Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 126728
March 8, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Application of the HST Transitional Rules to Realtor Services
Thank you for your fax of July 28, 2010, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of realtor services provided in British Columbia. We apologize for the delay in responding.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand that:
1. [...] (the Brokerage) is a licensed brokerage under the Real Estate Services Act (British Columbia) doing business in British Columbia. The Brokerage is registered for GST/HST purposes and is a member of [...] (the Board).
2. The Brokerage's main business activity is representing vendors of real property (Sellers) in real estate transactions. Generally, the Brokerage supplies services to the Sellers which include meeting with the Sellers, giving house staging advice, giving property market valuations, hosting open houses, showing properties to potential buyers, attending home inspections, preparing documents and performing various other tasks.
3. The Brokerage enters into multiple listing contracts (MLCs) with Sellers. Typically, a MLC sets out, amongst other things, the terms and conditions in respect of the service that the Brokerage will supply to the Seller, the amount of the commission payable to the Brokerage for the supply of its service, and whether a cooperating brokerage is allowed to show the real property to prospective buyers. Generally, where the latter is allowed, the MLC will set out how much of the Brokerage's commission will be paid to the cooperating brokerage.
4. Typically, a cooperating brokerage's main activity is representing prospective buyers of real property in real estate transactions. Generally, a cooperating brokerage's service includes attempting to find real property from the available stock that matches a buyer's preferences, showing buyers real property for sale, providing buyers information about comparable real property sales that have occurred in the area, assisting buyers in becoming pre-qualified for a certain level of financing, and advising buyers on making offers and assisting in closing the real property transaction.
5. You provided us with a blank copy of a MLC that the Brokerage enters into with Sellers. The relevant points of the MLC that pertain to the Brokerage's service supplied to the Seller, and the amount of the Brokerage's commission that will be paid to a cooperating brokerage, are as follows:
(a) The Seller lists the real property described therein exclusively with the Brokerage. The Seller authorizes the Brokerage to list the Seller's real property with the Multiple Listing Service (MLS) of the real estate board of which the Brokerage is a member and any other real estate board that the Brokerage selects and has access to.
(b) The Seller authorizes the Brokerage to cooperate with other brokerages acting for prospective buyers (Cooperating Brokerages), or with consent of the Seller, as a sub-agent of the Brokerage.
(c) The Seller authorizes the Brokerage to advertise the Seller's real property and to show it to prospective buyers during reasonable hours.
(d) The Seller agrees to allow Cooperating Brokerages to show the Seller's real property to prospective buyers.
(e) The Seller agrees to pay the Brokerage a gross commission of an agreed upon percentage of the sale price of the real property, plus applicable GST/HST and any other tax in respect of the commission (commission + tax = remuneration). Generally, the commission is payable to the Brokerage where:
i) a legally enforceable contract of sale between the Seller and a buyer is entered into during the term of the MLC;
ii) a legally enforceable contract of sale is entered into during a period specified in the MLC between the Seller and a buyer who is introduced to the Seller's real property or to the Seller, by the Brokerage, a Cooperating Brokerage or any other person including the Seller during the term of the MLC; or
iii) an offer to purchase is obtained from a prospective buyer during the term of the MLC and the prospective buyer is ready, willing and able to pay the listing price and agrees to the other terms of the MLC, even if the Seller refuses to sign the offer to purchase.
(f) The Seller agrees that the remuneration due to the Brokerage shall be payable on the earlier of the date the sale is completed, or the completion date, or where no contract of sale has been entered into seven (7) days after written demand by the Brokerage.
(g) The Seller agrees that to assist in obtaining a buyer for the Seller's real property, the Brokerage will offer to Cooperating Brokerages a portion of the Brokerage's commission of an agreed upon percentage of the sale price of the Seller's real property, plus applicable GST/HST and other applicable taxes in respect of that portion of the commission.
(h) The Seller irrevocably directs, or agrees to sign such documents as may be required by the Brokerage irrevocably directing a lawyer or notary public acting for the Seller or a buyer, to pay the remuneration due to the Brokerage, or the net amount remaining after the deposit monies held in trust have been credited against the remuneration due to the Brokerage, to the Brokerage and a Cooperating Brokerage, where applicable, by separate cheques to the Brokerage and the Cooperating Brokerage.
(i) The Seller acknowledges and agrees that a brokerage acting only for a buyer does not owe any agency duties to the Seller.
6. You advised us that the blank copy of the MLC that the Brokerage enters into with Sellers is a standard agreement that is used by the members of the Board. Furthermore, in situations where the Brokerage acts as a cooperating brokerage (as opposed to a listing brokerage) the obligations and entitlements set out in the MLC in respect of the Cooperating Brokerage would apply to the Brokerage in its capacity as a cooperating brokerage.
7. Generally, the arrangement between a listing brokerage and a cooperating brokerage who are both members of the Board is governed by the Board's [...]. Amongst other things, these [...] provide that: [...]
Interpretation Requested
You would like to know whether the HST at 12% applies to the amount of the Brokerage's commission payable to a Cooperating Brokerage where all or substantially all (i.e., 90% or more) of the service supplied by the Brokerage to the Seller is performed before July 2010, but all or substantially all of the service supplied by the Cooperating Brokerage is performed on or after July 1, 2010.
Interpretation Given
Based on the information provided, the Brokerage is a recipient of a taxable supply of a service made to it by the Cooperating Brokerage. As the recipient of a taxable supply, the Brokerage is required to pay GST/HST to the Cooperating Brokerage on the consideration for the supply (i.e., the amount of the Brokerage's commission payable to the Cooperating Brokerage). Despite that the Brokerage is required to charge and account for only the GST where all or substantially all (i.e., 90% or more) of the Brokerage's service to the Seller is performed before July 2010, the Cooperating Brokerage is required to charge and account for the HST at 12% on the total value of the consideration payable by the Brokerage to the Cooperating Brokerage for its service where all or substantially all of the Cooperating Brokerage's service is performed on or after July 1, 2010.
Determining When a Brokerage Performs its Services
Generally, section 43 of the New Harmonized Value-Added Tax System Regulations (the Regulations) provides that the HST at 12% applies to any consideration that becomes due, or is paid without having become due, on or after May 1, 2010, for a taxable supply of a service made in British Columbia, to the extent that the consideration relates to the portion of the service performed on or after July 1, 2010. However, if all or substantially all (i.e., 90% or more) of the service is performed before July 2010, only the GST at 5% is payable on the consideration for the taxable supply of the service.
The determination of when a brokerage's service is performed is a question of fact that must be determined on a case by case basis. It is the CRA's position that brokerages should determine the portion of their services performed before July 2010 and on or after July 1, 2010 on a case by case basis in a fair and reasonable manner.
Generally, a service provided by a listing brokerage to a vendor will start when the listing agreement is entered into with the vendor. Generally, a service provided by a cooperating brokerage to a listing brokerage will start when the listing brokerage first sets a time for the cooperating brokerage to inspect the real property for a particular buyer or to show the real property to a particular buyer. The CRA recognizes that in many cases the services provided by the brokerages will be substantially completed by the date that a legal binding purchase and sale agreement is accepted by the vendor and the buyer, which is the date the sale becomes unconditional. Where this is the case, these dates may be used to determine the extent of work performed before and on or after July 1, 2010. Therefore, in these cases, the CRA recognizes that these dates will form the basis for determining the percentage of work performed before July 2010 and on or after July 1, 2010.
However, in those circumstances where work is performed by a listing or cooperating brokerage after the date a binding purchase and sale agreement is entered into, that is, between the date the sale becomes unconditional and the closing date, the brokerage will be required to take this work into consideration.
Paying Commission to Cooperating Brokerage
Generally, in the real estate industry, a listing brokerage will sign a MLC with a vendor for the marketing and selling of the vendor's real property. Typically, the MLC outlines the terms and conditions of the contract for the service provided by the listing brokerage, the amount of commission payable to the listing brokerage, the applicable taxes payable, and the amount of the listing brokerage's commission that may be paid to a cooperating brokerage.
Where the listing brokerage is a GST/HST registrant, the listing brokerage is required to charge and account for tax on the full amount of the commission payable by the vendor. The commission is the consideration for the taxable supply of the listing brokerage's service to the vendor. The application of the HST transitional rules to the service provided by the listing brokerage will be determined solely on the service performed by the listing brokerage. The tax payable by the vendor to the listing brokerage for its service is not affected by the service provided by the cooperating brokerage to the listing brokerage.
Where the cooperating brokerage is a GST/HST registrant, the cooperating brokerage is required to charge and account for tax on the amount of the listing brokerage's commission that is payable to the cooperating brokerage. Notwithstanding that a cooperating brokerage typically represents the interest of the buyer, for GST/HST purposes, the cooperating brokerage is considered to be making a taxable supply of a service to the listing brokerage. As the recipient of the service (i.e., the person required to pay the consideration for the supply), the listing brokerage is required to pay GST/HST on the amount that it is required to pay to the cooperating brokerage. The application of the HST transitional rules to the service provided by the cooperating brokerage will be determined solely on the service performed by the cooperating brokerage. As indicated above, the amount of tax payable by the listing brokerage to the cooperating brokerage does not have an impact on the total amount, including the tax, payable by the vendor to the listing brokerage.
In your letter, you provided an example in which a vendor is required to pay a $5,000 commission to a listing brokerage for its service where the listing brokerage performed 90% or more of the service before July 2010. In your example, the listing brokerage is required to pay 40% of its commission (i.e., $2,000) to a cooperating brokerage, and the cooperating brokerage performed 90% or more of its service on or after July 1, 2010. However, the lawyer handling the transaction issued two cheques: one to the listing brokerage for $3,000 plus $150 GST, and the other to the cooperating brokerage for $2,000 plus $100 GST. The example assumes that there is no deposit to be credited against the amount payable by the vendor.
In your example, the listing brokerage should have charged the vendor and accounted for $250 GST (i.e., $5,000 x 5% = $250), and not $150 GST as you have described. The cooperating brokerage should have charged the listing brokerage and accounted for $240 HST (i.e., $2,000 x 12% = $240) which is payable by the listing brokerage, and not $100 GST as you have described. As the recipient of the taxable supply provided by the cooperating brokerage, the listing brokerage should have paid $240 HST to the cooperating brokerage. As the recipient of the taxable supply provided by the listing brokerage, the vendor should have paid $250 GST to the listing brokerage, regardless of the fact that the listing brokerage is required to pay HST to the cooperating brokerage.
With respect to this transaction, the listing brokerage should include the following amounts in its net tax calculation:
GST/HST Collectible ($5,000 x 5% GST) $250
Input Tax Credit ($2,000 x 12% HST) $240
Net GST/HST to be Remitted $10
With respect to this transaction, the cooperating brokerage should include $240 HST collectible, and not $100 GST collectible, in its net tax calculation. In situations where the cooperating brokerage accounts for the tax payable by the listing brokerage, but has not collected the tax from the listing brokerage, section 224 of the ETA provides that the cooperating brokerage may sue the listing brokerage for the tax.
Therefore, the lawyer handling the transaction should have issued two cheques for a total amount of $5,250 (i.e., $5,000 + $250 GST): one cheque to the cooperating brokerage for $2,240 (i.e., $2,000 + $240 HST), and the other cheque to the listing brokerage for the remaining balance of $3,010 (i.e., $5,250 - $2,240).
It should be noted that if the cooperating brokerage in the example above performed only 70% of its service on or after July 1, 2010, it would be required to collect GST at 5% on 30% of the commission received from the listing brokerage (i.e., $2,000 x 30% x 5% = $30 GST) and HST at 12% on 70% of the commission received from the listing brokerage (i.e., $2,000 x 70% x 12% = $168 HST).
For your convenience, find enclosed a copy of GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future change to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-2826. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Paul Lepine
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
Enc. GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretation Service
UNCLASSIFIED
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