H.S.T. and Residential Real Estate
There is much confusion over the applicability of the HST to residential purchase and sale transactions. This column will address this issue.
On resale homes, the typical form of Agreement of Purchase and Sale requires the Seller and the Buyer to indicate whether HST is either included in the purchase price or in addition, if applicable. Normally, the sale of residential homes and condominiums are exempt from HST. The Seller will not have to collect HST and the Buyer will not have to pay HST. The transaction itself is usually exempt. Exceptions to this include substantially renovated resales and Sellers who have claimed input tax credits. Regardless of this, the Seller is required to pay HST on any real estate commissions paid to the realtor. Both the Buyer and Seller will pay HST on the legal fees and most disbursements except for Land Transfer Tax and registration costs.
The purchase of newly constructed homes and condominiums have different rules. With respect to the purchase of new homes and condominiums, HST is always payable. However, almost every builder sells a new home by advertising that the purchase price includes HST. The fine print in any builders form of Agreement of Purchase and Sale provides that there is an HST rebate on new homes up to a value of $400,000. This rebate is typically assigned over to the builder who will pay the HST. Buyers are often not advised that if they do not intend to use the new home for a residence for themselves or for their immediate family member, they are ineligible for the HST rebate. Accordingly, when the purchase is of an investment property, the Buyer does not qualify for the HST rebate and would have to pay it as an adjustment to the builder on closing. This can be a substantial cost to the Buyer which is often unexpected. However, following closing, the Buyer could apply to Canada Revenue Agency to recoup the HST rebate if they can produce a lease for a period of at least one year.
To ensure that the Buyer qualifies for the HST rebate and will be residing in the property following closing, the Buyer must sign various documents on closing including a statutory declaration and indemnity to the builder confirming its use of the property. If the Buyer fails to tell the truth and misleads the builder in order to qualify for the HST rebate, serious consequences can follow which include a nasty reassessment letter from Canada Revenue Agency following closing demanding payment of the rebate together with interest and costs. Builders have become quite vigilant with verifying that the Buyer or its immediate family member has occupied the property following closing. It is therefore important that Buyers be truthful with respect to their use of the property.
With respect to new homes or condominiums, despite the inclusion of HST in the purchase price, the actual purchase price on the transfer/deed is less than the stipulated price in the Agreement of Purchase and Sale to reflect the non-HST portion. The good news is that Land Transfer Tax is not payable on the purchase price provided for in the Agreement, but is payable on a lesser amount which partially excludes the HST.
Builders will typically charge Buyers with HST on any extras included in the purchase price and almost always on builder adjustments. Legal fees and disbursements will be subject to HST but not Land Transfer Tax or government registration charges.
Situations for both new and resale homes will differ based on circumstances and accordingly, legal advice and in some cases accounting advice should be obtained so that there is no unforeseen HST owing by the Buyer on closing as a result of confusion among the parties to an Agreement of Purchase and Sale and their respective agents.
Source: Lorne Shuman / March 25, 2019