Nov 01, 1996

Sellers Right to Recover Tax Paid on Behalf of a Buyer #261


By Gerry Neely
B.A., LL.B.

Generally, the GST legislation makes a buyer of property, upon which GST is payable, responsible for its payment. The seller has the responsibility, as agent for the Crown, of collecting and remitting it. The question of the seller's rights when the buyer fails to pay the GST, was the subject matter of a B.C. case involving the sale of property used for both residential and commercial purposes.

The upper residential portion was exempt from GST which however, applied to the lower part used for commercial purposes. When Revenue Canada discovered that the sale had taken place, GST of almost $20,000 was assessed. The buyer refused to pay and Revenue Canada refused to collect it directly from the buyer, although it has the authority to do so. By the time the various avenues for self-help taken by the seller ended, interest and penalties had accrued and the seller eventually paid $26,500 to Revenue Canada.

Having paid the tax, Section 224 of the Excise Tax Act gave the seller the right to sue the buyer to recover the tax, as if the amount of the tax was a debt due to the seller rather than to Revenue Canada. However, there is a condition attached to this remedy.

Section 223 requires the seller to have notified the buyer by an invoice, receipt, or in the agreement entered into with the buyer in respect of the sale, that GST is either included in the purchase price or is added to it. No reference to GST was added to the printed form of contract between the parties. No notice of the addition of GST to the purchase price was given to the buyer until 2 1/2 years after the sale closed, when it was given, no doubt, as preliminary step to support the litigation that followed.

The buyer's arguments that the invoice was given out of time and did not comply with Section 223, were based upon a decision in an Ontario case where a seller sued unsuccessfully to recover from a buyer the tax paid by the seller. In that case, neither the contract, nor the statement of adjustments between the parties, made any reference to GST. The invoice setting out the buyer's liability was sent to him months after the closing, when the failure to pay GST was discovered upon an audit of the seller's books by Revenue Canada.

Compliance with Section 223 is essential to the success of a seller's claim, because of a decision by an Alberta court that if there is non-compliance, there is no other remedy available for a seller to collect the tax. Accordingly, the Ontario seller's action was dismissed because of non-compliance with Section 223.

That probably would have been the end of the British Columbia seller's action except for the fortuitous circumstances, that the parties used the commercial Contract of Purchase and Sale, prepared for the IC&I division of the Victoria Real Estate Board. It contained a clause with respect to GST, a clause in which each party covenanted and agreed to comply with the provisions of the Excise Tax Act, Part IX.

Where the contract doesn't state how GST is to be treated, tax of 7% is added to the purchase price. The judge interpreted this clause to mean that since the buyer is liable for GST, the parties always intended that GST would be added to the sale price.

The seller was given judgment against the buyer for the GST she had paid. However, since Section 224 only referred to the recovery of GST paid by a seller, she did not obtain judgment for the penalty and interest of approximately $6,500. Recovery of that amount awaits the result of further litigation.

It appears from the Reasons for judgment, that the buyer disregarded his lawyer's advice to become a registrant and the seller assumed that the buyer was registered. The importance of registration is that Section 221(2) of the Act exempts a seller of taxable real property from the collection of tax, if the buyer is registered under the Excise Tax Act.

Accordingly, regarding taxable supplies of real property, no seller and no lawyer acting for a seller, should transfer title without first receiving proof in the form prescribed by the Excise Tax Act that the buyer is a GST registrant.1

 1. Dworak v. Kimpton, S.C.B.C., Victoria, Reasons for judgment, October 29, 1996.

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