to recover their $150,000 deposit. The report described the home as well-built and, on a scale of nine, gave it an above-average seven. Only five deficiencies were noted and they could be repaired for less than $2,200. The most serious was the slope of the roof which was inadequate to drain water from it, and which might create a problem in 10 to 15 years.

Not surprisingly, the real estate agent concluded that early buyer's remorse had set in. She demanded to see the report and receive the buyers' reasons for the decision, neither of which was provided. From the seller's perspective, the buyers had the onus of proving that they acted reasonably and in good faith.

Their conduct should be measured by applying an objective standard that considered only the extent to which the deficiencies affected the building's fitness, structural completion and mechanical usefulness. Since the deficiencies were minor and could be repaired at a cost of less than one-sixth of one per cent of the sale price, the buyers' conduct was unreasonable and evidence of bad faith.

The buyers countered this by saying the home had been advertised as having been built with "the most extraordinary details" and "meticulous attention to detail." The report cast doubt on the quality of this work and the building had fallen below the expectations they had when they made their offer. They argued the test to measure their good faith was subjective in nature and should therefore take into account the factors which were important to them personally.

One of those factors was the problem they might have in the repair of the roof, both with respect to a tenant who was prepared to pay a high rent for immediate occupancy and the logistics of supervising work when they lived 1,500 kilometers away. There was no evidence of the usual hidden motives of a buyer who refuses to waive a condition - that is, lack of funds, price too high, another property he would prefer to have.

The judge concluded the buyers genuinely believed they were getting less than they had bargained for and ordered the return of the deposit. In doing so, he considered both the objective and subjective tests to which both parties referred.²

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