I have been contacted by an old friend (an Ottawa lawyer that I know and respect from my days at Goodmans LLP) who asked whether residential real estate commissions are subject to harmonized sales tax (HST) if the fees are in respect to activities performed by a real estate agent before July 1, 2010 and where the agreement of purchase of sale was signed before July 1, 2010, but the actual transfer of the residential real estate to the purchaser(s) occurred after July 1, 2010. Obviously, the real estate at issue is located in Ontario.
What was explained to me was that all or substantially all of the real estate agent's services are performed prior to the conclusion of an agreement of purchase and sale by the vendor and purchaser. Based on my personal experience buying a new home and selling an old home is that most of the services of the real estate agent are provided before the agreement is signed. The vendor's real estate agent makes the house or condominium unit pretty and takes pictures. Then they make a promotional brochure. Then they advertise the property. Then they take appointments for showings and sometimes attend the showings. They sometimes host open houses. The vendor's agent works to bring together a group of persons who would be interested in the property and often aims to create the environment of a bidding war between potential buyers. The vendor's real estate agent then receives the offer(s) to purchase and forwards the offer(s) to the homeowners. The negotiation process proceeds and eventually the vendor accept an offer an the paperwork is drawn up and signed. Very little in the way of services is required from the vendor's real estate agent after the agreement of purchase and sale is signed and sent to the lawyers.
The purchaser's real estate agent performs services of identifying properties that meet the purchaser's requirements, setting up appointments with other agents for listed properties and takes the purchasers to the various appointments. These services can take place over a number of months. Eventually the perfect property is located and the purchaser's agent assists the purchaser in arranging financing and drafting an offer. The purchaser's agent assists the purchaser with the negotiation of the deal and the final step is the agreement of purchase and sale. It is possible that the offer/negotiation stage may transpire on many homes until the purchaser concludes a contract with a vendor. In my experience, the purchaser's agent may also assist the purchaser find a lawyer and an inspector. Very little in the way of services is required from the purchaser's real estate agent after the agreement of purchase and sale is signed and sent to the lawyers.
That being said, after the date the agreement of purchase and sale is signed, there may be conditions in the agreement that must be satisfied (e.g. arranging financing, a home inspection, selling an existing home, etc.) before the contract is perfected. As a result, the important date is either the date of signing the agreement of purchase and sale or the date that the conditions are satisfied or expire.
The question is whether under the transition rules, the real estate agent must charge HST. The transition rule for services is that HST would generally apply to the supply of a service to the extent that the service is performed on or after July 1, 2010. HST would generally not apply to a supply of a service if all or substantially all (90 per cent or more) of the service is performed before July 2010. Consideration due or paid on or after July 1, 2010 would be subject to HST to the extent that the consideration is for the part of a service that is performed on or after July 1, 2010 (See Ontario Ministry of Revenue Information Notice #3 "General Transition Rules for Ontario HST")
Based on the transition rules:
1) With respect to residential real estate deals signed before July 1, 2010 and all conditions are satisfied before July 1, 2010, it should be that HST is not payable if all or substantially all of the real estate agent's services are performed before July 1, 2010. If the agreement of purchase and sale is signed and the conditions expire before July 1, 2010, it should be that all or substantially all of the services are considered to be performed before July 2010 and, therefore HST should not be payable.
That being said, it would be useful for the Canada Revenue Agency (CRA) to issue an administrative statement that they agree with the timing of the services. I cannot imagine what basis the CRA would give that 10% or more of the services are performed after the satisfaction of all conditions.
Real estate agents should help themselves by taking detailed records of when they performed services for clients so that they can do the math for the auditors.
2) With respect to residential real estate deals that are signed before July 1, 2010 and some of the conditions expire after July 1, 2010, the facts and the HST status of the supply will have to be considered on a case-by-case basis. It is possible that more than 10% of the services will be performed after July 1, 2010 if the conditions create particular complications or if the buyer picked the first home they saw and the real estate agent's time was required to keep a deal together.
3) With respect to residential real estate deals that are signed before July 1, 2010 and fall apart after July 1, 2010, the facts and HST status of the supply will have to be considered on a case-by-case basis with respect to amounts received by real estate agents from the deposits.