The Government of Canada and the Government of Ontario have signed
a Comprehensive Integrated Tax Coordination Agreement for the implementation of HST in Ontario. The HST will come into effect
in Ontario on July 1, 2010, at a rate of 13%, consisting of a 5% federal part (equivalent to the existing GST) and an 8% provincial
part. While most GST registered entities can claim the GST/HST paid on services as an Input Tax Credit, no such relief exists
when the client is an end consumer. Therefore, during the transitional period, it is important to be as accurate as possible
when assessing which tax rate applies to services for the end consumer who is most sensitive to the incremental 8% cost.The following are the key rules that will determine how the GST/HST will
apply to commissions charged for real estate services.
1. Services performed, due and payable prior to July 1, 2010 would only be subject to GST. For example, listing taken, offer
accepted and transaction closed before to July 1, 2010.
2. Services performed after June 30, 2010 would be subject
to HST, For example, listing taken, offer accepted and transaction closed after June 30, 2010.
3. Services started
prior to July 1, 2010 and completed after June 30, 2010 might be exempted from HST based on a transitional rule. The transitional
rule states that if 90% or more of the work is completed prior to July 1, 2010, then only GST would apply. Conversely, if
10% or less of the services is performed before July 1, 2010, the HST will apply. it is our opinion that transactions with
a firm Agreement of Purchase and Sale or a firm Agreement to Lease dated prior to July 1, 2010, are effectively more than
90% complete and therefore, subject to only the GST rate of 5%.
4. Services started prior to July 1, 2010 and completed
after June 30, 2010 that do not satisfy the 90% transitional rule requirement for HST exemption will be subject to a combination
of GST and HST in proportion to the work performed.
CRA's
official response to us is as follows:
"Whether
HST applies on an amount is a question of fact and determined on a case by case basis. REALTORS® often charge a service
fee for arranging for the sale of a vendor's property. A common question from REALTORS® is how they determine the portion
of their services performed on or after July 1, 2010. For example, a REALTOR® and a vendor enter into a listing agreement
on May 1, 2010 (the listing date) and the property is conditionally sold on July 15, 2010 (i.e., a firm sale date) but the
sale does not become final until August 15, 2010 (i.e., the closing date). The portion of a REALTOR®'s services performed
on or after July 1, 2010 may not necessarily be determined by the firm sale date or the closing date. Realtors should determine
the portion of their services performed on or after July 1, 2010 in a fair and reasonable manner."
Another example:
* Client signed listing agreement on March 22, 2010
* Offer was conditionally accepted March
24, 2010
* Conditions were removed and the deal firmed up by March 29, 2010
* Closing is July 15, 2010
The determination based on our checklist, and point 3 above, is that this
deal was 95% complete prior to the July 1 deadline. The remaining 5% being left for closing day activities (from a Realtor®'s
perspective, lawyers are a different matter)
This client
would only be charged GST on the commission payable.
Another
example:
* Client signed listing on June
15, 2010
* Offer signed and accepted on June 30, 2010
* Conditions removed by July 8, 2010
* Closing
on July 30, 2010
According to our checklist, and point
4 above, 75% of the work was done before June 30, 25% after July 1.
Client
would be charged GST on 75% of the commission payable, and HST on 25% of the commission payable.
Determination of percentage of work done will vary from brokerage to brokerage. The above examples
are based on our in-house checklist.
Alexx
