One of the issues that we as real estate professionals deal with in every sale transaction is the matter of taxes. Anyone that owns or has owned a property knows about property tax but there are a couple of other tax matters that come up in real estate sale and purchase agreements which many consumers are not overly familiar with and there is one in particular for which there are no readily available or clear answers. Here in Ontario its formal name is the “Harmonized Sales Tax,” commonly referred to as HST.
It is widely believed among consumers and by some REALTORS® that HST does not apply to resale real estate. If that was the case then Paragraph 7 titled HST in the Agreement of Purchase and Sale document used here in Ontario would not need to exist. Said paragraph reads as follows:
HST: If the sale of the property (Real Property as described above) is subject to Harmonized Sales Tax (HST), then such tax shall be ……………………………………………………… the Purchase Price. If the sale of the property is not subject to HST, Seller agrees to certify on or before (included in/in addition to)
closing, that the sale of the property is not subject to HST. Any HST on chattels, if applicable, is not included in the Purchase Price.
The wording in parenthesis that I have highlighted in bold, “included in/in addition to” are the only two choices available within the Agreement of Purchase and Sale to insert in the blank shown above. Example:
HST: If the sale of the property (Real Property as described above) is subject to Harmonized Sales Tax (HST), then such tax shall be included in the Purchase Price.
By filling in the blank as shown above both the Seller and the Buyer acknowledge and agree that if HST is applicable to the transaction, then HST is included in the purchase price. In essence the Seller will be responsible to remit the HST owing to the Canada Revenue Agency and the Buyer is therefore protected.
The majority of Agreements of Purchase and Sale are written this way. There are however situations where HST does apply and when it does, this is typically triggered by the tax status of the Seller not the Buyer. Over the past 20 plus years as a real estate practitioner in the southern Georgina Bay region I have dealt with a fair number of HST related transactions. Many transactions in the area are for recreational properties and Buyers often intend to rent them out from time to time. Sometimes, Buyers will for whatever reason, title the property in a company name on closing. That in itself may well render a property applicable to HST being payable on its sale at a future date which has nothing to do with the party who is Buyer. Many companies due to their annual business volume ie: sales may and probably are HST registrants.
In addition to a property being in their company name, the property may also be placed in a rental program say in the Village at Blue Mountain. The owner may use the property themselves but it is also rented out generating income for the owners. That can be another HST trigger. As long as the rental or other income from a property is less than $30,000 for a 12 month period, the owner does not need to become an HST registrant but if they already are that is a red flag. My immediate reaction when dealing with any Sellers where this is the case is to have them call their lawyer or accountant for clarification. We need to know this when a property is listed for sale. The REALTOR® Code of Ethics absolutely requires us to know our limitations in terms of special circumstances and to point our clients in the direction of those better to provide expert advice such as a lawyer, accountant or tax adviser etc.
Here is a good example to clarify the HST issue to some point. Typically when a property such as a vacant lot is sold in a newly created subdivision for the first time, HST will apply and it is often included in the purchase price. If John and Mary Smith buy the lot today for $200,000 and HST is included in the purchase price, the builder or developer is required to remit the HST payable. If the Smiths title the lot in their personal names to build a house then change their mind and re-sell the lot at a later date, HST will not apply. Let’s say that the Buyer of the Smith’s lot Bob and Susan Wilson, titles it in their company name, 123456 Ontario Inc. If at some future point in time their numbered company is to sell the lot a third time, HST will in all likelihood be applicable and the Wilson’s need to seek some qualified advice to confirm. This example illustrates the difference of these two scenarios. Just because HST is paid on a property once doesn’t is will not apply in the future as again, it all depends on the Seller and their respective tax status.
Over the years I have been involved in transactions where HST has been applicable where quite often, the Seller is unwilling to pay the HST hence Paragraph 7 in the Agreement of Purchase and Sale as noted above reads as follows:
HST: If the sale of the property (Real Property as described above) is subject to Harmonized Sales Tax (HST), then such tax shall be in addition to the Purchase Price.
What has just happened here is that unlike the example earlier, the payment of HST has been shifted from the Seller to the Buyer. In this circumstance, if the Buyer purchases a property for say $500,000, then the amount of HST owing at 13% is $65,000!
Contrary to what some believe or wish to believe, HST and real estate is not a matter of black and white. It’s a grey area and every situation needs to be examined carefully and with some expert advice that is beyond that of REALTORS®. In Part 2 of this subject I will give some further examples that can lead to costly mistakes to Sellers, Buyers and their respective REALTORS®.
If you are thinking of selling or purchasing a property is 2021 and are not sure about the issue of HST or have any tax or other related questions regarding real estate please do not hesitate to Contact Me. If I can’t answer your question I will certainly point you in the right direction as to who can.
Stay safe and stay tuned…..