Here in Ontario we have a sales tax of 13%, called the Harmonized Sales Tax (or HST). This is applied to goods and services purchased in the province. How does this apply to real estate you might ask? Well it certainly applies to the “service” portion of your transaction. For example home inspections, lawyers fees, real estate fees (commission) etc. Also, it can sometimes apply to certain properties depending on the situation.
Now, the question whether HST applies to a property or not is a notorious "grey area" in this business. It can be very difficult to get a straight answer, even for a seasoned Realtor. There are many, many variables involved - too many to go into detail here - but I will link below to some documents on the Canada Revenue Agency's (CRA's) website that may help to clarify a few scenarios.
**DISCLAIMER** - I am in no way an expert on tax matters or an Accountant, and the information in this post is meant to be a general overview of a few situations that can arise when dealing with real estate transactions. Every scenario can vary greatly, so I STRONGLY recommend that you consult with your Accountant to determine whether HST applies to your particular situation, and what the best course of action for you is. Even if the information is on CRA’s website, I still suggest you take that document and discuss it with your Accountant.
HST in an Agreement of Purchase & Sale
On an Agreement of Purchase & Sale, there is a section dedicated to discussing HST. For a normal residential resale home, it is fairly standard practice to indicate that the HST is “included in” the purchase price. The reality is, that with most resale homes, HST does not, in fact, apply. We will get into a few of these scenarios below.
Typically, if HST is applicable to the sale of a property, the offer will usually indicate that HST will be “in addition to” the purchase price, instead of “included in”. This is something that is often part of the negotiation process, while both Buyer & Seller determine the best outcome for all parties involved. There are different scenarios when one way or the other may be more beneficial for either the Buyer or Seller. In plain English though, if the HST is included in the purchase price, then typically it would come out of the proceeds that the Seller receives on closing, and would be remitted to the government at that time. If the HST is in addition to the purchase price, then the Buyer would be expected to pay that additional cost over and above the price of the property.
HST on Re-sale Residential Homes
As stated above, typically for a normal residential re-sale home, HST would not be applicable. However, there are a few exceptions, one being that if a substantial portion of the property has been renovated. CRA defines “substantial” as around 90%. On their website they say that “at least 90% of the building that existed before the renovations began must be renovated to some minimum degree. This determination applies to the interior area of the building”.
HST on Farmland
If land is being operated as a farm (which is a business) then HST will be applicable to the sale. Additionally, if you are not a farmer yourself, but are renting the land out to a local farmer to work - even if you are not claiming that rent as income on your tax return - then HST will be applicable. Now typically the HST will apply to the farmland, but the house itself, and a portion of property with the house will be exempt.
If the Buyer has an HST number, they can choose to self assess on their next HST return - rather than paying it upfront on closing day. In this case it would usually be indicated as “in addition to” the purchase price on the offer. The Buyer will be required to sign a document on closing stating that they agree to self assess, and will not hold the seller responsible for the remittance of the HST to the government. Here is a link
to CRA’s website regarding HST and farmland
HST on Vacant Lots
This can be a particularly confusing area and depends on the individual situation. Typically if the vacant land is owned by an individual and was purchased for their own personal use, then HST should not be applicable when they go to sell it.
If the land is owned by a company, then usually it would be considered to be part of the business, and HST would be applicable. If you purchased the property under a company name, but have only ever used it for personal use, then this would definitely be one of those situations where you want to involve your Accountant.
If the property was purchased, and then severed into multiple lots, which were then sold off, typically HST would apply, as this is considered to be a “business” and you are earning a profit.
HST on New Construction
According to CRA: “the sale of new housing by someone other than a “builder” is generally exempt from HST. Conversely, the sale of new housing by a builder is generally taxable for HST purposes”.
When you purchase a new home, usually the offer will state that HST is “included in” the purchase price. Most builders will ask, that in exchange for “including” the tax, the Buyer assign their rights to any HST rebate over to the builder. This allows the builder (who is a business, and will have an HST number), to remit the HST on their next return, and be eligible for any rebates etc. This is usually the most straightforward option for most Buyers, as they are not typically interested or able to pay the additional tax cost on top of the purchase price of the home.
HST on Commercial Real Estate
HST is usually applicable to commercial properties. There may be some exemptions or exceptions if there are residential areas in the same building (e.g. apartments on the 2nd floor etc). In this case the HST would likely only apply to the commercial portion of the building (or percentage of the building that is commercial in nature).
On commercial properties, dealing with the HST does not usually present as much of a concern as some of the other areas, as typically both Buyer and Seller will be operating businesses, and thus have HST numbers respectively.
To Sum It All Up
In summary, HST can be a very complex topic when it applies to real estate transactions. If you are buying and selling your personal homes, and not making a business out of it, then generally you should be exempt and likely won’t have to worry about it. If your real estate dealings fall under one of the other categories, then you could run across some of these situations, and it would be prudent to have an Accountant that you can call on to assist with making the most informed decisions possible.
**Another Disclaimer** - Again, I am NOT an Accountant or a tax specialist, so you most definitely need to consult with one whenever HST concerns arise. Did I say it enough throughout this article?? Call your Accountant!!!