In Real Estate & HST Can Be Taxing – Part 1, I covered some of the basic circumstances where the matter of Ontario’s Harmonized Sales Tax otherwise known as HST can significantly impact the sale of real property for both Sellers and Buyers. In Part 2, I am going to provide some additional information that real estate consumers and there respective real representatives need to be careful of and watch out for.
The first hurtle or question to ask in any real estate transaction is simply “will the sale of the real property be HST applicable?” As I mentioned in Part 1, the answer to that question is essentially based on the tax status of the Seller and in many circumstances but not all, the answer is pretty straight forward. The two critical questions that would indicate if HST applies are (a) is the property titled in a company name versus as person’s own name and (b) has their been any income earned from the property and reported for income tax purposes. If the answer to both of these questions is yes, then in all likelihood, HST will apply to the sale price. As covered previously, Paragraph 7 of the Agreement of Purchase and Sale document used in Ontario deals with the matter of HST 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.
As stated previously , there are two options to use in order to complete the blank area in this paragraph that basically states that if HST is applicable to the sale ….“then such tax shall be included in OR in addition to the Purchase Price.”
Over the years I have had people say that if HST is not applicable then you simply leave this section of the Paragraph 7 blank. Wrong, it cannot be blank! If HST does not apply then the Seller should have no qualms about having HST as being “included in” because upon the completion of the Agreement no HST will need to be paid. If after questioning a Seller about this and they are still insistent on leaving the “included in” or “in addition to” section blank because HST doesn’t apply I would be very suspicious and walk away. At the very least I would tell my client to seek professional legal or accounting advice.
Sometimes the issue of whether HST applies or not is not as crystal clear as one would expect. Several years ago I sold a 100 acre parcel of vacant land that was owned by an elderly couple in their seventies we’ll call them John and Mary Smith. The Smiths had owned the property since 1947 long before either HST or the previous Goods and Services Tax (GST) even existed plus it was in their personal names. The property had not been used for any income generating purposes. For the most part is was heavily wooded and further, it fell within the jurisdiction of the Niagara Escarpment Commission (NEC) where you can’t so much as cut down a tree or build a home without NEC approval.
On the surface it appeared that the sale of John and Mary’s property would not be subject to HST. They had owned it for over 60 years and it was in their personal names but there was one kicker. The Smiths were farmers and as such they were HST Registrants and that alone made the sale HST taxable. The property sold for $390,000 so the HST payable when the sale closed was just over $50,700. Knowing the significance of HST I had done my homework from day one. I worked with the Seller’s accountant and we filed a ruling with the Canada Revenue Agency to remove HST from being applicable. That ruling/request was ultimately denied. Throughout the transaction I was the Smith’s listing REALTOR® but I also represented the Buyer so I had fiduciary duties to look after the best interests of both parties. Once it was confirmed that HST was applicable on the sale, both parties agreed to share the $50,700 cost and everyone was happy. My thoroughness paid off and we avoided what could have been a very unpleasant and costly situation.
Over the years I have seen numerous transactions where the issue of HST was clearly missed. Too often in life we “assume” things and that is a bad habit to get into. Real estate transactions of any type and size are complex legal matters where nothing can be assumed. When they are the results are costly and unpleasant for Sellers, Buyers and the REALTORS® involved. More than once I have seen REALTORS® forfeit their entire commission on a sale all because of an issue that was completely avoidable had the correct measure been taken and investigation made.
On many occasions when HST is applicable on the sale of a property I have had other REALTORS® say “the Buyer just needs to become and HST Registrant and the HST will go away.” Such a statement is completely false. In that situation the HST just gets pushed off to another day sometime in the future. At such time, the property may well be worth more money which means the HST payable is even greater. You should never buy into such a statement and neither should your REALTOR®.
As REALTORS® we are not experts in everything and our very Code of Ethics states that in order to serve clients effectively we must direct them to ther appropriate source when qualified legal, accounting, financial, municipal zoning or other information is needed in order for them to make informed decisions. HST is clearly one of those grey areas that warrants investigation and advice from those qualified to provide it.
A piece of advice that I got from my own lawyer many years ago was this. “Treat every real estate transaction as though HST applies and the onus is on you to prove otherwise.” That statement has always stuck with me and in doing so my valued real estate clients have never been burnt nor have I while serving them with their selling and or buying objectives.
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.