GST/HST on commercial rent: what tenants and landlords owe

The general rule for commercial rent

The CRA states that commercial leases from a landlord who is registered for GST/HST are generally taxable. For a business in Ontario, that means the landlord charges 13% HST on the rent and shows it on the invoice. The rent you pay is the price of the space; the tax is a separate amount that, for many tenants, comes back through input tax credits.

Illustrative example: a tenant pays $4,000 a month in basic rent. With 13% HST the landlord invoices $520 in tax, for $4,520 in total. A tenant who can claim the credit recovers the $520, so the true cost is $4,000. A tenant who cannot claim it bears $520 each month. Residential rent follows different rules, which this article does not cover.

When the landlord is not charging tax

A landlord who makes taxable leases must register and collect the tax unless the landlord is a small supplier. The CRA’s memorandum on commercial real property says that a small supplier who has chosen not to register voluntarily is not required to collect tax on a lease, even though the lease itself is taxable in nature. In general, a small supplier is a person whose worldwide taxable supplies, including those of associated persons, are $30,000 or less, though special rules apply to some organizations.

If your landlord does not charge HST, ask whether it is because they are a small supplier. Do not add tax to a payment yourself. If a landlord later registers, ask how the change will show up on your invoices. Ask for the registration number on invoices where tax is charged, because a tenant needs it to support a credit.

Additional rent, percentage rent and operating costs

Many commercial leases add charges to basic rent: percentage rent, common area costs, and reimbursements such as property taxes. The CRA notes that percentage rent, which is a share of the tenant’s sales above a base amount, is taxed the same way as basic rent. Common area expenses and cost reimbursements are commonly treated as additional rent.

Calling something additional rent in the lease does not decide whether tax applies. The CRA says the status depends on whether the amount is consideration for a taxable supply, or for something separate from the lease. Its example is interest on overdue rent, which, if shown separately from rent, is a financial service and generally exempt. If a charge looks unusual, ask the landlord how it is treated and read the lease wording before you pay.

Property taxes in a net lease

Property tax is where tenants most often misjudge the bill. The CRA explains that property taxes a tenant pays are treated as part of the payment for the rental, even if the tenant pays the municipality directly, and so are subject to GST/HST like rent. This applies whether or not the lease calls them rent or additional rent.

The exception is narrow. If the tenant is directly liable to the municipality or another entity for the property taxes, that amount is not subject to GST/HST. The landlord’s own property taxes are generally not subject to GST/HST when the landlord pays the municipality, but a recovery from the tenant is part of the rent. When you compare quotes for space, compare them with HST and net charges included, so you see the real cost.

Rent-free periods, reductions and lease inducements

The CRA treats a rent-free period as a supply for no consideration, so a registered landlord does not collect tax for that period. If the landlord reduces the rent, tax is calculated on the reduced amount. Where tax was charged but not collected, or too much was collected, a credit note from the landlord or a debit note from the tenant can adjust it, subject to the documentary and eligibility requirements.

Leasehold improvements are different again. If the landlord pays for them and is a registrant, the landlord may claim credits and the tenant has no GST/HST consequence. If the landlord gives the tenant a cash inducement to do the work, the CRA treats the tenant as supplying construction inputs to the landlord, and a registered tenant must charge tax on that payment. Read these clauses with your accountant before you sign.

Can the tenant claim input tax credits?

A registrant generally can claim input tax credits for tax paid on costs, including leasing real property, to the extent it is used in commercial activities. That is why a registered consultant, retailer or contractor usually recovers the HST on rent. The CRA also says you cannot claim credits for tax on purchases used to make exempt supplies, so a tenant whose space is used for exempt services may not recover it.

Where a space is partly business and partly personal, only the business portion is eligible. Keep invoices that show the landlord’s name, the tax charged and the registration number, as the CRA’s documentation rules require. Claim the credit on the return for the reporting period of the purchase, and keep in mind the CRA’s time limits on late claims.

If you rent out commercial space

A landlord should first work out whether registration is required. If the landlord’s taxable supplies, together with associates’, stay within the small-supplier limit, registration may be optional, and our article on voluntary registration compares the trade-offs. A registered landlord can claim credits on costs of acquiring, improving or operating the property, to the extent it is used in commercial activities.

Many landlords hold property personally, through a corporation or through a partnership. How the property is held can affect GST/HST treatment, so describe the structure when you ask for advice.

What to bring to an accountant

Bring the lease and any amendments, a schedule of what is charged as basic and additional rent, recent landlord invoices, and details on whether the property taxes are paid to the landlord or the municipality. Ask whether your use of the space supports credits and whether the landlord’s registration number appears on each invoice. For a landlord, add the rental history, other income and associate information. If tax was charged incorrectly in the past, raise it early.