GST and Real Estate

Notes for Real Estate Board of Greater Vancouver Seminar on November 19, 2010 at Whistler
Prepared by Ian T. Davis, Race and Company LLP, Barristers and Solicitors.

The HST regime has a couple of meaningful dates. November 18, 2009 is an important date as presale contracts entered prior to this date will be exempt from HST regardless of when they complete. Accordingly it is important for the Real Estate practitioner to preserve such a contract and amend it rather than redo and re-date a contract. Generally these contracts may be assigned without losing the grandfathered status.

July 1, 2010 is the date that HST became payable on real estate transactions.

It remains an important date for the PST Transitional rebate, which is determined by the percentage of completion a new property was at before July 1, 2010. That rebate is due to the builder/developer unless the contract is written expressly crediting it to the Buyer. The contract should ideally state the level of completion at July 1, 2010.

The date is also relevant for determining if real estate commissions attract HST. If 90% of the work was done by a realtor prior to July 1, 2010, then the account will have only GST added. If more than 10% was done after July 1, 2010, then the commissions need to be split into amounts earned before and after July 1, 2010, with amounts after attracting HST.

Rebates for HST do not disappear like they did for GST for purchases over $450,000. Essentially the rebates are the same as they were for GST (36% of the 5%GST on purchase prices up to $350,000, followed by a pro rata erosion to zero rebate at $450,000) but adding the provincial component of the rebate, which is 5% of the purchase price on purchases up to $525,000. Over the $525,000 the rebate does not disappear but is capped at $26,250.

Like GST, investors are eligible for the rebates, but cannot get credit for them at closing by assigning them to the builder developer.

HST exemptions are the same as the GST exemption on the resale of property. Realtor should always determine HST status and include an appropriate warranty in the purchase contract. Whether HST is payable or not starts with the status of the Seller. How did the Seller hold the property and for what purpose? If held for a commercial purpose, such as a spec home, spec renovation or nightly rental property, then HST will be payable.

HST is not exempt just because a property predates GST or HST or because it has already been paid once in respect of a property. If an owner of a 40 year old cabin property started full time vacation rentals 2 years ago and then decides to sell, the sale will be subject to HST because the Seller is making a predominantly commercial use of the property.

Rental to a tenant to use as a residence is not a commercial use.

Vacant land will be HST exempt only where the owner either paid GST or HST (or purchased as an exempt supply) and intended a personal usage. The owner/seller had to intend to make some personal use of the land at some point, but then changed their mind to sell it instead. Holding as an investment for gain is not a “personal” use. Corporations are not capable of “personal ” use, so HST will be due where there is a corporate seller of vacant land (unless the corporation is holding in trust for a person intending personal use)

If a property is subject to HST but the Buyer intends to continue the predominant commercial use, then the Buyer can register for an HST account and defer the HST. The deferral will last until the predominant commercial use ceases, either by sale to a Buyer not intending commercial use or the owner simply stopping the commercial use. The latter situation triggers the self-supply rules and the Buyer must pay the HST on the value at time of self-supply. Realtors should never suggest a deferral unless they make it clear that commercial usage has to be real and not a sham. CRA does occasionally audit “commercial” properties and may assess HST if not convinced that the use of the property falls into the commercial realm.

Realtors should always include a provision in the contract about HST. Unless it is a clear transfer of commercial-use property and a deferral, the Buyer’s agent should include a warranty such as:

“The Seller warrants that the Property is exempt from HST as “used residential” property.” (or as “personal use vacant land”. This will put the Seller on notice to confirm with their accountant, failing which, they have to live by the warranty. Realtors acting for Sellers need to watch for these warranties and recommend that the Seller consult their accountant prior to accepting the warranty. Do not use a clause that says: ” HST, if applicable, shall be the responsibility of the Seller.”

This clause does not say if it is applicable or not and causes a problem for the lawyers and ultimately clients and realtors, due to its uncertainty.

Clear Title

The standard real estate contract provides that the Seller must deliver clear title except for charges in the Crown Grant or in favour of public authorities. The problem with relying on this clause is that where there is a private charge like a building scheme or neighbour easement, the Buyer will be able to back out of the deal if they choose to insist on the clearing of these items, which usually cannot be cleared. The solutions are:

1. Make sure the title is not subject to private items; or
2. Add a clause such as: “The Buyer agrees to accept subject to all of the non financial encumbrances set out on the attached title search.”

Realtors should also consider making a contract subject to the Buyer’s review of title encumbrances with a lawyer in the absence of pulling and providing the Crown Grant and all encumbrances to the client, and being confident in interpreting the title for the client. There are many properties in Whistler and other resorts that contain covenants preventing usage of the property by the owner as a residence. Vacant land, especially rural vacant land, heightens the need to have the Buyer understand the encumbrances on title, as rights of way, septic field covenants, or easements may interfere with location of a building and even ultimately prevent building at all.

Rural Issues

In rural situations realtors have to be alive to extra issues. Properties may be “water access only”, despite having a road in over a neighbour’s property. That road may not have a registered easement and may be subject to the neighbour liking the Buyer and extending the courtesy of allowing usage. The Realtor needs to draw the Buyer’s attention to the big issues of water, septic, power and access. Is the water potable? Banks often make it a funding requirement to have a potability certificate. Is the Septic system working and can it support any intended additions? Where is the closest power source? Does water come from a water source requiring a water license? Is there a riparian zone setback?

New septic field regulations in the last few years have rendered many properties unbuildable or relatively unbuildable because the expense of an engineered septic system where the property will not allow a regular septic field is exorbitant.

These issues may arise not on the purchase of the existing home, but when your purchaser decides to tear down the current house and build a new one. Many properties have covenants that grandfather the current dwelling, but prohibit new building that adds to the size of the home unless the owner can meet the then-current legislation such as septic regulations.

Realtors will need to make the investigation of some of these issues conditions of the contract of purchase and sale.
Special Assessments.

Realtors routinely add an addendum to purchase contracts dealing with Special Assessments. However, these come in a few different versions that lead to different results. Realtors should always review the one in the contract in play and make sure it suits their clients or the client understands it. The two issues are an unexpected new special assessment or proposed special assessment from the time of contract up to the completion date; and known assessments that have payment plans.

Property Managers will not issue Form F Certificates of full payment unless there is an undertaking to pay a special assessment if it has been assessed. This will generally mean that special assessments on payment plans will accelerate and become due at completion. This is because the payment plans are most often just a courtesy arrangement. The entire special assessment is usually assessed as due and payable at the time of assessment. One version of a strata addendum provides that the amount due prior to completion will be the responsibility of the Seller and the amount due after completion will be the responsibility of the Buyer. Even with payment plans, most special assessment will be technically due prior to completion, which can come as a nasty surprise to a Seller who may then seek redress from their realtor. This clause should accordingly be avoided. Where there is a payment plan, the Property Manager needs to be consulted to determine if a payment plan can continue through a completion without acceleration. Then write the clause in the way that suits the deal to expressly say which party will be responsible for which payments.

Realtors acting for Buyers should consider writing the special assessment clause to capture “proposed” but not assessed special assessments and provide for holdbacks equal to 125% of the highest estimate of the assessment pending determination of it.

Subjective Clauses

Subjective conditions precedent lack certainty, and this lack of certainty can make a contract unenforceable. The primary offender is the clause that makes the contract “subject to financing satisfactory to the Buyer in the Buyer’s sole discretion.” This sort of clause can allow the Seller to argue that the contract lacks enough certainty to enforce against the Seller until removed. This is why subjects to financing should be written with the detail that can be objectively determined. The alternative solution seen in practice is to recognize the clause as an option to purchase in favour of the Buyer and provide for a nominal option fee that is independent of the deposit or other contract payment to make it enforceable. Contracts made subject to vague due diligence should be written as options to purchase instead.

Performance Clauses and Holdbacks

Contracts are often written with clauses requiring the Seller to perform various changes or repairs prior to completion. These pose a problem for all where the Seller fails to perform either on purpose or simply due to the lack of available trades. Short of a negotiated solution, the Buyer must close or risk losing their deposit or worse as the work is rarely significant enough to be considered “fundamental”. The Buyer cannot unilaterally holdback funds to cure the problem. They can only sue to enforce the clause and seek damages for putting things right. This will not make for a happy Buyer, or a Buyer happy with their realtor.

The realtor can do a couple of things. They can help the Buyer identify items that are “fundamental” and have the performance clause include language to clarify that failure to perform shall be a fundamental breach of the contract entitling the Buyer to accept the repudiation of the Seller and have the deposit returned to them. This sends the right message to the Seller. However it does not ensure the property to the Buyer. A holdback clause can. The contract can provide for a failure of the performance by the Seller with language that allows the Buyer to get an estimate of the cost of doing the work, and entitles the Buyer’s lawyer to holdback 150% of the estimate and to pay or reimburse invoices from the holdback without input from the Seller. Note that the realtor should also write performance clauses to contemplate work being finished a few days before completion date to allow time for the buyer to get an estimate done.

The realtor’s objective should be to avoid the Buyer and Seller having to agree on the amount of a holdback or on payments from it. If they have to agree and do not, then they have to sue each other to determine the matter, and the realtor can expect to be sued in turn.

Title Insurance

Most realtors do an excellent job at helping their clients, especially first-time home buyers, estimate the total costs of the purchase. Realtors should now be aware that financial institutions are beginning to make title insurance mandatory following a couple of decisions from the B.C. Court of Appeal. Historically, title insurance was used in B.C. to insure against the survey issue where no survey existed. As strata plans are surveys, there was never a need to get title insurance for condominium purchases. That has changed with the court decisions and some banks now require title insurance to insure against fraud. We expect that within the year, title insurance will be mandatory for most financial institutions, adding a couple of hundred dollars to the closing costs on most purchases, but considerably more for high value properties.

Completion Dates

Month-ends and mid-months should be avoided to ensure the file gets more attention from lawyers and lenders, and to make life easier for clients needing to hire moving companies. Clients who sell one home in order to purchase another should be advised to allow at least one day between the transactions.

Property Transfer Tax

Couples putting only one partner’s name on title in order to use only one PTT exemption, thus saving the other exemption for a subsequent purchase, should understand that it is counterproductive estate planning. If the title holder then died unexpectedly, there will be a probate expense that would have been avoided with joint tenancy.

Corporate parties

Corporate Buyers or Sellers must be in good standing at the completion date. If a corporate Seller has been dissolved, there will need to be a significant amount of time to restore them before completion. Foreign corporate parties will need to produce Certificates of Good Standing from their authority over corporations (ie. The Secretary of State, not an accountant). That can also take a significant amount of time to obtain.