June 16th - 2010

Applying the HST: REALTOR®tips

The new harmonized sales tax (HST) takes effect July 1st. Ontario REALTORS® need to prepare for the changes now.

The new harmonized sales tax (HST) takes effect July 1st. Ontario REALTORS® need to prepare for the changes now. The HST will affect certain current agreements, such as purchase and sale agreements for new homes that close on or after July 1, 2010. However, REALTORS® also need to consider how HST will apply to their services that “straddle” the start up date of July 1, 2010.

The following guidelines have been summarized from information prepared by Rob Allwright, Senior Principal, KPMG-Ottawa for CREA and can be found along with further explanations and information about the HST at www.realtorlink.ca.

HST will generally apply to the same tax base as the current GST and GST registered REALTORS® will be automatically registered for the HST. As a result, REALTORS® will apply HST to the fees for their services relating to property in Ontario and BC that are currently subject to GST. For example, rather than REALTORS® commissions being subject to GST at the rate of five per cent, REALTORS® commissions for services relating to property in Ontario will be subject to HST at the rate of 13 per cent.

In addition, REALTORS® will pay the Ontario HST on most of their costs, such as office leases, office supplies, and equipment including computers and software. Some of these costs, such as the lease of office space, were previously only subject to GST.

Although REALTORS® will pay more sales tax as a result of a broader taxable base of goods and services, they will generally be able to recover the HST they pay by claiming input tax credits (ITCs). REALTORS® will no longer have to pay unrecoverable provincial sales tax (PST) on purchases consumed in providing their services, such as computers, software and office supplies. In terms of the overall impact of harmonization on a REALTORS® costs, there should be a net benefit.

Transitional rules
Ontario and BC released general transitional rules for the HST. These rules explain how HST will apply to transactions that straddle the start-up date. For purposes of the following discussion, it is assumed that a REALTORS® commission becomes due or is paid when the property is sold or leased.

The HST would generally apply to REALTORS® services to the extent, expressed as a percentage, that the services are performed on or after July 1, 2010. However, if 90 per cent or more of the services are performed before July 1, 2010, the HST will not apply.

For example, a REALTORS® services are performed from June 1, 2010 to July 2, 2010 with the sale of the property closing on July 2, 2010. The REALTORS® commission becomes due at that time of closing. More than 90 per cent of the REALTORS® services were performed before July 1, 2010. In these circumstances, the GST at the rate of five per cent will apply to the REALTORS® services.

In another example, a REALTORS® services are performed from May 1, 2010 to July 31, 2010 with the sale of the property closing on July 31, 2010. The REALTORS® commission becomes due at that time. In this case, two thirds of the services were performed from May 1, 2010 to June 30, 2010 and one third of the services were performed from July 1, 2010 to July 31, 2010. The REALTORS® will charge GST on two thirds of the amount charged for the services and HST on the remaining third.

When service starts and ends
Based on discussions with Canada Revenue Agency and Finance Canada officials it is a question of fact when the REALTOR® service commences and ends for purposes of applying either GST or HST under the transitional rules. The Canada Revenue Agency will consider various factors when making a determination as to when the services are performed and how the GST or HST will apply to the commission. These factors include:

  • when agreements are entered into (such as the listing agreement or buyer agency agreement and the agreement of purchase and sale) and when the transaction closes;
  • the records retained by the REALTOR®, such as mileage logs; and
  • the time period during which the REALTOR® is engaged by the client.
    Further, the Canada Revenue Agency has indicated that it will take a fair and reasonable approach in the circumstances.

In general, the service commences when the agent and client sign a listing agreement or buyer agency agreement. The service may conclude when the deal has “closed” – (leased or sold). It may or may not conclude when an agreement of purchase of sale/lease has been signed because the REALTOR® could still provide some services up to the time the REALTOR® is paid when the deal closes.

Canada Revenue Agency and Finance officials have indicated verbally that a reasonable basis to apply the 90/10 percent rule and to determine how much HST will be payable on the services may be to prorate the number of calendar days:

  • before July 1, 2010 (GST applies); and
  • after June 30 (HST applies)

over the time period beginning with the listing of the property and ending on the completion of the sale/lease.

The application of this approach will depend on your particular circumstances.

There are three general approaches that a REALTOR® may take depending on the REALTOR®’s circumstances and how conservative the REALTOR® wants to be. The most conservative approach is to charge and collect GST or HST based on when the transaction closes. If the approach is questioned by the client, the REALTOR® can decide whether or not it is appropriate in the circumstances to adjust the amount of tax (and take an offsetting adjustment in the REALTOR®’s return) or to advise the client that the client may make a tax paid in error claim.

Another less conservative approach is to allocate the fee between the services performed before July 1, 2010 and on or after July 1, 2010, based on the date of the listing agreement or buyer agency agreement and when the transaction closes.

The least conservative approach is to allocate the fee between the services performed before July 1, 2010 and on or after July 1, 2010, based on the date of the listing agreement or buyer agency agreement and when a firm agreement of purchase and sale is concluded. For example, if a REALTOR® determines in the REALTOR®’s circumstances that the REALTOR®’s services were performed prior to the date on which the agreement of purchase and sale was signed, the REALTOR® should be prepared to provide documentation to support this if the transaction is reviewed at audit. It is recommended that you discuss with your tax advisor an appropriate approach in your circumstances.

HST highlights

  • Starting July 1st, the HST will be in effect in Ontario.
  • Purchasers of newly constructed homes for primary residences up to $400,000 would not, on average, be subject to an additional tax burden in view of the new housing rebate up to $24,000.
  • There is a new rental housing rebate, similar to the enhanced new housing rebate, for new residential rental properties.
  • For new homes constructed in full or in part prior to July 1, 2010 that are subject to the HST on or after July 1, 2010, a PST transitional housing rebate is available to provide relief in respect to the PST embedded in the home.
  • HST will not be applicable to a used residence for re-sale.
  • For those who sell their home in Ontario, there will be a 13 per cent tax payable on the real estate commission (an eight per cent increase on top of the current five per cent.).
  • Lawyer's fees will also be subject to the 13 per cent HST in Ontario, as will the cost of a Condominium Status Certificate, however the total cost of that status certificate will remain at $100.
  • Moving costs, the cost of a home inspection and even home staging will increase to reflect the HST.

This article provides additional information and clarification promised in a message sent to all members in May. This article is intended for general information only and is not to be relied upon or construed as legal, accounting or other professional advice or a substitute for professional advice. Any questions about HST should be reviewed with brokerages’ and individual REALTORS®’ accountants and other tax advisors.

More information on HST (in particular, Related Resources of interest to REALTORS®) is now available on OREApedia.

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Ontario Real Estate Association

Jean-Adrien Delicano

Manager, Media Relations

JeanAdrienD@orea.com

416-445-9910 ext. 246