Often, real estate agents find themselves faced with difficult questions surrounding the Harmonized Sales Tax (HST) and its connection to the sale of Ontario farmland.
As real estate agents typically have first contact with prospective sellers, it’s important that they consider the following (non-exhaustive) list of questions prior to drafting any Agreements of Purchase and Sale:
- How is the property currently being used?
- How has the property been used in the past?
- Is the property currently being farmed?
- Has the property been farmed at any point in the past?
- Has the property been used, or is it currently being used, in connection with a hobby farm, where the seller had (or has) no reasonable expectation of making a profit?
- How much of the property is used for these activities?
- What is the remainder of the property used for?
- Who undertook such activities?
- Is there a house or other residence located on the property?
- Is the seller living on the property?
- Does the purchaser intend to live on the property?
These questions produce important answers that real estate agents (and real estate lawyers) should know far in advance of the contract drafting stage. As these answers may not be obvious from an inspection alone, asking a seller outright is strongly recommended.
It is important to remember that HST is not applicable in the following circumstances:
- Where a person sells or transfers farmland (that must have been used in the business of farming at any time prior to the sale or transfer) to a related person (an individual connected by blood, marriage, or adoption, or to a common law partner) for that transferee’s personal use and enjoyment (which does not include using the farmland in the business of farming);
- Where a partnership, trust, or corporation sells farmland to a partner, beneficiary, shareholder, or related person for that transferee’s personal use and enjoyment, but only if, immediately before the transfer, all or substantially all (90% or more) of the property was used in the business of farming and the transferee was actively engaged in the transferor’s business; and
- Where an individual or trust sells or transfers farmland that has not been used primarily in a farming business (think instead of a personal use property and/or a hobby farm) to a transferee, as long as that farmland has not been previously subdivided or severed into more than two parts (unless these subdivided or severed parts were sold to a related person, former spouse, or common-law partner for their personal use and enjoyment).
Unless your farmland sale transaction falls neatly into one of these three exceptions, HST is applicable.
How then does one deal with this HST?
- If the purchaser is an HST registrant, the seller does not have to collect HST generated by the sale. The purchaser reports the HST payable on their next HST return, while also claiming an offsetting input tax credit. If the purchaser will use 90% or more of the farmland in a farming business, he or she will be able to claim a full input tax credit.
Remember that the purchaser may very well have to remit some amount of HST after the transaction is completed if the offsetting input tax credit is not large enough to offset all of it. Make sure that prospective purchasers understand this.
- If the purchaser is not registered for HST, the seller must collect the HST generated by the sale and must then remit it to the Canada Revenue Agency.
If the farmland will be used in a farming business, a purchaser can then, immediately following closing, register for the HST and claim an input tax credit in order to recover some or all of the HST paid to the Seller. To ensure that this happens, such a registration must be completed immediately following closing. However, it is strongly recommended that the purchaser register for HST far in advance of the transaction’s completion date so that they can instead follow the procedure outlined in solution 1.
It’s also important to remember the “half-hectare rule” – that if there is a residence or house located on the farmland, the farmland transaction is viewed by the tax authorities as two separate ones:
- The first transaction involving the residence or house and the one half-hectare of land that such a structure sits upon (approximately 1.24 acres), to which HST is not applicable; and
- The second transaction involving the remainder of the farmland, to which HST is applicable.
Real estate agents should be conscious of this rule and negotiate these two purchase prices separately. These purchase prices should be inserted into the Agreement of Purchase and Sale (preferably Schedule A) together with a short explanation as to which one is HST applicable. This clause should be initialed by both parties.
Take care when apportioning the total value of the farmland between these two transactions. CRA can and will reassess the parties involved if they feel that too much of the total value was assigned to the HST-free residence and one half-hectare transaction. If ever in doubt about how to properly apportion the total value, it is strongly recommended that real estate agents retain the services of professional property appraisers.
A closing piece of advice for those drafting farmland purchase and sale agreements: Pay attention to the HST clause in the standard OREA form. Consider whether or not HST should be listed as being “in addition to” or “included in” the purchase price. Failing to do so can cost your clients money, and it can cost you an insurance claim.
Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice. Individual situations will differ and should be discussed with a lawyer. For specific technical and/or legal advice, please contact Chinneck Law.