Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
Case Number: 89235
September 16, 2008
Dear XXXXX:
Subject:
GST/HST RULING
Commissions related to the sale of property
Thank you for your letter of XXXXX, concerning the application of the Goods and Services Tax (GST) to services of a real estate agent in relation to the sale of shares and other assets. We apologize for the delay in replying.
All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder, unless otherwise specified.
Statement of Facts
Based on your letter dated XXXXX and additional information we received in writing from you and from XXXXX accountant for the vendors, and in discussions with XXXXX and Luba Baran XXXXX of the Canada Revenue Agency (CRA), we understand the facts to be as follows:
1. GST Status: XXXXX is registered for GST/HST purposes and operates a real estate agency under the trade name XXXXX.
2. Brokerage Contract: XXXXX was retained by XXXXX (the Vendors), as evidenced by an MLS Exclusive Seller's Brokerage Contract effective XXXXX (the "Brokerage Contract"), to sell their property, consisting of farm land and all buildings and attached equipment. The location of the property is the XXXXX.
(i) Under the Brokerage Contract, XXXXX is to receive a gross commission of XXXXX% plus GST and PST, subject to additional terms set out in the Brokerage Contract (XXXXX).
(ii) Under the Brokerage Contract, XXXXX agrees to offer a part of its commission to the Buyer's Broker, specified as XXXXX% plus GST and PST (XXXXX);
(iii) In your letter dated XXXXX, you indicate that XXXXX billed the seller commission equal to XXXXX% of $XXXXX plus GST and PST.
3. Offer/Contract of Purchase and Sale: Under a contract of purchase and sale using the standard form of the XXXXX Real Estate Association (XXXXX REA), dated XXXXX (the Offer), XXXXX (the Purchaser) offers to purchase from XXXXX, through XXXXX, farm land (in the line for legal description, there is a reference to XXXXX XXXXX), buildings and XXXXX equipment. The Offer is accepted on XXXXX by XXXXX, with the standard acceptance clause including an acknowledgement to pay commissions pursuant to the listing agreement (see item 2 above; the listing agreement is referred to herein as the Brokerage Contract).
• XXXXX to the Offer, on the standard XXXXXREA form, sets out various terms and conditions, and includes a reference to XXXXX It also states that the names of the sellers are: XXXXX
• XXXXX
• XXXXX
• XXXXX.
4. Amendments to Offer: Various amendments to the Offer were made after XXXXX:
(i) An amendment to farm/ranch contract of purchase and sale, on a standard XXXXX REA form, dated XXXXX, extends the acceptance date of the contract of purchase and sale.
(ii) A counter-offer on the standard XXXXX REA form, dated XXXXX, clarifies certain terms of the sale, including which assets are not included, and reiterates that the purchaser's lawyer is to prepare a sales agreement for the sale of shares and assets, as noted in 3 above.
(iii) A notice to remove conditions, on a standard XXXXX REA form, dated XXXXX XXXXX, removes certain conditions in the contract of purchase and sale.
(iv) A further amendment to farm/ranch contract of purchase and sale, on a standard XXXXX REA form, dated XXXXX, changes the possession date to XXXXX.
5. Unsigned Copy of Part of Agreement of Purchase and Sale: Parts of an unsigned copy of an agreement of purchase and sale between the vendors, XXXXX, and the purchaser, XXXXX., (the Agreement of Purchase and Sale) provides for the sale of shares in XXXXX by the individual shareholders to the purchaser XXXXX, the sale of XXXXX house to the purchaser XXXXX, the sale of XXXXX house to the purchaser XXXXX, the sale of XXXXX lands and equipment to the purchaser XXXXX. The closing date under the Agreement of Purchase and Sale was to have effect from XXXXX; however, the parts of the document provided do not include a signature and thus do not confirm the actual closing date.
6. GST Charged and Remitted on Broker's Commission: A letter dated XXXXX, from the Vendors' accountant, XXXXX, confirms that XXXXX charged the Vendors a commission fee at the rate of XXXXX% on the total purchase price of $XXXXX, for services rendered in brokering the sale, resulting in commission of $XXXXX. Your letter dated XXXXX indicates that as a registrant, XXXXX charged, collected and remitted GST at the rate of 7% on your entire commission of $XXXXX, in the amount of $XXXXX.
7. Purchase Price Attributable to Assets/Shares: In the above-noted letter of XXXXX to XXXXX, XXXXX expressed the view that the GST was not applicable to the portion of the commission charged to his client that related to the share sale, on the basis that services provided to arrange for a financial service are exempt supplies for GST purposes. In support of this view, XXXXX refers to obsolete GST/HST Policy Statement P-048, Real Estate Agents Commissions and Housing Co-Op Units. He requested that XXXXX refund an amount of GST to the vendors, calculated based on the proportion of consideration paid on the sale which related to the shares (XXXXX). XXXXX XXXXX' letter also sets out a break down of the $XXXXX purchase price paid by XXXXX. among shares and various other assets, as set out in the table below.
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
Another letter from XXXXX to XXXXX of the CRA XXXXX dated XXXXX, includes XXXXX pages out of the Agreement of Purchase and Sale, as referenced in item XXXXX above, that clarifies that the additional parcel of farm land in XXXXX name, which sold for $XXXXX as indicated in the previous letter of XXXXX, was added to the transaction at a later date.
8. Broker's Activities: You provided the following additional information to XXXXX of the CRA, in a telephone conversation on XXXXX:
• You confirmed that the sale was arranged so that all components of the sale were required to be included. The transaction would not have occurred if any of the components (e.g., XXXXX house) was not included. It was the Vendors' requirement that all components of the transaction were to be sold.
• You also clarified what you, as agent, did with respect to the transaction - you obtained a listing for the sale of the business, originally XXXXX. You assisted the Vendors in calculating the likely worth of the business and all of the assets included in the sale. You advertised the business as being for sale and contacted likely purchasers. On a number of occasions, you prepared an offer to purchase the business on behalf of a potential purchaser. XXXXX You also helped the Vendors determine that it would be beneficial to structure the majority of the transaction as a share sale.
Ruling Requested
Is a portion of the commission set out in the Brokerage Contract earned by XXXXX for an exempt supply because it relates to the sale of shares?
Ruling Given
Based on the facts set out above, we rule that the supply provided by XXXXX under the Brokerage Contract related to the sale of various properties is a taxable supply. XXXXX should charge and remit GST with respect to the amount of the gross commission provided for in XXXXX of the Brokerage Contract. To the extent that XXXXX shares its commission with another broker (e.g. the Buyer's broker as set out in XXXXX of the Brokerage Contract) who is a GST registrant, that broker would charge XXXXX GST on the amount of the shared commission. XXXXX would be eligible to claim an input tax credit for the GST related to the shared commission provided the conditions in section 169 are met.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
Explanation
One of the first issues to be considered in determining the GST status of the services provided by XXXXX under the Brokerage Contract is whether they constitute a single supply, or multiple supplies consisting of arranging for the sale of various assets and the shares of a corporation, and possibly, providing advice. GST/HST Policy Statement P-077R2: Single and Multiple Supplies discusses the factors to be considered in making this determination. Based on this guidance and related case law, and particularly, in light of that fact that XXXXX could not negotiate the sale of each property and equipment separately for each owner, XXXXX would be considered to be making a single supply.
As set out in P-077R2, the next step is to determine the characterization of the single supply in order to determine its GST status, in particular, the significance of the fact that the transaction was structured, at least in part, as a sale of shares.
For GST/HST purposes, most supplies of services that are made in XXXXX are taxable supplies subject to the GST at the rate of 5% (7% prior to July 1, 2006) unless the supply is specifically identified as being a zero-rated supply or an exempt supply. Zero-rated supplies are taxable at the rate of 0% and are listed in Schedule VI. Exempt supplies are listed in Schedule V and are not subject to the GST/HST.
Section 1 of Part VII of Schedule V exempts the supply of a financial service that is not included in Part IX of Schedule VI (i.e., a zero-rated financial service). The term "financial service" is defined in subsection 123(1) to include the transfer of ownership of a financial instrument, which is defined to include an equity security. Paragraph (l) of the definition of financial service provides that a service of arranging for certain financial services is also a financial service.
In accordance with case law and GST/HST Policy Statement P-239: Meaning Of The Term "Arranging For" As Provided In The Definition Of "Financial Service", in characterizing the single supply under the Brokerage contract, it is necessary to consider the predominant element, or the dominant and essential characteristic of the supply. This should generally be determined in light of the activities undertaken and contracted for, and what is the dominant element of those activities, based on the time and effort expended, and in particular, the intention at the time an agreement is entered into.
While the ultimate agreement to sell the property was structured, in part, as a sale of shares, and in part, as a sale of other assets, under the Brokerage Contract the Seller listed property (i.e. farm land and all buildings and attached equipment) for sale with XXXXX. The predominant element of XXXXX supply under the Brokerage Contract was finding a potential purchaser for the property not arranging for the sale of shares.
The parties to the sale transaction and their lawyers, subsequent to the signing of the Offer/Contract of Purchase and Sale on the standard XXXXX REA form, determined how the sale transaction would be structured.
If you require clarification with respect to any of the issues discussed in this letter, please contact me directly at 613-952-9210 or Luba Baran at 613-941-2046.
Yours truly,
Dawn Weisberg
Manager
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
Email this Content