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Sometimes in the excitement of undertaking planning to achieve income tax savings, the impact of goods and services tax (“GST”), harmonized sales tax (“HST”) or the provincial sales tax (“PST”) can be overlooked. These indirect tax traps can come as a surprise after a transaction has already taken place. Be aware of the following examples:
For GST/HST purposes, a partnership interest is considered to be a financial instrument. Since financial instruments are exempt from GST/HST, no GST/HST will apply to the purchase or sale of an interest in a partnership.
In contrast, BC PST does not consider a partnership to be its own entity. For PST purposes, the partners of the partnership are considered to own their proportionate share of the partnership assets which can include both taxable and non-taxable assets (for example, office equipment versus goodwill). Where a partnership interest is sold, PST will need to be collected on the portion of the value of the taxable assets not already attributed to that partner’s proportionate interest unless a specific exemption applies.
Startup companies often issue stock options as part of the compensation to their consultants. Since the consultant is not an employee, the value of the options is considered to be payment for services rendered instead of employment income.
Where a consultant is required to be registered for GST/HST purposes, they must collect and remit the applicable GST/HST on the value of the stock options. The company can recover the GST/HST paid by claiming the amounts as input tax credits (“ITCs”) on their sales tax return.
Where a tenant makes a payment to a landlord in exchange for damage, modification, breach or termination of a lease agreement, these payments are considered to have GST/HST included in them, where the original lease payments would have been subject to GST/HST.
The landlord is deemed to have collected, and the tenant to have paid, GST/HST on this amount, which allows the tenant to claim an ITC. Sometimes overlooked is the fact that the vendor must back out the tax included in the payment and remit that amount to the Receiver General.
Landlords should consider the GST/HST impact when determining the appropriate damage payment so that they do not end up receiving less than intended. For example, if the parties agree to a $1,000,000 damage payment, the landlord must remit GST/HST of $47,619 and is only really receiving $952,380.
The above content is believed to be accurate as of the date of posting. Tax laws are complex and are subject to frequent changes. Professional advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.