VERICO Designer Mortgages

We have received more detailed information from CREA about how commissions should be taxed when the listing and closing dates of a real estate transaction straddle July 1, the start-up of HST in Ontario.

In the scenario we used in a previous article, a listing is taken on May 1 and a sale is made, with the closing date of July 31.  The commission is due and payable on July 31.  In their initial ruling, the Canada Revenue Agency (CRA) and the Department of Finance had decided the determining factor would be the length of time from the beginning of the listing to the closing date, when the commission would be due.  In our scenario, then, two-thirds of the commission would be subject to GST (for the time period of May 1 – June 30) and one-third subject to HST (for July 1 – July 31).

The rationale behind this decision was that REALTORS^® typically do not track the time they spend on a particular client’s account, and would therefore be unable to accurately determine whether their services were substantially (90 percent or more) completed before July 1.  With that in mind, the CRA agreed that a reasonable simplified basis for calculating the GST and HST amounts when a REALTORs^® services straddle the start-up date is to prorate the fee based on the number of calendar days covered by the services agreement before and after the July 1 start-up date.

It seemed simple, but not entirely fair, considering that just because a deal closes on July 31 doesn’t mean that the REALTOR^® offers services for that entire period of time.

We’ll go back to the example where a listing is taken May 1, and add in that an offer is accepted on June 15, with the closing to take place July 31.  The commission is still due and payable on July 31. According to the Canada Revenue Agency, if a REALTOR^® feels that all of his or her services are at an end with that accepted Agreement of Purchase and Sale, they could use that date as the date of completion of their services.   However, the REALTOR^® would have to be prepared to prove to a CRA auditor through documentation that his or her services were all or substantially all completed at that date.

To sum up, HST will apply to REALTORS^® services to the extent that the services are performed on or after July 1, 2010.  If 90 percent or more of the services are performed before July 1, the HST will not apply.  If we go back to our scenario, more than 90% of the REALTORS^® services were supplied before July 1, so the REALTOR^® could charge only GST on his or her services, and no part of the commission would be subject to HST.  The onus is on the REALTOR^®, however, to be able to prove to any auditor that no services – or no more than 10% of their services – took place after the accepted Agreement of Purchase and Sale and July 1, 2010.

REALTORS^® will have to use extra caution in instances where an offer is accepted after July 1.  Care will have to be taken to determine what percentages of their services were offered before July 1 and what percentage after.  The same rule – that HST will not apply if 90 percent of services were completed before July 1 – will be in effect, but REALTORS^® will have to determine what that percentage is and bill GST and HST appropriately.  They will also have to be prepared to document their conclusions in the event of an audit by the Canada Revenue Agency.