Harmonized Sales Tax (HST) is an important aspect that should be addressed when entering into a real estate transaction in Ontario. Different factors such as type of subject property, prior use of subject property, purchaser’s HST registration, etc. can impact applicability of HST in a real estate transaction, and therefore, it is important to address it prior to entering into a firm Agreement of Purchase and Sale (APS).

In this blog post, we will be discussing how HST is usually dealt with in a real estate transaction depending upon the type of property involved in a transaction.

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Residential Resale Property

A resale residential property (including detached, semi-detached, condominium, etc.) is generally exempt from HST as long as it has been used strictly for residential purposes and contains no commercial component. However, several circumstances can trigger HST liability, including situations where the seller has completed a substantial renovation, where the property was previously used as a short-term rental (e.g., Airbnb), etc.

Agreements prepared using the Ontario Real Estate Association (OREA) standard forms for residential properties include a clause addressing HST. This clause specifies whether HST is “included in” the purchase price or “in addition to” it. In practice, real estate agents often default to marking HST as included in the purchase price for resale homes.

For both the Seller and the Buyer, this detail is crucial. Before signing a firm APS, the Seller should determine whether HST may apply to the transaction. If the Seller agrees HST is “included in” and it is later determined that HST is in fact applicable, the Seller will be required to remit HST out of the sale proceeds, effectively reducing their net sale amount. Conversely, when the APS provides that HST is “in addition to,” any applicable HST is added on top of the purchase price, and the Buyer must pay it on closing.

The standard clause also requires the Seller, where HST is not applicable, to certify on closing that HST is not applicable.

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Residential New Construction Property

Unlike resale residential properties, newly built homes in Ontario are subject to HST. The key terms governing how HST is handled (including whether it is included in the purchase price and who is responsible for paying it) are set out in the APS.

Builders almost never use the standard OREA APS. Instead, they rely on their own builder-form agreements, which are typically long and technical. These agreements commonly state that HST is included in the purchase price and that the Builder will remit HST to the CRA after closing. However, this cannot be assumed, and Buyers should always have their APS reviewed by a lawyer to confirm how HST is treated in that specific transaction.

An item that usually becomes cause of confusion in such transactions is GST/HST New Housing Rebate (“HST Rebate”). Most Builder APS forms state that the purchase price is net of the HST Rebate, meaning the price assumes the Buyer qualifies for the rebate. The APS usually requires the Buyer, if eligible in the Builder’s sole discretion, to assign the HST Rebate to the Builder on closing. If, however, the Buyer does not qualify for the HST Rebate, as determined by the Builder, then the Buyer must pay the Builder the full HST Rebate amount on closing.

Commercial Property

Transactions involving commercial property are always subject to HST, regardless of whether it is a used or newly built property.

Standard OREA APS for commercial properties also has a clause addressing HST which mentions that HST shall be in addition to the purchase price. It further provides that if the Buyer certifies on closing that the Buyer will self-assess and remit HST directly to CRA, along with an indemnity to the Seller against any claims related to HST, then the Seller shall not collect HST on closing. It also provides that the Buyer shall be an HST registrant on closing.

Most agreements involving a newly built commercial property also contain a similar clause. However, it is important that a lawyer reviews the APS to determine how HST is being handled.

HST also plays a significant role in other types of real estate transactions, including vacant land purchases, assignment sales, etc. Because HST can dramatically affect the true cost of a transaction, it is essential to consult a real estate lawyer experienced in a wide range of transaction types.

Our firm is always here to guide you through your real estate transaction, and we will be more than happy to answer any questions you may have with regards to how HST is handled in your Agreement of Purchase and Sale.

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