A REALTOR® Guide to GST/HST/QST

A REALTOR® Guide to GST/HST/QST 1

A REALTOR® Guide toGST/HST/QST


TABLE OF CONTENTSPART A: INTRODUCTION 2

PART B: THE GST/HST - AN OVERVIEW 21. What is the GST/HST? 22. What is taxed? 33. Application to real estate services 54. GST/HST registration, filing and documentation requirements 65. Simplified accounting method - the quick method 8

PART C: REALTORS’ REVENUES 126. Revenues subject to GST/HST 127. Rules for when GST or HST applies 138. Tax-extra vs. Tax-included real estate fees 149. Timing of GST/HST liability on revenues 1410. Commissions payable to co-operating brokers/agents 1511. Commissions earned by employed salespersons 1512. Commissions earned by independent contractors 1513. Small brokers/agents and independent contractors 1614. Bad debts 16

PART D: REALTORS’ EXPENSES 1815. Input tax credits - general rules 1816. Employee reimbursements/allowances 1917. Input tax credit restrictions 2018. Recaptured input tax credits 2119. Expenses incurred by employed salespersons 2220. Real estate board fees 2221. Allocating between taxable and exempt activities 22

PART E: GST/HST AND REAL ESTATE 2322. General rules 2323. Exempt supplies of real property 2424. Certificate on exempt sale 2625. New housing rebates 2726. Renovated housing 3027. Other rules 31

PART F: QUEBEC SALES TAX (QST) 3228. QST overview 3229. QST rate and application 3230. What is taxed under QST 3331. QST registration, filing and documentation requirements 3332. Simplified accounting method 3433. REALTOR® revenues 3434. Rules for when QST applies 3435. Input tax refunds 3536. QST and real estate 36

PART G: GST/HST AND QST PLANNING 4137. Compliance 4138. Cash flow 4139. Accounting systems 4240. Rebates for employed sales persons 42

A REALTOR® Guide to GST/HST/QST2

PART A: INTRODUCTION

This guide was originally prepared by a National Task Force of Real Estate Industry Leaders representing the Canadian, Ontario and Quebec Real Estate Associations and the Real Estate Boards of Toronto and Greater Vancouver with the assistance of two chartered accountancy firms. It has been updated by a chartered accountancy firm to April 23, 2013. Its purpose is to assist REALTORS® in understanding the impact of the Goods and Services Tax (“GST”), Harmonized Sales Tax (“HST”) and Quebec Sales Tax (“QST”) on the real estate industry, its clients and customers.

The GST/HST and QST information herein is based on the Excise Tax Act (“ETA”) and the Act Respecting the Quebec Sales Tax (“QSTA”) and the regulations thereto and the amendments proposed to the legislation as well as administrative directives and relevant jurisprudence to April 3, 2013. The above noted legislation and administrative directives are subject to change and REALTORS® should ensure that any changes or new court decisions made after this revised edition of the guide are considered.

The Canada Real Estate Association (“CREA”) cannot guarantee that all the information contained in this guide is accurate, complete or up-to-date and CREA makes no representations to that effect. In particular, the information contained in this guide is not to be relied upon or construed as legal and/or real estate advice. REALTORS® and any other person involved in real estate transactions using this guide are urged to seek expert advice on the specific issues affecting them.

PART B: THE GST/HST - AN OVERVIEW

1. What is the GST/HST?The GST is a form of value-added tax, similar to the taxes levied by members of the European Union, New Zealand and Australia. The current GST rate is 5%1.

The provinces of New Brunswick, Nova Scotia and Newfoundland and Labrador, Ontario, and Prince Edward Island (the “Harmonized Provinces”) repealed their existing retail sales taxes in order to harmonize with the GST. The tax rate (commonly referred to as the Harmonized Sales Tax or “HST” rate) in the Harmonized Provinces is 13% in New Brunswick, Newfoundland and Labrador and Ontario (comprised of a 5% federal component and an 8% provincial component); 15% in Nova Scotia (comprised of a 5% federal component and an 10% provincial component); and effective April 1, 2013, 14% in Prince Edward Island (comprised of a 5% federal component and an 9% provincial component). Note that British Columbia harmonized on July 1, 2010 but transitioned back to a GST and PST effective April 1, 2013. In addition, Nova Scotia will reduce its HST rate to 14% effective July 1, 2014 and 13% effective July 1, 2015.

Section 7 contains a summary of the rules for determining what rate of GST/HST to apply. An important point to note is that the GST and HST are similar taxes and generally the same rules apply. The only difference relevant to the real estate industry is that the new housing rebates in the Harmonized Provinces generally only apply to the 5% federal component of the HST; only in Ontario and Nova Scotia is a portion of the provincial component of the HST rebatable.

1 Prior to July 1, 2006, the GST rate was 7%. From July 1, 2006 to December 31, 2007 the GST rate was 6%. On January 1, 2008 the GST rate was reduced to 5%. The attached Appendix – GST/HST Rate Reductions, explains the rules relating to the reductions.


A business registered for the GST/HST collects the applicable tax from its customers on the sale price of the property or services it supplies. However, each registered business is generally entitled to claim an “input tax credit” (refund) for any GST/HST paid in acquiring goods and services used in making such supplies. Input tax credits are available to each person in the production and distribution chain except the final consumer of the property or service who bears the full tax on payment of the retail price.

The GST/HST remitted to the government in a given period will equal the gross amount of tax charged on sales during the period minus the total of input tax credits claimed for that period. Where the input tax credit exceeds the tax collectible on sales for a particular period, a business receives a refund. The following example illustrates the basic mechanics of the GST/HST, assuming the transactions are outside the Harmonized Provinces such that the 5% rate applies:

Sale PricePurchase

PriceGST on Sale

Input Tax Credit

Net Tax Remitted

Paper mill sells paper to wholesaler

$100 $- $5 $- $5

Wholesaler sells paper to advertiser

$200 $100 $10 $5 $5

Advertiser provides services to REALTOR® $600 $200 $30 $10 $20

REALTOR® provides services to client

$1,000 $600 $50 $30 $20

TOTAL NET TAX $50

The previous example illustrates that the total tax paid by the final consumer ($50) is the same amount of net tax that has been remitted in stages by the businesses involved in supplying the service to the consumer.

2. What is taxed?Generally all supplies of property or services in Canada are subject to GST (HST where supplied in the Harmonized Provinces) unless one of the following exceptions applies:

• Thesupplyis“zero-rated”(i.e.,taxappliesbutatarateof0%),• Thesupplyismadetoanon-taxableperson,• Thesupplyisexempt,or• Thesupplyismadebyanon-registrant.

Zero-rated suppliesBusinesses are not required to charge GST/HST on zero-rated goods and services they provide. However, they are still able to claim an input tax credit for the GST/HST payable on expenditures relating to the zero-rated goods and services they provide. This has the effect of totally removing the GST/HST from the cost of the zero-rated goods and services supplied to the final consumer.


The following goods and services are zero-rated:

• “Basicgroceries”(preparedmealsandcertain“snack”foodsarenotzero-rated),• Prescriptiondrugs,• Certainmedicaldevices,• Certainagriculturalandfishingequipment,• Exportsofgoodsandservices,and• TransportationintooroutofCanada(exceptcertaincrossborderairtravel).

Non-taxable personsCertain provinces and their specified provincial entities do not pay GST/HST2. In addition, goods and services supplied to First Nations and First Nations Organizations are not subject to GST/HST in prescribed circumstances. Registered businesses making otherwise taxable supplies to such persons are not required to charge GST/HST; however, they are still entitled to claim an input tax credit for any GST/HST incurred in the course of making such supplies.

Exempt suppliesBusinesses do not charge GST/HST on tax-exempt goods and services they provide. In this respect, exempt supplies are similar to zero-rated supplies. They are not however, entitled to claim an input tax credit for the GST/HST incurred on expenditures relating to supplying exempt goods and services. As a result, tax-exempt goods and services bear some tax content which business purchasers are not able to recover.

For example, while residential rents are exempt many of the costs incurred by the landlord, such as repairs, are taxable and the landlord cannot recover such tax. Such tax costs must ultimately be reflected in the landlord’s rent structure.

The following property and services are exempt from GST/HST:

• Saleofmost“used”residentialhousing,• Mostrentalsofresidentialhousing,• Mosthealthservices,• Daycareservices,• Legalaidservices,• Someeducationalservices(howevermanybusinesscourseswhicharenotrequiredto

obtain or maintain accreditation will be taxable),• Financialservicesincludinginterest,dividends,insuranceandbrokerageservices,and• Many,butnotall,goodsandservicessuppliedbycharities,non-profitorganizations,

municipalities, hospitals, schools, colleges and universities.

Supplies made by non-registrantsA business with less than $30,000 per year in revenues3 from otherwise taxable (including zero-rated) supplies is not required to register for GST/HST, though the business can register voluntarily. If such a business does not register then GST/HST does not apply to the goods and services it supplies and the business cannot claim an input tax credit for any GST/HST incurred on its expenditures.

2 Currently, the following provinces and territories do not pay GST/HST on their purchases: Alberta, Saskatchewan, Manitoba, Yukon, and the Northwest Territories.3 Includes world-wide revenues from taxable supplies as well as revenues from associated persons and generally measured on a rolling four calendar-quarter basis.


3. Application to real estate servicesReal estate brokerage service fees or commissions relating to real property situated in Canada have not been accorded either zero-rated or tax-exempt status and are therefore subject to tax at the rate of 5% (or the rate in effect in a particular Harmonized Province). REALTORS® are, therefore, required to collect GST/HST on their real estate commission revenues but are also entitled to claim input tax credits for any GST/HST paid on their purchases of taxable goods and services. Although REALTORS® may be providing services in respect of real estate transactions that are exempt from GST/HST (e.g., the sale of used housing), their services will be subject to GST/HST.

GST/HST also applies to most other costs relating to real estate transactions including appraisal fees, legalfeesandinspectionfees.MortgagebrokeragefeesandcommissionsareexemptfromGST/HST.Mortgagebrokersarethereforenotrequiredtochargetaxonsuchfeesandareunabletoclaiminputtaxcredits for tax paid on purchases connected with this business.

The following provides a simplified numerical example of the computation of GST for a real estate brokerage firm, assuming the firm operates outside of the Harmonized Provinces.

Amount before GST

GST TotalGST Collectible

- Input Tax Credit

Net Amount

Revenue

Real estate services $1,350,000 $67,500 $1,417,500 $67,500 $1,350,000

Appraisal fees 115,000 5,750 120,750 5,750 115,000

1,465,000 73,250 1,538,250 73,250 1,465,000

Expenditure

Payments to other Brokers/agents4 750,000 37,500 787,500 (37,500) 750,000

Employee salaries5 65,000 - 65,000 - 65,000

Computer system 30,000 1,500 31,500 (1,500) 30,000

Professional services 5,000 250 5,250 (250) 5,000

Memberships 15,400 770 16,170 (770) 15,400

Promotion 146,500 7,325 153,825 (7,325) 146,500

Postage 1,000 50 1,050 (50) 1,000

Depreciation6 16,500 - 16,500 - 16,500

Interest7 75,000 - 75,000 - 75,000

Rent 100,000 5,000 105,000 (5,000) 100,000

Office supplies 5,000 250 5,250 (250) 5,000

1,209,400 52,645 1,262,045 (52,645) 1,209,400

Net Amount 255,600 20,605 276,205 20,605 255,600

4 These are payments made to other brokers/agents that are subcontractors.5 Salaries and wages paid to employees are not subject to GST/HST.6 A full input tax credit is available for capital purchases at the time of purchase thus no input tax credit is normally allowed for depreciation.7 Interest charges are exempt from GST/HST.


4. GST/HST registration, filing and documentation requirementsRegistrationAs noted above, all businesses with annual taxable revenues from taxable (including zero-rated) supplies in excess of $30,000, must register with the Canada Revenue Agency (“CRA”) to collect and remit GST/HST. Registration is optional for businesses with annual gross revenues of below $30,000.

A business that does not already have a Business Number (“BN”) must apply for a BN and GST/HST registration on GST/HST form RC1 Request for a Business Number (BN). This same form can be used to register for income tax, payroll and customs purposes to the extent required. If the business already has a BN, GST/HST registration is obtained by filing a GST/HST form RC1A Business Number (BN) – GST/HST Account Information. A GST/HST registration number consists of the 9 digit BN with an RT suffix.

REALTORS®basedinQuebecshouldnotethattheMinistèreduRevenuduQuébec(“MRQ”)isresponsible for administering the GST/HST in Quebec on behalf of the CRA. Thus, a REALTOR® based in QuebecmustregisterforbothGST/HSTandQSTwiththeMRQ.

Filing requirementsBusinesses registered for the GST/HST are required to periodically file GST/HST returns and to remit the net tax8 due, if any. Upon registration, a business will be assigned a filing period based on its projected annual revenues from taxable (including zero-rated) supplies and the taxable revenues of associated persons. A business can elect to file more frequently than its assigned period, which is advisable if the business is normally in a net refund position. However, that would not normally be the case for a REALTOR®.

The reporting periods and options are as follows:

Annual Gross Revenues * Assigned Reporting Period Options

$1,500,0009orless Annual Monthly/Quarterly

$1,500,001-$6,000,000 Quarterly Monthly

Over$6,000,000 Monthly None

* Total taxable revenues from taxable supplies, including zero-rated supplies, of the person registering and any associated persons. Commission revenues should be based on gross commissions, not net after payments to co-operating Brokers.

Returns filed on a quarterly or monthly basis are due within one month after the end of the reporting period, while those filed annually are due within three months after the year-end.10 However, annual filers must pay quarterly installments where their GST/HST net tax payable is $3,000 or more.11 Given the need to file installments, many businesses that qualify for annual filing elect to simply file returns on a quarterly basis.

Net tax due must be remitted with the return. Annual filers must remit the balance owing net of installments or claim a refund if the installments paid exceed the balance owing. For periods from 1991 throughMarch2007penaltiesandinterestwillbechargedfromtheduedateonanytaxesunpaid.The

8 Net tax is the difference between the GST/HST collectible during the reporting period and any input tax credit claimed for that reporting period.9 The threshold below which annual GST/HST filing is permitted increased from $500,000 to $1.5 million effective for fiscal years that begin after 2007.10 If you are an individual with business income for income tax purposes who is an annual filer with a December 31 fiscal year end, you have to file your return by June 15. However, you have to remit your net GST/HST amount owing by April 30.11 The net tax threshold increased from $1,500 to $3,000 for fiscal years that begin after 2007


interest is calculated at a prescribed rate plus a penalty at an annual rate of 6%, added together and compounded daily. For periods beginning April 2007, only interest will apply, at the same rate as under the Income Tax Act, which is the prescribed rate plus 4 percentage points, revised quarterly. The only penaltyforlateremittanceafterMarch2007isifthereturnisnotfiledontime.

If the net tax for the period is negative (i.e., the input tax credits claimable exceed the GST/HST collectible) a refund is claimed. Outstanding refund claims are credited with interest beginning 30 days after the later of the day the return is filed with the CRA and the day following the last day of the reporting period.

Supporting records and documentationA business registered for GST/HST is required to either indicate the amount of GST/HST payable or the factthatthepriceincludesGST/HST.MostbusinesseshaveelectedtoshowGST/HSTasaseparateamount rather than price their goods and services including the tax; however, vendors of taxable residential property often opt to price inclusive of GST/HST.

In order to claim an input tax credit, a registrant must have appropriate supporting documentation. Supporting records can include invoices, cash register receipts, formal written contracts (including contracts for periodic lease payments), credit card receipts or any valid document issued or signed by a registrant concerning a transaction on which GST/HST is paid or payable.

The amount of information required on the supporting documentation depends on the value of the purchase, as follows:

Purchases less than $30

Purchases between $30 and $150

Purchases of $150 or more

Vendor’s name (trading name) Required Required Required

Date Required Required Required

Total consideration paid or payable Required Required Required

Total amount of GST/HST charged on the supply of services or, alternatively, statement that price includes GST/HST

Required Required

Tax status of each item where the invoice or receipt covers both taxable supplies, which are tax-free or tax exempt

Required Required

Vendor’s GST/HST registration number Required Required

Purchaser’s legal or trading name Required

Terms of sale (cash, discount, etc.) Required

Description of the supply or services Required

Registrants are not required to obtain supporting documentation for input tax credit claims in certain circumstances such as purchases from coin-operated machines, reasonable allowances paid to employees and other special cases.

Not all of the above noted information must be supplied in a single document. In some cases, two or more documents combined may provide the necessary support.

The CRA has indicated that where payment of a commission is contingent upon a sale and is paid or payable based on a percentage of that sale, in addition to the required information previously listed,


sufficient documentary evidence must also be maintained to establish:

• Thatthesalehasbeenmade,• Theamountofthesale,and• Thetimeofthesale.

Again, it is not necessary that all information be contained in a single document. There may be two or more documents that provide the documentation and the nature of those documents can vary depending upon a particular transaction.

Where a selling Broker is paying a commission to a listing Broker, the selling Broker must obtain documents that include all of the required documentation to support its input tax credit claim for the GST/HST payable to the listing Broker. Offers of purchase and sale and reminder notices will not generally constitute sufficient documentation. A listing agreement and a completed sales agreement together may contain all of the required information for the selling Broker to claim an input tax credit.

Similarly, where a listing Broker is paying a commission to a selling Broker, the listing Broker must obtain the information necessary to support its claim for an input tax credit for the GST/HST payable to the selling Broker. Again, the reminder notice may not be sufficient. The CRA has suggested that the only satisfactory evidence that tax on the inter-Broker commission is paid or payable by the listing Broker to the selling Broker is some form of receipt containing the required information and issued at the time the sale is completed. This receipt could be a Notification of Completion or a similar document.

REALTORS® should ensure that they do not pay GST/HST to any person who does not supply a valid GST/HST registration number.

The retention period for supporting records for GST/HST is the same as under the Income Tax Act - six years.

5. Simplified accounting method - the Quick MethodSmall REALTORS® with total annual revenues (including GST/HST) of $200,000 or less are eligible to use asimplifiedmethodcalledtheQuickMethodtocalculatetheirnettaxpayable(orrefundclaimable).TheQuickMethodisessentiallyaimedatrelievingbusinessesfromhavingtorecordtheGST/HSTpayableontheirexpendituresinordertoclaiminputtaxcredits.UndertheQuickMethod,ratherthanclaiminginputtax credits (other than qualifying purchases of capital personal property, real property and other specified expenditures), a business simply remits a percentage of the business’ GST/HST included revenues. CertainsmallbusinessesareprecludedfromusingtheQuickMethod;however,REALTORS® are eligible, providing they fall below the $200,000 revenue threshold.

IfaregisteredbusinesselectstousetheQuickMethod,itmuststillchargetheappropriateGST/HSTonany taxable goods or services it supplies; however, the business only remits a specified percentage of those revenues. The prescribed percentage depends upon whether the business is based in or making supplies in the Harmonized Provinces or in the rest of Canada and whether the business involves the sale of goods or the provision of services. The prescribed percentages for service providers, which would generally include REALTORS®, are summarized below.

Note that these percentages are based on the assumption that if the business is based in the Harmonized Provinces, all of its services are supplied in those provinces; conversely if the business is based outside the Harmonized Provinces, all of its services are supplied outside those provinces.


Businesses based outside Harmonized ProvincesRemit 3.6% of taxable revenues from supplies made outside the HST provinces, including GST, earned duringtheyear.Taxablerevenueexcludeszero-ratedrevenues.Also,registrantsusingtheQuickMethodare entitled to a credit of 1% on the first $30,000 of taxable revenues in each fiscal year. To qualify for the 1%credit,theQuickMethodelectionmustbeineffectatthebeginningofafiscalyearor,ifyouareanewregistrant, on the day you became a registrant.

If a registrant is a monthly or quarterly filer, the 1% credit applies to all reporting periods of a fiscal year until the registrant reaches the $30,000 threshold, or the end of the fiscal year. If a registrant files annual returns, the 1% credit applies to the first $30,000 of taxable revenues in that fiscal year. If you do not make $30,000 in taxable revenues in a fiscal year, any unused portion cannot be carried forward.

A full input tax credit may be claimed for the GST payable on purchases of capital personal property and real property, subject to restrictions noted in Section 18 below and the GST charged on sales of such items must be remitted in full.

Businesses based in Nova Scotia Remit 10% of taxable revenues from supplies made in Nova Scotia, including HST, earned during the year. Again, taxable revenue excludes zero-rated revenues and a credit of 1% on the first $30,000 of taxable revenues in each fiscal year is available.

A full input tax credit may be claimed for the HST payable on purchases of capital personal property and real property (again subject to restrictions noted in Section 18) and the HST charged on sales of such items must be remitted in full.

Businesses based in Prince Edward Island Remit 9.4% of taxable revenues from supplies made in Prince Edward Island, including HST, earned during the year. Again, taxable revenue excludes zero-rated revenues and a credit of 1% on the first $30,000 of taxable revenues in each fiscal year is available.


Businesses based in British Columbia For taxable supplies made in British Columbia for reporting periods beginning on or after July 1, 2010 but before April 1, 2013, and ending on or after April 1, 2013, remit 8.2% of taxable revenues from supplies made in British Columbia, including HST, for consideration that becomes due, or that is paid without having become due, before April 1, 2013. Again, taxable revenue excludes zero-rated revenues and a credit of 1% on the first $30,000 of taxable revenues in each fiscal year is available.

TheQuickMethodratesapplicabletosuppliesmadeoutsidetheHSTprovinceswouldapplyforallotherconsideration and for reporting periods that begin on or after April 1, 2013.



Businesses based in the remaining Harmonized Provinces Remit 8.8% of taxable revenues from supplies made in the remaining Harmonized Provinces, including HST, earned during the year. Again, taxable revenue excludes zero-rated revenues and a credit of 1% on the first $30,000 of taxable revenues in each fiscal year is available.


ThebenefitoftheQuickMethodforaqualifyingREALTOR® is that the remittance to the government is based on a simple formula. The REALTOR® is not required to separately identify the GST/HST collected on revenues and then deduct the amount of GST/HST paid on purchases that are eligible for an input tax credit. However, under this method, REALTORS® are allowed to claim an input tax credit only on capital purchases.

ExampleAssume a REALTOR®basedinManitobahasannualrealestatecommissionsof$100,000plus$5,000ofGST and purchases a computer for $8,505 (including GST, ignoring retail sales tax) during the year. The GSTremittableundertheQuickMethodwouldbecalculatedasfollows:

Gross Commissions $ 100,000 Plus: GST @ 5% 5,000 Total Tax Included Revenue $ 105,000

GST Remittable (3.6%) $ 3,780

Credit on first $30,000 (1%) $ (300)

Input credit available on computer (5/105ths of $8,505) $ (405) Net GST remittance under quick method $ 3,075 Net GST remittance under normal method $ 4,595 Net Benefit under quick method $ 1,520

This method may not be beneficial to REALTORS® who conduct a significant amount of split-commission work with other Brokers/agents. The GST/HST remittable must be calculated on gross commissions, in which case the remittances will be considerably higher than under the normal rules of GST/HST.


ExampleAssume an independent contractor receives 100% of his commissions but is obliged to pay 40% (i.e., $40,000) to a Broker/agent for administrative services. The independent contractor earns gross commissionsof$100,000fortheyear.UnderthenormalrulesandtheQuickMethod,thisindividualcouldcalculate his GST remittance as follows:

NORMAL METHOD GST Collectible $ 5,000 Input Tax Credit on Administrative Services (i.e., 5% x $40,000) (2,000) Net Remittable $ 3,000

QUICK METHOD Gross Commissions $ 100,000 GST @ 5% 5,000 Total Tax Included Revenue $ 105,000

GST Remittable (3.6%) $ 3,780 Credit on First $30,000 (1%) (300) Net Remittable $ 3,480

EXTRA COST OF USING QUICK METHOD ($3,480 - $3,000) = $480

Inthisexample,thereisanextracostof$480inusingtheQuickMethod.Small REALTORS®mustcarefullyconsidertheadvisabilityofusingtheQuickMethod.Althoughitmayreduce the costs of accounting and filing GST/HST returns, it may significantly increase GST/HST costs where there are significant expenses subject to GST/HST.

FurtherinformationontheQuickMethodcanbeobtainedfromtheCRAinGST/HSTbookletRC4058.AqualifyingbusinessthatwishestousetheQuickMethodmustcompleteaGST/HSTformGST74 - Election and Revocation of an Election to Use the Quick Method of Accounting and submit it to its local CRA office. The election may be revoked but only at least one year from when it first became effective.


PART C: REALTORS’ REVENUES

6. Revenues subject to GST/HSTAll commissions and fees earned by Brokers/agents with respect to the sale or lease of real property situated in Canada are subject to GST/HST. Real estate fees are taxable even if the sale or lease of the real property is exempt. For example, sales of existing housing are normally exempt from GST/HST. However, the real estate commissions earned on the sale of such housing are nevertheless taxable. Other revenues earned by REALTORS® such as appraisal fees, referral and consulting fees are also subject to GST/HST.

Services supplied to non-residents of Canada are generally zero-rated subject to certain exceptions. One exception is services that relate to real property located in Canada. Thus, services provided by REALTORS® to non-residents will generally be subject to GST/HST where the services are in respect of real property in Canada. Services supplied to non-residents in respect of real property outside of Canada are zero-rated.

MortgagebrokeragefeesandcommissionsareexemptfinancialservicesandthereforeexemptfromGST/HST.

REALTORS® may provide listings and negotiate sales for members of their families. Upon completion of a sale in such circumstances, a commission is often not charged by the REALTOR® on the basis that the work done is regarded as a “gift”. REALTORS® should be aware that provisions exist in the ETA which require the GST/HST to be paid on the fair market value of a supply made to non-arm’s length persons who are not registered and not entitled to claim input tax credits. While it is possible that the CRA may not apply these provisions to require tax to be paid when the facts of a particular situation clearly indicate that the work performed was a gift; where commissions are routinely foregone and input tax credits continue to be claimed on expenses incurred or the transaction involves a split commission, REALTORS® should be aware that the CRA has the ability to assess tax owing even though no commission has been charged.

TABLE A: REVENUES AND GST/HST Revenue Item Taxable Tax Exempt/Non-Taxable Real estate brokerage fees: - Broker/agent X - Independent contractor X Commission income paid to employees X Referral fees X Property management fees X Appraisal fees X Consulting fees X Mortgagebrokeragefees X Interest or dividend income X Office management fees X Franchise fees X

Referral and other taxable fees charged to non-residents in respect of real property located outside of Canada are zero-rated. Such fees charged to persons resident in Canada are taxable regardless of where the property is located unless the service provided by the REALTOR® is performed entirely outside of Canada.


7. Rules for when gst or hst appliesTaxable supplies of real propertyIf the real property being supplied, regardless of whether supplied by way of sale or by way of lease, license or similar arrangement, is located in one of the Harmonized Provinces the HST rate in effect in the particular Harmonized Province applies, otherwise the 5% GST rate applies to real property located in other parts of Canada.

Taxable services supplied in relation to real propertyGenerally, REALTORS® will be providing services in relation to one or more specific properties. If a property is in one of the Harmonized Provinces, then the HST rate in effect in the particular Harmonized Province applies to the services provided in respect of that property. If a property is in another part of Canada, the 5% GST will apply.

If a REALTOR® is providing services in relation to real property (e.g., a pipeline) located in more than one jurisdiction, the following rules must be considered.

A supply of a service in relation to real property that is situated in Canada that is situated primarily (more than 50%) in the Harmonized Provinces is deemed to be made in the Harmonized Province in which the greatest proportion of the real property that is situated in the Harmonized Provinces is situated.

For example, assume 60% of the pipeline is situated in the Harmonized Provinces. Further, assume the 80% of the pipeline that is situated in the Harmonized Provinces is situated in Ontario. The supply of the service in relation to the pipeline will be deemed to be made in Ontario.

If this rule does not result in the determination of a single Harmonized Province because the real property is equally situated in two or more Harmonized Provinces, the supply of the service is deemed to be made in the Harmonized Province among those provinces that has the highest rate of HST. If two or more of the Harmonized Provinces in this case have the same rate of HST, HST will be required to be charged by the supplier using that particular rate and the supply is deemed to be made in the Harmonized Province where the business address of the supplier that is most closely connected with the supply is located (generally, the contracting address).

A supply of a service in relation to real property that is situated in Canada and otherwise than primarily (50% or less) in Harmonized Provinces is proposed to be made in a non-Harmonized province and subject to GST at the rate of 5%.


8. Tax-extra vs. Tax-included real estate feesUnder the GST/HST, businesses have the option of pricing their products or services by either:

• ShowingtheGST/HSTasaseparateamountpayableoninvoicesorinwrittenagreements,or• IncludingtheGST/HSTinthefinalpriceofaproductorservice.

In real estate terms, this translates as follows:

• CommissionorfeerealizedfromthesaleofapropertyplusGST/HSTonthatcommissionor fee; or

• CommissionorfeewiththeGST/HSTalreadycalculatedintothetotalowedtotheBroker/agent by the vendor.

The first option makes the GST/HST clearly visible to consumers of housing and easier to identify as the government’s tax and not as a component of the REALTORS® fee. For vendors who are registered and entitled to claim an input tax credit for the GST/HST payable on commissions, having the tax shown as an extra amount is preferable so they can readily identify the GST/HST amount. Thus, in practice, most REALTORS® have opted to show the GST/HST as an extra amount on all fees for service.

9. Timing of gst/hst liability on revenuesGeneral rulesThe ETA provides that GST/HST normally becomes payable on the earliest of the following events:

• Thedatepaymentismadebythecustomer/client;• Thedateofissuanceofaninvoicetothecustomer/client;• Thedateshownontheinvoice;and• Theduedateforpaymentstipulatedinawrittenagreementwiththeclient/customer.

CommissionsIn the case of real estate listing agreements where the Broker’s/agent’s right to the commission is contingent upon completion, the CRA has confirmed that GST/HST will be payable on the date of completion. For agreements where the commission is not contingent upon closing, the timing of the liability will depend upon the terms of the agreement. Unless these agreements are amended to expressly provide for the payment of the commission upon completion of the transaction, GST/HST may be payable at an earlier date (i.e., date of execution of the Agreement of Purchase and Sale).

Some REALTORS® may, in advance of the closing date, issue various reminder notices to the vendor of the property, or to the vendor’s solicitor, of the expected commission that is to become due and payable on the date of closing. In addition, the vendor may prepare a notice to the solicitor advising the solicitor to pay the commission to the REALTOR® upon closing.

The CRA has accepted that the issuance of a reminder notice in a situation where the listing agreement provides that the commission is contingent (i.e., payable only if the transaction closes) will not trigger the liability to remit GST/HST before the closing. Therefore, if a commission is due and payable under a written agreement when a transaction is complete, (i.e., the closing date) then GST/HST is payable on the closing date and the issuance of a reminder notice does not cause the GST/HST on the commission to become due.


Where a listing agreement is not contingent but provides that the commission be paid on the closing of the sale of a certain property, a REALTOR® must be more careful in issuing a reminder notice. If the reminder notice is considered to be an invoice requesting payment on the closing, the GST/HST will become payable upon issuance. However, the CRA accepts that a reminder notice does not request payment but rather reiterates the provisions of the listing agreement will not trigger the GST/HST liability.

A direction issued by the vendor to their lawyer authorizing the lawyer to pay the REALTOR® the amount of the commission on closing will not trigger the GST/HST liability. A direction is not an invoice for GST/HST purposes, since it is a communication between the vendor and his/her solicitor.

Other revenuesThe GST/HST on other taxable revenues such as appraisal and consulting fees will generally be payable on the invoice date unless paid prior to the issuance of the invoice, in which case the date of payment will trigger the GST/HST liability.

10. Commissions payable to co-operating brokers/agentsCommissions payable to co-operating Brokers/agents are subject to GST/HST, unless that Broker/agent happens to be a small supplier who is not registered for GST/HST. The selling Broker is required to collect tax on its share of the commission from the listing Broker. The listing Broker is required to collect GST/HST on the total commission payable by the vendor of the property but may claim an input tax credit for the GST/HST payable to the selling Broker. The listing Broker will be eligible for this input tax credit when the tax is paid or becomes payable to the selling Broker.

In many cases, the fee that the selling Broker receives is contingent upon the commissions being paid by the vendor of the property. Although a selling Broker may issue a notice to the listing Broker that appears to be an invoice requesting payment, the notice is not regarded as an invoice that triggers the obligation to remit GST/HST. The notice is not regarded as notification of an obligation to pay the amount as long as the fee to the selling Broker is contingent upon the listing Broker being paid. Similarly, the listing Broker would not be able to claim an input tax credit on the basis of such a notice issued before the closing where the fee is contingent on the listing Broker being paid.

11. Commissions earned by employed salespersonsReal estate salespeople that are employees, as opposed to independent contractors, need not register for GST/HST purposes and are not required to charge their employers GST/HST on commissions or fees earned by them. Employees may be entitled to claim rebates on certain expenses incurred by them in the course of their employment (see Section 39 below).

12. Commissions earned by independent contractorsThe issue of whether a particular salesperson is an employee or an independent contractor is beyond the scope of this guide. The CRA has indicated that an individual considered to be an employee for Income Tax purposes will similarly be considered to be an employee for GST/HST purposes.

Independent contractors who are classed as self-employed for Income Tax purposes are required to register for GST/HST purposes if their annual gross revenues exceed $30,000. Where registered, independent contractors are required to charge GST/HST on their gross commissions or fees earned and are entitled to claim input tax credits for the GST/HST paid on expenses related to these taxable activities.


Independent contractors who are entitled to the full amount of the commissions through a Broker/agent are required to collect GST/HST on the full commission. Where the independent contractor pays a percentage or a fixed amount to the Broker/agent for administrative and operating costs, the independent contractor pays GST/HST on this amount and is entitled to recover the GST/HST paid as an input tax credit on filing his or her GST/HST return.

ExampleAssume that the independent contractor is entitled to a commission of $1,000 but under his arrangement with his firm, 40% of the commission is payable to the Broker/agent for administrative fees.

Amount GST Collected GST Paid TotalGross Commission $1,000 $50 $- $1,050Administration Fees 400 - 20 420

If this were the independent contractor’s only transaction in the period, the GST return would reflect the following:

GST Collected $ 50 Input Tax Credit (20)

Net Remittance $ 30

13. Small brokers/agents and independent contractorsREALTORS® with annual revenues of $30,000 or less are not required to register and collect GST/HST although they may elect to do so. Those who choose not to register do not collect GST/HST on their fees and commissions, nor are they able to claim input tax credits on their business expenses including commissions paid to co-operating Brokers.

REALTORS® with annual revenues of $200,000 or less may elect to use a simplified accounting method to compute their GST/HST liability (see Section 5 above).

14. Bad debtsThere may be instances where a REALTOR® is unable to collect a commission or other consideration for taxable services. Where a REALTOR® has remitted the GST/HST collectible on such supplies and then writes off the receivable including the GST/HST, the GST/HST component of the receivable may be recovered by the REALTOR®. No recovery is allowed where the receivable is due from a non-arm’s length party. Allowances for bad debts or provisions for doubtful accounts will not trigger the credit. The receivable must be written off in the books of account to quality for a credit.

The credit is calculated as follows:

A x B/C

Where: A - is the GST/HST payable in respect of the supply; B - is the total amount of consideration, GST/HST and provincial tax (if applicable) written off as uncollectible; and C - is the total consideration, GST/HST and provincial tax (if applicable) for the original supply.


ExampleIn September 2010 a REALTOR® in Ontario charges a client a consulting fee of $10,000 plus $1,300 HST and is only able to collect $5,000. The REALTOR® remitted the HST collectible (i.e., $1,300) in the GST/HST return for the period in which the fee was invoiced. In 2012, the remaining receivable (i.e., $6,300) had not been paid and was written off as uncollectible. The REALTOR® would therefore be eligible to reduce his/her net tax liability for 2012 as follows:

$1,300 x $6,300 $11,300

= $724.28

If some or all of an amount previously written off as uncollectible is subsequently recovered and the REALTOR® previously recovered the GST/HST included in the write-off, the REALTOR® must remit the GST/HST content of the amount recovered based on the following formula:

A x B/C

Where: A - is the amount of the bad debt recovered by the person; B - is the tax payable in respect of the supply to which the bad debt relates; and C - is the total of the consideration, tax and applicable provincial tax payable in respect of the supply.

ExampleAssuming that the REALTOR® in the example above receives a payment of $4,000 in 2013, the REALTOR® would be required to remit GST as follows:

$4,000 x $1,300 $11,300

= $460.18

If a vendor were to pay the commission but refused to pay the GST/HST on the commission and the REALTOR® writes off the GST/HST as uncollectible, the REALTOR® cannot recover the full amount of GST/HST, only the amount calculated using the above noted formula may be recovered.

A bad debt credit may be claimed in the same reporting period in which GST/HST was remitted on the supply. Where a debt is written off in the same reporting period as the GST/HST is remitted, the REALTOR® is required to report the GST/HST for that reporting period and claim an offsetting credit.

Bad debt adjustments may be claimed in the GST/HST return for the period when the amount is written off or in a subsequent reporting period within four years of the period in which the amount was written off.


PART D: REALTORS’ EXPENSES

15. Input tax credits - general rulesA basic principle of the GST/HST is that a registered person engaged in making taxable (including zero-rated) supplies is generally entitled to receive a credit for the tax paid on purchases used in connection with the business. This recoverable tax is referred to as an input tax credit. Generally, input tax credits are allowed for the full amount of the GST/HST paid or payable by a registered person on purchases of all property and services, including capital property or fixed assets, used in connection with making taxable (including zero-rated) supplies. An input tax credit can be claimed as soon as the invoice is received even though payment may not be made until a subsequent period. In other words, there is generally no “matching principle” in GST/HST. Similarly, input tax credits can normally be claimed on the full amount of any capital purchases. There is no requirement to amortize the input tax credit over the life of the capital asset.

MostREALTORS® are engaged exclusively in making taxable (including zero-rated) supplies and are therefore entitled to recover all of the GST/HST they incur, subject to the general restrictions discussed below in Section 17. REALTORS® engaged in making exempt supplies (e.g., REALTORS® who broker mortgages, REALTORS® who purchase and sell exempt residential properties and/or REALTORS® who have significant investment portfolios) must allocate their input tax credits between their taxable and exempt activities as discussed in Section 20 below.

The following describes the application of tax to certain types of expenses incurred by REALTORS® and indicates which expenses are subject to GST/HST. It is assumed that the supplies are received in Canada from GST/HST registered suppliers.


TABLE B: EXPENDITURES AND GST/HST Expenditure Item Taxable Tax Exempt/Non Taxable Advertising X Automobile expenses X Automobile purchase X Bank charges X Business taxes X Commercial rent X CPP and EI payments X Employee insurance X Gifts X Insurance X Interest expense X Legal and accounting fees X Mealsandentertainment X Office equipment X Office supplies X Payments to co-operating Brokers X Pension plan payments X Photocopier charges X Postage X Promotional expenditures X Property taxes X Salaries and wages X Telephone and fax charges X Traveling expenses X

16. Employee reimbursements/allowancesReimbursements When a REALTOR® reimburses an employee for expenditures incurred by the employee in the course of the employee’s employment, the REALTOR® is deemed to have paid the GST/HST incurred by the employee.

REALTORS® have two options with respect to calculating the GST/HST included in expense reimbursements where the expense includes GST/HST. The general rule is that a REALTOR® can claim the actual tax paid on the expenditures made by the employee. However, this rule requires that the REALTOR® have a proper invoice to support the amount of GST/HST paid. In practice, invoices may not be obtained, particularly for smaller expenditures such as parking, taxis, meals, etc. The CRA therefore allows for the use of a simplified factor to calculate the GST/HST included as follows:

Expenditures to cover expenses in Nova Scotia 14/114 (0.1228)

Expenditures to cover expenses in Prince Edward Island 13/113 (0.1150)


Expenditures to cover expenses in Ontario, New Brunswick, and Newfoundland and Labrador 12/112 (0.1071)

Expenditures to cover expenses in British Columbia 11/111 (0.0991)

Expenditures to cover expenses in the rest of Canada 4/104 (0.0385)

The factors reflect the fact that in some cases there are components to some reimbursements that are not subject to GST/HST (i.e., gratuities paid on meals or provincial retail sales taxes paid). If the factor method is used, it must be used consistently for that type of expenditure. In practice, many businesses either use the factor method for all taxable reimbursements or use it for smaller expenditures such as meals, parking, etc. and claim the actual GST/HST paid on larger expenditures such as airfare, car rentals and accommodation where proper invoices are usually obtained.

The above rules only apply to expenditures incurred by employees that include GST/HST. No input tax credit may be claimed on expenditures where no tax was paid. This would include expenditures incurred outside of Canada but would also include any non-taxable expenditures made in Canada. While most expenditures in Canada include GST/HST some do not. For example, the purchases of most food items in agrocerystorearenotsubjecttoGST/HST.Municipaltransit,roadtollsandferrytollsarealsonotsubjectto GST/HST.

AllowancesWhere a REALTOR® pays an allowance to an employee, the purpose of the allowance is to cover expenses that relate to the REALTOR®’s business and it is reasonable to expect that all or substantially all of those expenses are subject to GST/HST, the allowance is deemed to include GST/HST. Thus, for example, reasonable mileage allowances and meal per diems are deemed to include tax (note that a flat car allowance that is not calculated through reference to distance driven does not qualify).

Expenditures to cover expenses in Nova Scotia 15/115 (0.1304)

Expenditures to cover expenses in Prince Edward Island 14/114 (0.1228)

Expenditures to cover expenses in Ontario, New Brunswick, and Newfoundland and Labrador 13/113 (0.1150)

Expenditures to cover expenses in British Columbia 12/112 (0.1071)

Expenditures to cover expenses in the rest of Canada 5/105 (0.0476)

17. Input tax credit restrictionsMeals and entertainmentA REALTOR® may claim an input tax credit for the GST/HST incurred on meals and entertainment expenses. However, at year-end the REALTOR® must repay 50% of the GST/HST incurred on such expenditures to the extent such expenditures are restricted for Income Tax purposes. As a practical matter, many businesses simply claim 50% of the GST/HST paid when the expenditure is made rather than claiming the full amount and adjusting it at year-end.


Personal expendituresA REALTOR® may not claim an input tax credit for the GST/HST paid on any expenditure acquired exclusively for the personal use of an employee or personal use of a shareholder unless the REALTOR® charges the employee consideration equal to the fair market value of the property or service supplied. Similarly, a REALTOR® cannot claim an input tax credit for the GST/HST paid on any purchase that is solely for their own personal use.

Club membershipsA REALTOR® may not claim an input tax credit for the GST/HST paid for a membership in a club, the main purpose of which is to provide dining, recreation or sporting facilities.

Passenger vehiclesInput tax credits on the purchase or lease of a passenger vehicle are restricted in some circumstances. Where the vehicle is used exclusively (interpreted by the CRA to mean 90% or more) for personal use by an employee, no input tax credit will be allowed.

Where a vehicle is used at least 10% for business purposes, input tax credits will be allowed but only up to the prescribed maximums. Currently, the maximum GST/HST that may be claimed on a purchased vehicle is the GST/HST payable on the purchase price up to a maximum of $1,500 in GST or $3,900 in HST. The maximum GST/HST that may be claimed on a leased vehicle is the GST/HST payable on the monthly lease charge to a maximum of $40 per month GST or $104 per month HST.12

Where a vehicle is purchased by a GST/HST registered REALTOR® who is an individual, the individual cannot claim an input tax credit at the time of purchase, rather, an input tax credit may be claimed annually based on the GST/HST content of the capital cost allowance claimed by the individual in respect of the vehicle of Income Tax purposes. If the individual REALTOR® leases the vehicle, an input tax credit may only be claimed for a portion of the GST/HST to the extent the lease charge is deductible for Income Tax purposes.

18. Recaptured input tax credits Large businesses (generally businesses and associated entities with taxable revenues greater than $10 million) are required to recapture the provincial component of the Ontario and British Columbia13 HST (i.e., 8% and 7% respectively) claimed as an ITC for certain categories of expenses. These are referred to as recaptured input tax credits (RITCs). Specifically, ITCs claimed on the following specified services are subject to the RITC requirement:

• Energy,includingelectricity,gas,fuel(otherthanfuelusedinapropulsionengine),andsteam, together with any transportation service charges and fees (e.g., delivery charges or regulatory fees) that are incidental to the supply of the energy

• Telecommunicationservices,includinglocalandlong-distancetelephoneservices;audio,video, and computer link-ups; faxes and email; data transmissions; cable, pay, and satellite television; and lease or licence of telecommunication lines (but does not include Internet access services, web-hosting services, and toll-free telephone services)

• Mealsandentertainmentexpensesthatarecurrentlysubjecttothe50%inputtaxcreditrestriction under the Excise Tax Act (i.e., that are subject to 50% deductibility for income tax purposes)

12 For the period July 1, 2006 to December 31, 2007, the maximum GST claimable in respect of the purchased vehicle was $1,800 and $4,200 in HST. The maximum GST claimable on a leased vehicle was $48 and $112 in HST.13 For expenditures incurred from July 1, 2010 to March 31, 2013.


• Roadvehiclesthatweighlessthan3,000kilogramsandarerequiredtobelicensedforuseon public highways, including most cars, minivans, and pickup trucks, but not trailers and semi-trailers. Also included are parts and services relating to these road vehicles that are purchased, or brought into the province, within the first 12 months following the date of acquisition of the vehicle, except for parts and services acquired in the course of routine maintenance of the vehicle

The full ITC must be claimed and the amount subject to recapture must be reported separately.

19. Expenses incurred by employed salespersonsCommissioned salespeople defined as “employees” under the Income Tax Act are not required to register and collect the GST/HST. However, to the extent they incur expenses which are deductible by them for Income Tax purposes, employed salespeople are able to claim a rebate, on an annual basis, for the GST/HST paid on qualifying expenses. Rebate claims are filed together with their Income Tax returns for the relevant year.

When a salesperson that is an employee purchases capital items such as pagers, computer terminals and cellular telephones for business use, no GST/HST rebate may be claimed. Only self-employed commissioned salespersons (independent contractors) may claim GST/HST input tax credits on the purchase of these items. However, GST/HST rebates may be claimed by an employed salesperson where such equipment is leased rather than purchased.

20. Real estate board feesMostboardsandassociationschargemembershipfeesthataresubjecttoGST/HST.Wheremembershipfees in real estate boards and associations and most other special fees are subject to tax, the members are normally entitled to claim input tax credits or rebates for GST/HST payable on these fees.

21. Allocating between taxable and exempt activitiesAs noted above, as a general rule, to the extent that expenditures are incurred in relation to making taxable (including zero-rated) supplies, any GST/HST incurred may be recovered as an input tax credit. MostREALTORS® are engaged exclusively in taxable activities and thus can recover all of the GST/HST they incur, subject to the restrictions noted above.

However, if a REALTOR® is making both taxable and exempt supplies, it is necessary to allocate the GST/HST paid between these activities. Examples of exempt revenues would include:

• MortgageBrokeragefees,• Significantportfolioinvestments14, and• Exemptsale/rentalsofresidentialproperty.

In instances where REALTORS® earn both taxable and exempt revenues, input tax credits can be partially claimed to the extent that expenses can be related to taxable activities. Where a particular expense can be directly related to a taxable activity, a full input tax credit for the GST/HST paid on the expense may be claimed. Conversely, where an expense relates entirely to an exempt activity, no input tax credit may be claimed. Expenses such as general overhead that relate to both taxable and exempt activities must

14 Interest earned on operating cash surpluses is generally considered incidental to the taxable activities of the REALTOR®.


be allocated between those activities on some reasonable basis and an input tax credit claimed for the portion of the GST that relates to the taxable activity.

The CRA will not prescribe or impose methods of allocation on registrants. The GST/HST legislation simply requires that such allocations be fair and reasonable and used consistently throughout the year. REALTORS® may wish to consider allocations based on time spent in each activity on a daily basis.15 If the effort required to earn each type of revenue is approximately the same, an allocation based on revenue could be used; however, an allocation based on revenue may not necessarily be reasonable.

The GST/HST payable on capital personal property (e.g., purchase of a computer) can only be claimed where the property is used primarily (over 50%) in taxable activities, otherwise no input tax credit may be claimed. The GST/HST payable on the purchase of real property is based on the extent to which the property is used in taxable activities.

PART E: GST/HST AND REAL ESTATE

22. General rulesAny supply of real property located in Canada is subject to GST/HST unless it is specifically exempted from the tax. The following are the general categories of exempt real property transactions:

• Mostresidentialrentals,• Salesofusedresidentialhousing(unlesssubstantiallyrenovatedorlastusedotherwise

than as a place of residence),• Salesofpersonaluselandbyanindividualoranestate,• Certainsalesoffarmlandtorelatedindividualswherethefarmlandisforpersonaluse,and• Mostsuppliesofrealpropertybycharities,non-profitorganizations,universities,colleges,

schools and hospital authorities.

These categories are reviewed in greater detail below. However, REALTORS® are cautioned that the application of these rules can be highly complex in certain situations and REALTORS® should exercise extreme caution in advising clients as to the application of GST/HST to a particular transaction. REALTORS® should recommend that clients seek their own professional advice in determining the application of GST/HST to any real property transaction.

Unless an exemption applies, the supply will be taxable. Thus, the following categories of real property transactions are generally taxable:

• Commercialrentals,• Salesofnew(orsubstantiallyrenovated)residentialhousing,• Salesofcommercialproperty,and• Mostsuppliesofrealpropertybyamunicipality,provinceorthefederalgovernment.

15 On January 26, 2007 the Department of Finance introduced new ITC allocation rules applicable to financial institutions. These rules apply to fiscal years that begin after March 31, 2007. In addition, the Department of Finance introduced a new “GST/HST Annual Information Schedule for Financial Institutions”. If you believe your business is either a listed financial institution (e.g., a bank, insurer or securities dealer) or a de minimis financial institution (e.g., annual interest revenue of $1million or more), contact your tax advisor to determine how you may be affected by these new rules.


The exemption for small suppliers does not apply to sales of real property. GST/HST applies to the taxable sale of real property sales even if the supplier is not registered and the supply is below the $30,000 small supplier threshold16.

A person selling taxable real property is not obligated to collect the GST/HST payable in the following circumstances:

• Allsalesbynon-residents;• Allsalesofnon-residentialpropertytopersonsregisteredforGST/HSTpurposes;or• SalesofresidentialpropertytopersonsregisteredforGST/HSTpurposes,otherthan

individuals.

Where tax is not collected on a taxable sale of real property, the purchaser must self-assess the tax (i.e., the purchaser is required to report the tax payable to the CRA directly). If the property is acquired by the purchaser primarily for resale or for use in taxable activities, the GST/HST payable is reported on the purchaser’s GST/HST return for the period. Otherwise, the GST/HST payable is reported on a separate GST/HST form (form GST 60 GST/HST Return for Acquisition of Real Property).

It is important to note, that where a legal parcel of property is being supplied that includes both taxable and exempt components, the supply will be treated as two separate transactions for GST/HST purposes. For example, the sale of a building with apartments on the upper floors and commercial space on the bottom floor is treated as a two separate properties for GST/HST purposes.

23. Exempt supplies of real propertyRental of residential propertyThe following residential rentals and associated supplies are exempt from GST/HST:

• Rentalofaresidentialcomplexoraunitinaresidentialcomplex(e.g.anapartmentor condominium unit but not a unit in a hotel or similar complex) for occupancy by an individual for a period of at least one month;

• Rentalofaresidentialcomplexorunitsinaresidentialcomplextoapersonwhointendsto make exempt rentals of that complex or units to individuals for periods of at least one month;

• Short-termaccommodations(i.e.,accommodationsforlessthanonemonthregardlessof whether in a residential complex or in a hotel or similar establishment) where the rental charge does not exceed $20/day or $140/week;

• Rentalsofonemonthormoreoflandonwhicharesidentialcomplexislocated;• Rentalofaparkingspaceincludedwithanexemptresidentialrental;• Condominiumfeeschargedbystratacorporationtounitowners;• Coophousingfeeschargedbycoophousingcorporationstoshareholdersoccupyingunits

in a coop housing complex; and• Rentalofamobilehomepadorfloatinghomemooragesite.

16 Note that a sale of an interest in real property (such as a licence or easement) is generally viewed by the Canada Revenue Agency as a sale of real property and the GST/HST is determined accordingly.


Sale of “used” residential propertyThe sale of used residential property is generally GST/HST exempt. The sale of a new residential property is taxable. Thus it becomes very important to determine when a property is “used”.17

Generally speaking, the sale of any residential property (i.e., a single family dwelling, duplex, apartment building or condominium unit) is exempt from GST/HST when it is currently being occupied as a place of residence by individuals or when it is currently vacant but was last occupied as a place of residence. The sale of residential property that has never been occupied as a place of residence18 is generally taxable unless the vendor is an individual who did not construct the complex in the course of a business or an adventure in the nature of trade19. The sale of a residential complex that has been substantially renovated20 since it was last occupied as a place of residence is considered to be a new complex and taxable on sale.

An owner-occupied home is treated as a residential complex where it is used primarily as such. Even if the home includes a room used as an office by a self-employed registrant, the entire home still qualifies as a used residential complex and therefore is exempt on resale. Where an owner-occupied residential complex is not used primarily for residential purposes, only the residential portion is exempt on resale; the remainder is taxable. An entire residential property that is being used or was last used as a place of business is taxable (i.e., a house converted to a dental office).

While in many cases the application of GST/HST will be clear, there are instances where the application of GST/HST rules is far from clear and REALTORS® are again cautioned against giving advice to clients on the application of tax.

Sales of other personal use property by individualsThe sale of real property, other than a residential complex, by an individual or personal trust21 is exempt from GST/HST unless one of the following exceptions applies.

• Thepropertywascapitalpropertyusedprimarilybytheindividualinthecourseofabusiness with a reasonable expectation of profit immediately before the sale. For example, if the individual was farming the land with a reasonable expectation of profit from that business then the sale is taxable.

• TheindividualisaGST/HSTregistrantandthepropertyiscapitalpropertyusedprimarilyin being leased or licensed to another person or both leased and used in the course of a business. Note that in this case there is no reasonable expectation of profit test. Thus, even if the individual was leasing or licensing the property to another person for a nominal sum such that there was no reasonable expectation of profit, the sale of the property would still be taxable.

17 The GST/HST legislation does not actually make reference to the term “used”; however, the term is commonly used to describe property that has been previously occupied as a place of residence and is therefore exempt on being sold.18 In the case of an apartment building, if at least one of the units has been occupied as a place of residence by individuals the entire building is considered “used”.19 An individual who purchases a new residential complex from a registrant and within one year sells in back to the original vendor without having occupied it can elect to have the sale back to the vendor taxable and thereby recover the GST/HST originally paid in acquiring the property.20 The term “substantial renovation” means the renovation or alteration of a building to such an extent that all or substantially all of the building that existed immediately before the renovation or alteration was begun, other than the foundation, external walls, interior supporting walls, floors, roof and staircases, has been removed or replaced where, after completion of the renovation or alteration, the building is, or forms part of, a residential complex.21 A testamentary trust or inter vivos trust where all of the beneficiaries are individuals.


• Theindividualsoldthepropertyinthecourseofabusiness.Forexample,iftheindividualis a developer or otherwise engaged in the business of buying and selling land and the property was part of his or her property “inventory” the sale would be taxable.

• Theindividualhaspreviouslysubdividedthepropertyintomorethantwoparcelsexceptthat any “forced” subdivision does not count in determining whether the more than two parcel test is met. Thus, for example, if an individual owned a vacant lot which they subdivided into two lots and then the municipality acquired a strip off the front of both lots for road widening, the latter subdivision would not mean the lot had been subdivided into more than two lots.

• Thesaleofthepropertyisan“adventureinthenatureoftrade”fortheindividualANDtheindividual elects to make the sale taxable22.

• ThepropertyisbeingsoldbacktotheoriginalvendorwhoisregisteredforGST/HSTpurposes and who had charged GST/HST on the original sale23.

The sale of vacant land by an individual can be one of the most confusing areas of the GST/HST. The same parcel of land may be taxable, exempt or the vendor may have a choice depending upon the circumstances.

Sales of farmlandAlthough sales of farmland will generally be subject to GST/HST, certain sales of farmland between family members and related parties will be exempt provided the farmland is subsequently used by the purchaser for personal use and enjoyment. If the farm is to be used as an operating farm it will normally be subject to GST/HST when it is sold. The portion of the farm used as a residence, on which no input credit has been claimed for GST/HST previously paid, will be exempt from GST/HST.

Supplies by public service bodiesThere are special rules governing the supply of real property by organizations that are charities, non-profit organizations, universities, colleges, schools and hospital authorities24. Generally such supplies are exempt; however, certain supplies are taxable and such organizations often have the option of electing to treat an otherwise exempt sale as taxable. REALTORS® should seek confirmation from the supplier as to the tax status of the supply when the supplier is a public service body. 24. Certificate on exempt salePurchasers of residential property (from any vendor) or personal use property (from individuals or personal trusts) where the vendor states the supply is exempt, should obtain a statement or certificate from the vendor that the property is exempt from the GST/HST. Since the determination of the tax status may depend on the use of the property by the vendor, the purchaser may not always be able to properly determine its status. If the purchaser obtains such a certificate and has no reason to doubt its accuracy, it is the vendor who will be held liable for the GST/HST if the CRA determines that the sale was in fact taxable. A purchaser of real estate that the vendor maintains is exempt from GST/HST should obtain a certificate or written statement that the property meets the exempt requirements in order to protect

22 A vendor might want to consider the election where they paid GST/HST on acquiring the property and are selling it to a person who can recover the GST/HST payable, making the election allows for the recovery of the GST/HST paid on the original purchase. However, the vendor must also consider the Income Tax implications of making such an election.23 The reason the individual would want to make the election in this case is that the original vendor would be able to recover the GST/HST charged and making the election allows the individual to recover the GST/HST they paid on the original purchase of the property.24 Effective February 1, 2004 most supplies of real property by municipalities are taxable.


themselves from GST/HST liability in the event that the vendor’s representations prove to be incorrect. The certificate is not a prescribed form nor is its use mandatory.

25. New housing rebatesThe GST/HST legislation provides for a variety of partial rebates of the 5% GST payable on the purchase of new or substantially renovated residential property. For new housing in Ontario and Nova Scotia, a partial rebate of the provincial component of the HST may also be claimed. No rebates of the provincial component of the HST may be claimed in Prince Edward Island, New Brunswick, or Newfoundland and Labrador.25

Purchase of House/Duplex or Condominium UnitAn individual making a taxable purchase of a house/duplex or condominium unit may claim a partial rebate where the property is acquired for use as the primary place of residence of the individual or a related individual (includes a former spouse or common law partner).

Where the purchase price of the property is $350,000 or less, the rebate is 36% of the GST payable to a maximum of $6,30026.

Where the purchase price of the property is between $350,000 and $450,000, the GST rebate is determined by the formula:

A x (450,000 - B) 100,000

Where A - is the lesser of $6,300 and 36% of the GST paid, and B - is the purchase price.

No rebate is claimable where the purchase price exceeds $450,000.

The rebate may either be claimed by the purchaser or assigned to the vendor of the property who can then credit the purchaser with the rebate. The rebate must be claimed within two years of the date the purchaser acquired the property.

If the property is located in Nova Scotia, an additional rebate may be claimed. The rebate is equal to the lesser of $1,500 and 18.75% of the provincial component of the HST payable on acquiring the property.

If the property is located in Ontario, an additional rebate may be claimed. The rebate is equal to the lesser of $24,000 and 75% of the provincial component of the HST payable on acquiring the property.

25 During the period of July 1st, 2010 to March 31, 2013, British Columbia also offered a rebate for the provincial component of the HST paid.26 Where GST was payable at the rate of 6%, the maximum rebate amount was equal to the lesser of 36% of the GST paid and $7,560. Where GST is payable at 5% as a result of the 1% rate reduction of January 1, 2008, the maximum rebate amount is equal to the lesser of 36% of the GST paid and $6,300.


Purchase of house/duplex or condominium unit/lease underlying landWhere a new residential complex is developed on leased land, such that the buyer purchases the unit but leases the underlying land, the buyer is exempt from GST/HST on the purchase of the unit and the land lease. However, GST/HST is effectively included in the price as the vendor will be liable for GST/HST on the fair market value of the property supplied. An individual making an exempt purchase of a house/duplex or condominium unit in such a situation may claim a partial rebate where the property is acquired for use as the primary place of residence of the individual or a related individual (includes a former spouse or common law partner).

Where the fair market value of the property (including the land) is $367,500 or less, the rebate is 1.71% of the “total consideration” to a maximum of $6,300. “Total consideration” means the consideration paid for the purchase of the building but does not include any consideration paid for the lease of the underlying land or an option to purchase such land.

Where the fair market value of the complex is between $367,500 and $472,500, the rebate is determined by the formula:

A x (472,500 - B) 105,000

Where A - is the lesser of $6,300 and 1.71% of the total consideration, and B - is the fair market value of the property.

No rebate is claimable where the fair market value of the property exceeds $472,500.

The rebate may either be claimed by the purchaser or assigned to the vendor of the property who can then credit the purchaser with the rebate. The rebate must be claimed within two years of the date possession of the property was transferred to the individual.

If the property is located in Nova Scotia, an additional rebate may be claimed. The rebate is equal to the lesser of $1,500 and 1.31% of the total consideration payable for the property27.

If the property is located in Ontario, an additional rebate may be claimed. The rebate is equal to the lesser of $24,000 and 5.31% of the total consideration payable for the property.

Purchase of share in housing cooperativeWhere a new residential complex is owned by a housing cooperative corporation, the buyer of a share in that cooperative corporation is exempt from GST/HST on the purchase of the share. However, GST/HST is effectively included in the share price as the cooperative corporation will be liable for GST/HST on the fair market value of the property developed. An individual making an exempt purchase of a share in the cooperative corporation in such a situation may claim a partial rebate where the property is acquired for use as the primary place of residence of the individual or a related individual (includes a former spouse or common law partner).

Where the consideration paid for the share is $367,500 or less, the rebate is 1.71% of the consideration paid for the share to a maximum of $6,300.

27 The rate was 1.39% prior to the rate increase of July 1, 2010.


Where the consideration paid for the share is between $367,500 and $472,500, the rebate is determined by the formula:

A x (472,500 - B) 105,000

Where: A - is the lesser of $6,300 and 1.71% of the total consideration, and B - is the fair market value of the property.

No rebate is claimable where the fair market value of the property exceeds $472,500.

The rebate must be claimed within two years of the date ownership of the share was transferred to the individual.

If the property is located in Nova Scotia, an additional rebate may be claimed. The rebate is equal to the lesser of $1,500 and 1.31% of the total consideration payable for the property28.

If the property is located in Ontario, an additional rebate may be claimed. The rebate is equal to the lesser of $24,000 and 5.31% of the total consideration payable for the property.

Rebate for owner built homesAn individual constructing a house/duplex may claim a partial rebate where the property is used as the primary place of residence of the individual or a related individual (includes a former spouse or common law partner).

Where the fair market value of the property upon completion is $350,000 or less, the rebate is 36% of the GST/HST paid by the individual for the land and the improvements thereto.

For property with a fair market value between $350,000 and $450,000, the GST rebate is determined by the formula:

A x (450,000 - B) 100,000

Where: A - is the lesser of $6,300 and 36% of the GST paid, and B - is the fair market value of the property.

No rebate is claimable where the fair market value of the property upon completion exceeds $450,000. The rebate must be claimed within two years of the earlier of the date the complex was occupied as a place of residence and the date the complex was substantially complete.

If the property is located in Nova Scotia, an additional rebate may be claimed. The rebate is equal to the lesser of $1,500 and 18.75% of the provincial component of the HST payable on building the property.

28 The rate was 1.39% prior to the rate increase of July 1, 2010.


If the property is located in Ontario, an additional rebate may be claimed. The rebate is equal to the lesser of $24,000 and 75% of the provincial component of the HST payable on acquiring the property. However, where no HST was paid on the land, the rebate is equal to the lesser of $16,080 and 75% of the provincial component of the HST payable on building the property.

Rebate on new residential rental propertiesThe rebates listed above all apply to individuals acquiring a new residential property for their own use or for use by a related person. Until 2000, no rebates were available for new residential rental properties. However, for properties where construction commenced after February 27, 2000, rebates are now available on new residential rental properties to the extent it is expected that the property (or individual units in a multi unit complex) is to be leased for at least one year as the primary residence of an individual.

In the February 26, 2008 Federal Budget, a number of GST/HST measures were proposed relating to the construction of long term residential care facilities. The Budget proposed a clarification to ensure that the GST new residential rental property rebate would apply to such facilities.

The rebates are claimed by the person developing the new housing and essentially parallel those claimable by purchasers of new housing listed above except that there are no rebates available for the provincial portion of the HST in Nova Scotia.

26. Renovated housingThe sale of a used home is normally exempt from GST/HST. However, there are situations where a renovation may be substantial enough that the sale of the renovated home is considered to be taxable. The following details the GST/HST rules for substantial renovations and other renovations.

Substantial renovations The sale of a substantially renovated residential dwelling in the course of a business is taxable. The sale of the substantially renovated dwelling will be treated in the same manner as the sale of a new home and it may qualify for a new housing rebate. A residential dwelling is considered to have been substantially renovated if it incorporates no more of the original building than the supporting walls, roof, floors, staircases, foundation and other minor ancillary parts. A registrant in the business of substantially renovating homes can claim input tax credits for the GST/HST paid on all taxable purchases relating to the substantial renovation. However, no input tax credit is available in respect of the purchase price of the used home since it presumably would have been exempt.

Since the substantial renovation test is based on structural changes to the dwelling, renovators may attempt to plan renovations so that they do not qualify as substantial. In this case, the resale of the renovated dwelling may be exempt. If not, the GST/HST will apply to the full value of the renovated dwelling, including the value of the land, subject to any new housing rebate available. These rules will only apply to a person in the business of buying and substantially renovating a residential dwelling. The rules do not apply to a homeowner who undertakes a substantial renovation for his own use.

Other renovationsDifferentrulesapplywhere,inthecourseofabusinessofmakingsalesofrealproperty,apersonpurchases and renovates a home, but not to the degree that it qualifies as a substantial renovation. In this situation, a “self-supply” rule applies to tax the value added by the renovator. The renovator is required to pay tax on those costs that would be capitalized for income tax purposes if the property were capital


property. In essence, this rule will require the renovator to pay an additional tax based on the internal labour component of the renovation only. Once again this self-supply rule only applies to someone in the business of buying, renovating and selling residential property. It does not normally apply to a homeowner who contracts for or makes renovations to his home.

27. Other rules“Self-supply” on new residential rental property Special rules, commonly referred to as the “self-supply rules”, normally apply where a property owner constructs an apartment building or another residential structure which the owner subsequently rents on an exempt basis for residential use. The owner is able to claim input tax credits in the normal manner on purchases related to the construction of the residential complex. However, at the time the completed complex is put into rental use, the owner is required to pay (self-assess) GST/HST calculated on the fair market value of the land and building at that time. The complex thereafter qualifies as a used residential dwelling and any subsequent resale is exempt (unless substantially renovated prior to such resale). The reason for this rule is to treat the owner in the same way as any other person who would be required to pay GST/HST on the purchase of a new building for rental purposes. This avoids any advantage for owners who construct their own residential units relative to those who purchase completed residential units for rental purposes.

For example, assume a landlord incurs costs of $10,000,000 in constructing a new residential complex in BritishColumbiaonwhichhehaspaidGSTof$500,000.Duringtheconstructionphase,thelandlordisentitled to recover this $500,000 in GST through the input tax credit mechanism. At the time the building is first put to rental use, its fair market value is say $12,000,000. The landlord is liable for GST at that time in the amount of $12,000,000 x 5% = $600,000. No further input tax credits are claimable by the landlord while the building is being rented. Upon resale of the building, GST will normally not apply, as the property will qualify as a used residential complex. The builder will also be entitled to a New Residential Rental Property rebate, as previously discussed.

Input tax credit at time of purchase Input tax credits are generally claimable at the time of purchase, to the extent that the real property is acquired for use in a taxable activity. For example, if a new ten-story building is purchased and the bottom floor has commercial stores and the other nine stories are residential apartments for rent, the GST/HST payable must be apportioned between the commercial activities which are taxable and the residential activities which are exempt. If the commercial area was 15% of the whole building, then input tax credits could be claimed equal to 15% of the GST/HST paid on the purchase. There are two exceptions to this general rule:

1 No input tax credit is allowed for the commercial use of any real property acquired by an individual where it is primarily for the owner’s personal use. Accordingly, no input tax credit is allowed for an office in a house where the house is primarily used as the individual’s place of residence.

2 Special rules apply to charities, non-profit organizations, municipalities, universities, colleges, schools and hospital authorities with respect to recovering GST/HST payable on taxable real property acquisitions.

Change of use - capital real property Where the use of commercial real property that is capital property changes there are so called “change-of-use” rules which may apply. If the commercial usage increases, the registrant is entitled to an input tax credit to the extent of the increased use. Conversely, if the commercial uses decreases, GST/HST will be


payable. The GST/HST recoverable/payable is based upon the GST/HST paid on the original acquisition of the property and any improvements thereto.

Input tax credit at time of saleIn some cases, a registrant is required to collect tax on the sale of real property for which no input tax credit, or only a partial input tax credit, was claimed on the original purchase of the property or improvements to that property. For example, a medical practitioner who owns the commercial building in which he or she practices, may also rent out part of the space commercially. Because the medical services will be exempt, the practitioner will be able to claim only a partial input tax credit at the time of the purchase, but the building will be fully taxable on resale. In this case, the vendor may be able to recover some or all of any previously unclaimed GST/HST at the time of sale.

The input tax credit at the time of sale is the lesser of:

• TheunclaimedportionoftheGST/HSTactuallypaidbytheregistrantontheoriginalacquisition of and subsequent improvements to the building; and

• TheproportionoftheGST/HSTpayable(orthatwouldbepayablebutforaSection167sale of a business election being made) on the sale of the property that relates to the exempt use of the property at the time of the sale.

The effect of this rule is that upon sale all the remaining tax is removed from the building provided the building has not decreased in value since its acquisition by the vendor.

PART F: QUEBEC SALES TAX (QST)

28. QST overview Like the GST/HST, the QST is a form of value added tax. The QST rules are generally the same as the GST/HST rules. A REALTOR® carrying on business in Quebec is generally required to be registered for QST purposes, collect QST on any taxable supplies made in Quebec and is generally entitled to claim a refund (referred to as an input tax refund or “ITR” in Quebec) for any QST incurred on expenditures made in Quebec. However, there are some differences between the GST/HST and the QST. The following sections summarize the areas where the application of QST differs from the GST/HST. In addition, differences in the civil law treatment of real property in Quebec can result in variations in the sales tax treatment of transactions. As a result, it is important to consult with your sales tax advisor when considering the GST/HST and QST implications of real property transactions in Quebec.

29. QST rate and application Please note that since January 1st, 2013, the province of Quebe has further harmonized its QST with the federal GST regime. However, do note that Quebec is not considered a Harmonized Province. Also, since January 1st, 2014, the QST is no longer calculated on the amount including GST.

Thus, since January 1st, 2013, the QST rate is 9.975% and the QST applies to the consideration charged for supplies (excluding GST). For example on a $10,000 commission, the QST payable is $997.50 (9.975% of $10,000).


30. What is taxed under QST Generally the rules for determining whether supplies are taxable, zero rated or exempt are the same for QST as for GST/HST. Thus, for example, the sales of used residential properties or long term residential rentals are exempt from QST just as they are for GST/HST.

Please note that prior to January 1st, 2013, financial services were zero-rated supplies under the QST regime. However, since January 1st, 2013, financial services are now exempt supplies and thus follow the same treatment as the GST/HST.

For example, prior to January 1st, 2013, mortgage brokerage fees and earnings on an investment portfolio were zero-rated. REALTORS® were generally not restricted from claiming ITRs if engaged in such activities. However, since January 1st, 2013, mortgage brokerage fees and earnings on an investment portfolio are exempt supplies and no longer give rise to ITRs.

31. QST registration, filing and documentation requirements Registration As under GST/HST, a person carrying on business in Quebec with QST taxable (including zero rated) revenues in excess of $30,000 (not including the GST/HST) must register for QST. Persons required to register must apply to the Revenue Quebec Agency (“RQ”). RQ is also responsible for administering the GST/HST in Quebec on behalf of the CRA. Thus a REALTOR® based in Quebec must register for both GST/HSTandQSTwiththeMRQ.RegistrationforeitherQSTonlyorforbothGST/HSTandQSTismadeonFormLM1V“ApplicationforRegistration”. Filing requirements The filing requirements and frequencies are the same under QST as under the GST/HST. REALTORS® based in Quebec are required to file a joint GST/HST and QST return reporting both taxes. The returns are made on forms:

• VDZ-471-V:QSTreturnonly• FPZ-500-V:GST/HST–QSTreturn

Supporting documentation As under GST/HST, a business registered for QST must either indicate the amount of QST on the invoice orindicatethattheconsiderationincludedtheQST.MostbusinesseselecttoshowtheQSTasanextraamount.

For ITR purposes, the rules for supporting documentation are generally the same as under the GST/HST, with the exception of the following additional requirements for claiming ITRs:

All invoices (regardless of amount) must contain the following information:

• Adescriptionsufficienttoidentifythegoodsorservices,and• AnindicationoftherateoramountofQSTandsuppliesthataresubject.


32. Simplified accounting method As under the GST/HST, REALTORS® with total annual taxable revenues (including zero-rated sales and sales made by associates) of $418,95229 )including GST/HST and QST, or less are eligible to use the QuickMethodofaccountingforQSTaswellasGST/HST.

If a REALTOR® has elected to use the simplified method, then the QST the REALTOR® must collect is the full 9.975% on any taxable supplies the REALTOR® makes but the REALTOR® is only required to remit, in general, 6.6% of taxable sales (including QST).

As under the GST/HST, a REALTOR®usingtheQuickMethodisentitledtoacreditof1%onthefirst$31,421 of taxable revenues including QST during the fiscal year, provided the method is used on the first day of the fiscal year or the first day of registration.

When a REALTOR®isusingtheQuickMethod,he/shecannotclaimITRsinrespectofmostbusinessexpenses (e.g., heating, rent, telephone). However, an ITR may be claimed for any QST paid on acquisitions of land and property (e.g., buildings, furniture, vehicles) that give entitlement to capital cost allowances (CCA) for income tax purposes, subject to the restrictions noted in Section 34 below.

Finally, the full QST collectible on sales of capital personal property and real property must be remitted. Finally, an input tax refund may be claimed for any QST paid on capital personal property and real property.

33. Realtor® revenuesThe application of QST to revenues typically earned by REALTORS® is the same as it is for GST/HST.

As mentioned previously, prior to January 1st, 2013, there was a difference in the treatment of financial services, as they were exempt for GST/HST purposes and zero-rated for QST purposes. Thus, mortgage brokerage services, interest and dividends earned on investments were zero rated rather than exempt.

34. Rules for when qst applies Taxable supplies of real property If the real property being supplied, regardless of whether supplied by way of sale or by way of lease, license or similar arrangement, is located in Quebec the QST will apply (unless specifically exempted from the QST).

Services supplied in relation to real property Generally, REALTORS® will be providing services in respect of a specific property. If that property is in Quebec, then the QST will apply to those services. If the property is outside Quebec, QST will not apply.

If a REALTOR® is providing services in respect to a number of properties located in different locations, the following rules, which are the same as the rules for determining whether GST or HST applies, must be considered.

A supply of a service in relation to real property that is situated in Canada that is situated primarily (more than 50%) in the Quebec is deemed to be made in Quebec.

29 For periods following December 31, 2012.


35. Input tax refunds QST will generally apply to expenditures made by REALTORS® in the same manner as the GST/HST and REALTORS® are generally entitled to recover the QST paid as an ITR in the same manner as an ITC may be claimed for GST/HST except where the REALTOR® is a large business. A large business is generally defined to mean a person with taxable revenues30 in Canada of over $10,000,000.31

Large business restrictions REALTORS® who qualify as large businesses are not entitled to claim ITRs for the QST incurred on the following expenditures:

• Energy,includingelectricity,gas,fuel(otherthanfuelusedinapropulsionengine),andsteam, together with any transportation service charges and fees (e.g., delivery charges or regulatory fees) that are incidental to the supply of the energy

• Telecommunicationservices,includinglocalandlong-distancetelephoneservices;audio,video, and computer link-ups; faxes and email; data transmissions; cable, pay, and satellite television; and lease or licence of telecommunication lines (but does not include Internet access services, web-hosting services, and toll-free telephone services)

• Mealsandentertainmentexpensesthatarecurrentlysubjecttothe50%inputtaxcreditrestriction (i.e., that are subject to 50% deductibility for income tax purposes)

Road vehicles that weigh less than 3,000 kilograms and are required to be licensed for use on public highways, including most cars, minivans, and pickup trucks, but not trailers and semi-trailers.

Employee reimbursements/allowances As with the GST/HST, there are essentially two options for claiming ITRs on reimbursements and allowances. The rules vary depending on whether the QST registrant is a large business or not.

Large businesses A REALTOR® that is a large business may claim the actual QST paid on reimbursements or 9.975/109.97532 of a qualifying allowance except where the reimbursement or allowance relates to a restricted expenditure. Alternatively, a large business may apply a factor of 5%33 to all reimbursements that include QST and all qualifying allowances claimed by an employee through expense reports, including restricted expenditures, and claim that amount as an input tax refund.

If REALTOR® has decided to use the factor of 5%, this factor will be applicable on any traveling expenses incurreddirectlybytheentity.Moreprecisely,iftheREALTOR® decides to pay an airfare ticket directly to a travel agency, the company will have to use the factor of 5% if it is using it for the expense reports.

Other businesses REALTORS® that are not large businesses may claim the actual QST paid as an ITR on reimbursements or use a factor of 9/109 to calculate the QST included in reimbursements that are subject to QST. The QST included in qualifying allowances is 9.975/109.975 of the allowance.

30 Including revenues of associated persons.31 Including revenues from outside Canada from a permanent establishment in Canada; excluding financial services. 32 9.5/109.5 for purchases in 2012, 8.5/108.5 for purchases in 2011 and 7.5/107.5 for purchases prior to 2011.33 5% for purchases in 2012, 4.5% for purchases in 2011 and 4.1% for purchases prior to 2011.


1% Limit for food, beverage and entertainmentTheQuébecBudgetSpeechofJune12,2003,announcedthattheamountoffood,beverageandentertainment expenses that a taxpayer deducts from property or business income for a taxation year must henceforth not exceed 1% of the taxpayer’s annual sales. Under the QST system, this means that a registrant may not claim an input tax refund for food, beverage and entertainment expenses that are considered non-deductible due to the 1% limit. This measure does not apply to large businesses that use 5% method.

Other restrictions

Meals and entertainment REALTORS® that are not large businesses may only claim 50% of the QST incurred on meals and entertainment expenditures that are restricted under the Quebec Income Tax Act. Large businesses cannot claim an ITR for the QST incurred on such expenditures as noted above.

Personal expenditures As under the GST/HST, a REALTOR® may not claim an ITR for the QST paid on any expenditures acquired exclusively for the personal use of an employee unless the REALTOR® charges the employee a fair market value for the supply.

Passenger vehicles REALTORS® who are not large businesses may only claim the QST incurred on passenger vehicles calculated on the capital cost threshold for income tax purposes. Large businesses cannot claim any ITRs for the QST incurred on such expenditures as noted above.

Club membershipsA REALTOR® may not claim an input tax refund for the QST paid for a membership in a club, the main purpose of which is to provide dining, recreation or sporting facilities.

Allocating between taxable and exempt supplies As noted above, since January 1st, 2013, financial services such as mortgage brokerage fees and earnings on an investment portfolio are exempt supplies. Thus, REALTORS® may have to allocate their ITRs between taxable and exempt activities For example, if a REALTOR® owned and leased residential rental property, no input tax refund could be claimed on expenditures relating to that activity and expenditures that related to both taxable and exempt activities would have to be allocated between the two.

36. QST and real estate The rules for applying QST to supplies of real estate in Quebec are generally the same as those applying GST/HST to supplies of real property in Canada. However, as under the GST/HST, REALTORS® are cautioned that there may be differences in certain circumstances and clients should be encouraged to seek their own professional advice in determining the application of QST to any real property transaction in Quebec.

New housing rebates Partial rebates of the QST on new or substantially renovated housing are available as under the GST/HST; however, the rebate thresholds are lower and the formulas used for calculating the rebate are different.

For New Housing Rebates prior to January 1, 2013, where an individual was not eligible for a QST rebate


because the maximum threshold was exceeded but was entitled to a GST rebate on the property, the individual could claim a rebate of the QST calculated on the GST rebate paid. However, since January 1, 2013, the QST is no longer calculated on the GST inclusive amount. Therefore, a rebate of the QST is no longer available if there is a rebate available for GST. Unfortunately, the thresholds were not changed accordingly.

Purchase of house/duplex or unit held in co-ownership An individual making a taxable purchase of a house/duplex or unit held in co ownership may claim a partial rebate where the property is acquired for use as the primary place of residence of the individual or a related individual. The calculation of the New Housing Rebate is as follows:

The rebate is calculated as:

IfthepurchaseagreementwasenteredintowiththebuilderafterDecember31,2012(i.eGST5%andQST 9,975%):

• Forpropertycosting$200,000orless,therebateis:(50%xA)toamaximumof$9,975.• Forpropertybetween$200,000and$300,000therebateis: [$300,000 - Purchase price] x (50% x A) $100,000 to a maximum of $9,975.• Forpropertycostingabove$300,000therearenorebateclaimable.

Where A is the QST paid by the individual (purchase price x 9.975%)

If the purchase agreement was entered into with the builder on or after January 1, 2012, but before January 1, 2013 (i.e., GST 5% and QST 9.5%), and ownership and possession were transferred after December31,2011:

• Forpropertycosting$200,000orless,therebateis: (49.1429%34 x A) + B

Where the result of 49.1429% x A is limited to a maximum of $9,804.

• Forpropertybetween$200,000and$300,000therebateis: [$300,000 - Purchase price] x (49.1429%37 x A) + B $100,000


• Forpropertycostingabove$300,000therearenorebateclaimable.Where:

• AistheQSTpaidbytheindividual(purchasepricex9.975%)35; and• BistheQSTpaidinrespectoftheGSTrebatetheindividualisentitledtoclaim

(9.5% X GST rebate)36

34 The factor of 49.1429% is used instead of 50% to avoid additional calculation. This rate takes into account the QST calculated on the GST rebate.35 Mathematical factor including the calculation of the QST on the GST.36 Please refer to Section 25 of the New Housing Rebate for GST purposes.


Other situations that are not covered in this guide may occur (example: purchase agreement entered at other dates for which the delay to claim the rebate is not yet expired). Therefore REALTORS® are encouraged to seek their own professional advice in determining the new housing rebate for which they are entitled in Quebec under those situations.

The rebate may either be claimed by the purchaser or assigned to the vendor of the property who can then credit the purchaser with the rebate. The rebate must be claimed within two years of the date the purchaser acquires the property.

Purchase of share in housing cooperative corporation Where a new residential complex is developed by a housing cooperative corporation, QST does not apply to the purchase of a share in the cooperative corporation. However, QST is effectively included in the share price as the cooperative corporation will be liable for QST on the fair market value of the property developed. An individual purchasing a share in the cooperative corporation in such a situation may claim a partial rebate where the property is acquired for use as the primary place of residence of the individual or a related individual. The calculation of the New Housing Rebate is as follows:

IfthepossessionofthehomeoccurredafterDecember31,2012,orifthepurchasedoftheshareofthecapital stock of a housing co-op and the housing co-op was paid QST on the immovable at a rate of 9.975% (i.e GST 5% and QST 9.975%)

• Forpropertycosting$229,950orless,therebateis:(4.34%xA)(Maximum $9, 975)• Forpropertybetween$229,950and$344,925therebateis:

[$344,925-FMV] x (4,34% x A)(Maximum $9, 975) $100,000

• Forpropertycostingabove$344,925therearenorebateclaimable.

Where A is the QST purchase price paid for the home

If the possession of the home occurred on or after January 1st, 2012, but before January 1, 2013, or if the purchased of the share of the capital stock of a housing co-op and the housing co-op was paid QST on the immovable at a rate of 9.5% (i.e GST 5% and QST 9.5%):

• Forpropertycosting$229,950orless,therebateis: (4.2636% x A) + B


• Forpropertybetween$229,950and$344,925therebateis: [$344,925 - Purchase price] x (4.2636%37 x A) + B $100,000


• Forpropertycostingabove$344,925therearenorebateclaimable.

37 The factor of 4,2634% is used instead of 4,34% to avoid additional calculation. This rate takes into account the QST calculated on the GST rebate.


Where:

• AistheQSTpurchasepricepaidforthehome;and• BistheQSTpaidinrespectoftheGSTrebatetheindividualisentitledtoclaim


Other situations that are not covered in this guide may occur (example: purchase agreement entered at other dates for which the delay to claim the rebate is not yet expired). Therefore REALTORS® are encouraged to seek their own professional advice in determining the new housing rebate for which they are entitled in Quebec under those situations.

The rebate must be claimed within two years of the date ownership of the share is transferred to the individual.

Owner built homes IfabuildingpermitwasissuedtotheownerafterDecember31,2010,sothathecouldcarryouttheconstruction or the substantial modification of a home himself or if the owner entered into a written agreementfortheconstructionorthesubstantialmodificationofahomeafterDecember31,2010.

The New Housing Rebate is calculated as:

• Forpropertycosting$200,000orless,therebateis:(50%xA)+B• Forpropertybetween$200,000and$300,000therebateis: [$300,000-FMV] x (50% x A) + B $100,000• Forpropertycostingabove$300,000therearenorebateclaimable.

Where:

• AistheEligibleQST• BistheQSTpaidinrespectoftheGSTrebatetheindividualisentitledtoclaim


Eligible QST: This amount corresponds to the total QST paid by the individual. The amount of Eligible QST is cannot exceed the below maximum.

MaximumofeligibleQST:First of all, in order to calculate the maximum of eligible QST the invoices have to be sorted based on the amount of QST paid on the incurred expenses for each of the below period:

C. the period beginning January 1, 2013; (i.e QST rate paid 9.975%)D. theperiodfromJanuary1,2012,toDecember31,2012;(i.eQSTratepaid9.5%)E. theperiodfromJanuary1,2011,toDecember31,2011;(i.eQSTratepaid8.5%)F. theperiodfromJanuary1,2008,toDecember31,2010;(i.eQSTratepaid7.5%)

38 Please refer to section 25 of the New Housing rebate for GST purposes.39 Please refer to section 25 of the New Housing rebate for GST purposes.


Oncetheinvoicesaresortedthepercentageofinvoicespertheaboveperiod(C,D,EorF)mustbecalculated.

• IfthepercentageCis100%,themaximumeligibleQSTis$19,950• IfthepercentageDis100%,themaximumeligibleQSTis$19,608• IfthetotalofpercentagesE+Fis100%,themaximumeligibleQSTis$17,544• IfthepercentagesofC,D,E,Farealllessthan100%,themaximumofeligibleQSTisthe

resultsof(Cx$2,406)+(Dx$2,064)+$17,544

Other situations that are not covered in this guide may occur (example: building permit or written agreement for the construction or the substantial modification prior to January 1, 2011 for which the delay to claim the rebate is not yet expired). Therefore REALTORS® are encouraged to seek their own professional advice in determining the new housing rebate for which they are entitled in Quebec under those situations.

The rebate must be claimed at the earliest of:

• 4yearsafterthedatethecomplexisoccupiedasaplaceofresidenceofthebuilder;• 2yearsafterthedateownershipistransferredtoanotherperson(iftransferredbefore

complex is occupied); and • 2yearsafterthedatethecomplexissubstantiallycompleted(90%).

Rebate on new residential rental properties DevelopersofnewresidentialrentalhousingmaybeentitledtoQSTrebatesthataresimilartothoseavailable for GST/HST except that the rebate thresholds are lower (the individual units must have a value of less than $300,000 to qualify for the rebate).


PART G: GST/HST AND QST PLANNING

37. Compliance Although the GST/HST and QST are liabilities of the recipients of the services received, the REALTOR® is the person required to collect and remit such taxes where applicable and is subject to assessment for the tax plus interest and penalties if the tax is not collected and remitted as required. Thus, it is critical to ensure that the proper amount of tax is collected and remitted.

CRA and RQ auditors often reject claims for GST/HST input tax credits and QST ITR where the documentation supporting the claim is not appropriate. REALTORS® should ensure that they obtain appropriate documentation (typically an invoice or comparable document) including the supplier’s GST/HST number and where appropriate the supplier’s QST number.

38. Cash flow A REALTOR® may experience a cash flow benefit where the tax is normally being collected from the client before it must be remitted. This will occur, for example, when the liability for the tax arises and the client paysthebalanceontheclosingofthesale.Monthlyandquarterlyfilersdonothavetoremitthetaxuntilthe end of the month following the period in which the GST/HST liability rose. This results in a minimum of a 30 day period where the REALTOR® may hold the amount of the GST/HST. The same applies for QST.

A negative cash flow will result in situations where the REALTOR® must remit the GST/HST before collecting it from the client. This would occur where a REALTOR® who files monthly or quarterly GST/HST returns issues an invoice prior to the period end but does not collect the tax before the end of month following the period end.

REALTORS® with gross revenues of $1,500,000 or less may elect to file annually with quarterly installments.Dependingontheyearendofthebusinessandtheannualbusinesscycle,theREALTOR® who files annual returns may experience positive or negative cash flows. For example, a small REALTOR® mayexperienceasurgeinsalesandthuscommissionsintheperiodofMarch1toMay31ofeachyear. By structuring the fiscal year end to be February 28 or earlier, the REALTOR® will benefit from the collectionofGST/HSTonMarch1toMay31revenueswhichcanberetainedandremittedinevenquarterly installments based on the expected annual revenues.

Careful planning is required to ensure that the registrant is maximizing the cash flow effects of the GST/HST and QST where applicable. Some or all of the following steps might improve the cash flow of the business and minimize the need to finance GST/HST and QST remittances:

• Donotissueaninvoiceforservicesrendereduntiltheearliestoftheclosingofthesale,the date of payment for the REALTOR®’s services or the date specified in a contract for payment of the REALTOR®’s services. Consider the issuance of reminder notices rather than invoices in order to avoid triggering the GST/HST liability prior to the closing date.

• Ensurethatthereisnodelaybetweenthedateoftheinvoiceandthedateitissenttotheclient.• Implementapayablessystemtorecordpurchaseinvoicesassoonastheyarereceived.

This will permit a timely claim for input tax credits. • Delaythepaymentofpurchasesonaccount(recognizingthatthevendorhasanequally

strong incentive to collect the account quickly so that he does not have to finance the remittance of the tax).

• Makelargecapitalpurchasesneartheendofareportingperiod.


It is important to remember that the GST/HST and QST collected with revenues are held in trust for the federal and provincial governments. Although a REALTOR® may take advantage of the cash flow planning opportunities, the REALTOR® should budget for the GST/HST and QST remittances. Failure to make the remittances on the deadlines could result in expensive penalties and interest assessments.

Quarterly and annual filers will have the option of electing a more frequent reporting period. A cash flow analysis that takes into account the cyclical nature of the business should be conducted before deciding on the preferred reporting period for the business.

39. Accounting systems Accounting systems and records must accommodate an audit trail, which will be subject to a periodic review by the CRA (RQ in Quebec) auditors.

In the revenue cycle, information must support the correct remittance of GST/HST and QST where applicable. In the expenditure system, the amount of GST/HST and QST paid or payable on purchases must be tracked to support the periodic input tax credit/refund claims.

For financial statement presentation, the GST/HST and QST collected should not be included with revenues. Similarly, GST/HST and QST incurred on expenditures should not be included in expenses or capital if it is eligible to be claimed as an input tax credit/refund.

Modificationstoaccountingsystemsrequire,asaminimum,theintroductionofaGST/HSTliabilityaccount to record the GST/HST collected or collectible on revenues and a GST/HST receivable account to record GST/HST incurred on expenditures. It is often advisable to also create a clearing account to post the period end balances from those two accounts to avoid errors in posting payments and/or receipt of refunds. Similar accounts should be set up for QST if the REALTOR® is registered for QST purposes.

40. Rebates for employed sales persons Individuals who are commissioned employees of real estate Brokers are not required to register with the CRA for the GST/HST. They are not required to charge GST/HST on their commissions or file a GST/HST return. The commissions earned by their employer are taxable and it is the employer not the employee who must collect and administer the GST/HST.

Employed salespersons may claim a rebate of the GST/HST paid on certain business expenses. The most common expenditures on which GST/HST will be recoverable are automobile, advertising, membership dues and promotional expenses.

As long as the expenditure is deductible for Income Tax purposes, the rebate may be claimed on the annual Income Tax return. The rebate may be claimed within four years after the year in which the expenditure was made. The employed salesperson should obtain proper GST/HST receipts or invoices to support the rebate claim.

The purchase of capital equipment, such as cellular phones, computers and fax machines, are not deductible for Income Tax purposes by an employed salesperson. The GST/HST rebate is therefore not available on those purchases. It may be preferable to lease these items in order to qualify for the Income Tax deduction and the GST/HST rebate.


GST/HST rebate claims on business expenses are restricted in a manner similar to restrictions under the Income Tax Act. The GST/HST rebate on an automobile used for business purposes is calculated as:

• 15/115(0.13)inNovaScotia • 14/114(0.12)inPrinceEdwardIsland • 13/113(0.12)inOntario,NewBrunswick,andNewfoundlandandLabrador • 12/112(0.11)inBritishColumbia• 5/105(0.0476)intherestofCanada

of the capital cost allowance deducted for Income Tax purposes. The GST/HST rebate on meals and entertainmentexpensesisrestrictedto50%ofthetaxpaidontheseexpenses.Membershipfeesinaclub,the main purpose of which is to provide dining, recreational or sporting facilities, are not deductible for Income Tax purposes and do not generate a GST/HST rebate.

The same rules apply with respect to QST incurred by employees in Quebec.

Any questions or comments about the service or products CREA provides? You can contact us on-line at [email protected].

200 Catherine Street, 6th Floor, Ottawa, Ontario, K2P 2K9 Tel: 613-237-7111, Fax: 613-234-2567

A REALTOR® Guide to GST/HST/QST

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Transcript of A REALTOR® Guide to GST/HST/QST