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: 128518
May 26, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Application of the HST Transitional Rules to Realtor Services
Thank you for your fax of July 30, 2010, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of realtor services provided in [...] [Participating Province X]. 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 the following:
1. [...] (the Brokerage) is a licensed real estate brokerage under the [...]. The Brokerage is a GST/HST registrant. The Brokerage is a member of the [...][City 1] Real Estate Board.
2. The Brokerage specializes in representing sellers of real property in real estate transactions and specializes in [...]. Generally, the Brokerage supplies its service to the sellers, and the service includes: meeting with the sellers, providing house staging advice, determining property market valuations, hosting open houses, showing properties to potential buyers, attending home inspections, preparing documents and performing various other tasks. Generally, the Brokerage is referred to as a listing brokerage when it operates in this capacity.
3. Generally, listing brokerages enter into Multiple Listing Service (MLS) agreements with sellers. Typically, a MLS agreement sets out, amongst other things, the terms and conditions in respect of the service that the listing brokerage will supply to the seller, the amount of the commission payable to the brokerage for the supply of its service, and whether a co-operating brokerage is allowed to show the real property to prospective buyers. Generally, where the latter is allowed, the MLS agreement will set out how much of the listing brokerage's commission will be paid to the co-operating brokerage.
4. Typically, a co-operating brokerage's main activity is representing prospective buyers of real property in a real estate transaction. Generally, a co-operating brokerage's service includes: attempting to find real property from the available inventory 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. In this particular case, the Brokerage agreed to represent a prospective buyer of real property in a real estate transaction, specifically, a purchase of a [...] in [City 1] ([Participating Province X]).
6. The seller's listing brokerage and the seller entered into a MLS agreement on [mm/dd/yyyy] and the listing brokerage commenced working for the seller on that date.
7. The Brokerage commenced working with the buyer sometime on or after July 1, 2010.
8. The Brokerage introduced the buyer to the seller and the seller's listing brokerage on [mm/dd/yyyy].
9. A Confirmation of Co-operation and Representation Agreement ([...][Agreement]) was signed by the seller's listing brokerage and the Brokerage on [mm/dd/yyyy]. This agreement sets out the amount of the listing brokerage's commission that is payable to the Brokerage, in its capacity as a co-operating brokerage, and states that the Brokerage is representing the interests of the buyer.
10. The offer to purchase the [...] was accepted by the seller on [mm/dd/yyyy]. A Purchase and Sales Agreement was drawn up on this date with a closing date of [mm/dd/yyyy].
11. The listing brokerage was responsible for disbursing the commissions earned from the sale of the [...] to the Brokerage. According to the [Agreement], the commission payable to the Brokerage, in its capacity as co-operating brokerage, is as indicated in the MLS information for the property plus any applicable GST/HST.
12. The seller's listing brokerage stated that because it entered into the MLS agreement with the seller before July 2010, and that because more than 10% of its service was performed on or after July 1, 2010, then both commissions (i.e., the listing brokerage's and the Brokerage's) should be prorated between GST (to the extent that the commission relates to the portion of the service performed before July 2010) and the HST (to the extent that the commission relates to the portion of the service performed on or after July 1, 2010) as both commissions relate to the same real estate transaction.
13. Conversely, the Brokerage stated that since all of its service was performed on or after July 1, 2010, then the Brokerage should only charge and account for HST at 13% on the commission payable to it by the seller's listing brokerage.
14. Although the seller's listing brokerage disagreed with the Brokerage's view, the listing brokerage paid the Brokerage the full HST at 13% on the commission payable to the Brokerage for this particular transaction.
Interpretation Requested
You would like to know whether the HST at 13% applies to the amount of the listing brokerage's commission payable to the Brokerage, where some of the services performed by the listing brokerage occurred before July 2010 and the rest of the services performed by the listing brokerage occurred on or after July 1, 2010 to the seller, but all of the services supplied by the Brokerage is performed on or after July 1, 2010.
Interpretation Given
Based on the information provided, the listing brokerage is a recipient of a taxable supply of a service made to it by the Brokerage. As the recipient of a taxable supply, the listing brokerage is required to pay GST/HST to the Brokerage on the consideration for the supply (i.e., the amount of the listing brokerage's commission payable to the Brokerage.) Despite that the listing brokerage has to account for GST at 5% for the services to the seller that are performed before July 2010 and to account for HST at 13% for the services to the seller that are performed on or after July 1, 2010, the Brokerage is required to charge and account for the HST at 13% on the total value of the consideration payable by the listing brokerage to the Brokerage for its service where all of the 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 13% applies to any consideration that become due or is paid without having become due, on or after May 1, 2010, for a taxable supply of a service made in [Participating Province X] 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 Canada Revenue Agency's (CRA) 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 seller will start when the listing agreement is entered into with the seller. Generally, a service provided by a co-operating brokerage to a listing brokerage will commence when the listing brokerage first sets a time for the co-operating brokerage to inspect the real property for the buyer or to show the real property to the 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 seller 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 co-operating brokerage after the date a binding purchase and sale agreement is entered into, that is, between the date the becomes unconditional and the closing date, the brokerage will be required to take this work into consideration.
Commission payable to co-operating brokerage
Generally, in the real estate industry, a listing brokerage will sign a MLS agreement with a seller for the marketing and selling of the seller's real property. Typically, the MLS agreement outlines the terms and conditions of the contract for the service provided by the listing brokerage, the amount of the 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 co-operating 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 seller. The commission is the consideration for the taxable supply of the listing brokerage's service to the seller. 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 seller to the listing brokerage for its service is not affected by the service provided by the co-operating brokerage to the listing brokerage.
Where the co-operating brokerage is a GST/HST registrant, the co-operating brokerage is required to charge and account for tax on the amount of the listing brokerage's commission that is payable to the co-operating brokerage. Notwithstanding that a co-operating brokerage typically represents the interest of the buyer, for GST/HST purposes, the co-operating 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 co-operating brokerage. The application of the HST transitional rules to the service provided by the co-operating brokerage will be determined solely on the service performed by co-operating brokerage to the listing brokerage. The tax payable by the seller to the listing brokerage for its service is not affected by the service provided by the co-operating brokerage to the listing brokerage.
For example, let us assume that a seller is required to pay a $10,000 commission to a listing brokerage for its service and the standard MLS agreement provides for 50% sharing of the commission between the listing and co-operating brokerages. Where the listing brokerage performed 90% or more of the service before July 2010, the listing brokerage is required to charge and account for $500 GST ($10,000 * 5%). Where the co-operating brokerage performed all or substantially all of its service to the listing brokerage on or after July 1, 2010, the co-operating brokerage is obligated to charge and account for $650 HST ($5,000 * 13%).
With respect to this transaction, the listing brokerage should include the following amounts in its net tax calculation:
GST/HST Collectible ($10,000 * 5% GST) $500
Input Tax Credit ($5,000 *13% HST) $650
Net GST/HST to be Remitted (Refunded) ($150)
With respect to this transaction, the co-operating brokerage should include $650 HST collectible in its net tax calculation. In situations where the co-operating 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 co-operating brokerage may sue the listing brokerage for the tax.
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 changes 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 613-952-8814. 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,
Christiana De Benedetti
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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