In the original words of CRA, for GST/HST purposes, all sales of land situated in Canada are taxable, unless explicitly exempted.
This means that all land transactions in Canada involve GST/HST unless certain exceptions are met. In other words, there are two possibilities for trading vacant land:
One is taxable, HST is paid (mostly)
The other is HST exempt, no HST
So when is it paid and when is it not paid? If it is paid, who pays it? What are the exceptions?
In this article, I will try to explain it clearly.
A piece of vacant land can be divided into personal-use, farmland and business use according to its nature or use. Whether GST/HST is paid during the transaction depends on the nature of the land itself, the purpose of the seller holding it, and whether it has been divided or even divided into several pieces.
Examples of HST – HST taxable
First, the commercial use and profit expectations of the land – If the seller’s intended use of a piece of land is to use it for commercial purposes (more than 50%) before it is sold, and the seller has reasonable profit expectations, the sale of such land will involve HST.
Example 1 – David’s restaurant business is very good, especially on weekends, there is always a long queue at the door, and parking spaces are hard to find. There happened to be a vacant land next to it, and David found an opportunity to buy it and planned to build a large parking lot. However, before the construction started, the main kitchen staff was poached, and gradually the customer flow was not as good as before. There was no choice, David sold the land again, and this transaction would be subject to HST.
Analysis: This piece of land belongs to capital real property, either personal use or business use, there is no other option. David’s intention to purchase it is for business use, with reasonable business purposes and profit expectations, so the sale of this land involves HST.
Example 2 – David bought a large orchard, built a house in the orchard for his own use, and operated the orchard picking. A few years later, the family moved back to the city and sold the orchard along with the house.
Analysis: Although it was sold as a “package”, it was actually two transactions: one was the sale of the owner-occupied house and the land, and the other was the sale of the farmland. The sale of the owner-occupied house and the reasonable land occupation are HST exempt and do not involve HST; but the orchard is a farmland for commercial use, so the orchard part must be subject to HST.
Second, frequent transactions and commercial substance – if the seller’s main business is related to real estate (such as real estate developers) and buying and selling real estate is a normal business model, such sellers will be subject to HST when selling vacant land
Example 1 – David bought a piece of land and planned to resell it within a year, so he did not carry out any development. Moreover, before buying the land, he had no experience and had never had a real estate transaction record. This was his first time.
Analysis: David bought the land for the purpose of selling it as soon as possible and making a profit. The sale of the land meets the business purpose, and the income from the sale of the land must be reported as business income; but HST is still exempt (because it does not constitute a business model). If David continues to do it from now on, and multiple transactions constitute a business pattern, then the sale of the land will have to pay HST.
Example 2 – David bought a piece of land and planned to sell it as soon as possible. In order to get more money, he applied to divide the land into two pieces and did some basic maintenance of the land according to the municipal requirements.
Analysis: The income from the sale of land is reported as business income, but HST exempt (it has not yet constituted a business model).
Example 3 – David has been engaged in real estate development for several years. Last year, he bought a piece of land with an old house on it. He planned to demolish it and rebuild it before selling it. As a result, he had a problem with the funds just after demolishing the old house. It happened that someone wanted to buy it at this time, so he sold it.
Analysis: David is a “developer or real estate practitioner”, and the income from the sale of land is reported as business income; at the same time, selling land is a normal business model with business substance, so HST must be collected for the sale of land.
Third, dividing a piece of land into multiple pieces (more than two pieces) and then selling it to unrelated third parties involves HST
Examples of not paying HST – HST exempt
First, personal-use land – personal hoarding of land is for personal use (personal-use land), and the sale does not involve HST
Example 1 – A few years ago, David bought a vacant land and planned to use it for himself. During the holding period, he neither developed nor operated the land. Later, the land price rose, and he sold the land directly. This transaction does not involve HST.
Example 2 – David bought a vacant land and planned to build a house for himself. He dug a well and buried underground pipes. As a result, he accidentally fell and was hospitalized. After recovering, he no longer had the energy to build a house. In this case, he sold the land and did not involve HST.
Example 3 – David bought a 20-acre farmland, of which 15 acres were planted with grass and the other 5 acres were built as a horse farm. Raising horses has always been David’s interest. Later, he invested 30,000 in the pasture and 70,000 in the horse farm (3/7 of the capital investment). He spent about 25% of his time on the pasture and 75% of his time on the horse farm every day. After the hay was harvested, 65% was sold and 35% was kept for feeding horses. A few years later, David sold the pasture and the horse farm together. Should HST be collected for this transaction?
Analysis: First, the pasture is used for profit (selling hay), and the horse farm is used for personal enjoyment. If calculated by area, 75% of the area is used for business and 25% for enjoyment; if calculated by investment, 30% is invested in business and 70% is spent on personal enjoyment; if calculated by time spent, 75% of the time is spent on personal enjoyment. Overall, the entire piece of land is still mainly used for personal enjoyment (personal use), so the sale of the land is HST exempt.
Second, divide into two pieces – an individual divides a piece of land into only two pieces. As long as the land has not been divided from other land before, then the two small pieces are sold again, and any one piece is HST exempt.
Third, divide into multiple pieces – an individual divides a piece of land into multiple pieces (more than two pieces) and sells it to others, then the sale of each piece involves HST; but if the buyer is a relative (former spouse or other related person) and they use it for their own use, it is HST exempt.
Fourth, non-recurring transactions and sales purposes – If an individual buys land for the main or secondary purpose of profit, such as buying it first and hoarding it, and then developing or selling it in the future (either way actually has a profit purpose). But the seller is not a real estate-related person, does not trade the land regularly, and does not invest a lot of time and effort in the land, then the sale of such land is also HST exempt.
Example 1 – David inherited a vacant land that his father used to grow corn. After it came to David, he did not grow anything and hoarded it for a few years until the land price rose. In order to sell more money, he applied for a division to divide the land into several pieces and sold them to different buyers. David did not develop or operate the land during the holding period, and selling the land was not David’s job, so the transaction of selling the land is HST exempt.
However, if David spent a lot of time developing the land in addition to applying for land subdivision, or tried to develop the land, or had business activities, or advertised a lot to attract buyers to bid, such behavior is in the course of business or as an adventure or concern in the nature of trade, then HST will be collected when selling the land.
Who will pay it?
In most cases, when a transaction involves HST, the buyer pays it to the seller, and the seller then pays it to CRA. Therefore, both collection and payment are the responsibility of the seller.
Self-assess – However, if the buyer already has an HST number at the time of handover, the buyer is responsible for handing it in. This is called the buyer’s “self-assessment”. Many people don’t know this and are prone to overlook it. Later, they are confused when they are checked by CRA.
Before signing a sales contract, both parties should read the terms carefully. If the part about HST in the contract says “in addition to” the purchase price, this means that HST is calculated separately. At this time, both parties must make it clear who is responsible for paying. As the saying goes, “When buying a pig, look at the pen; when marrying a wife, look at the yard.” For such a big thing as buying land, it is necessary to spend more time on it to avoid CRA finding fault in the future.
Farmland
In most cases, the transaction of a piece of farmland involves HST. There are exceptions, but the conditions must be met:
First, if an individual sells farmland to relatives, such as spouse and children, and the relatives take over and use it for their own use, this transaction is HST exempt;
Example 1 – A farmer is old and has not farmed for the past two years. He usually simply takes care of it and weeds. He sold this farmland to his son. The son does not farm, but raises a few pet dogs and flowers. This transaction from the father to the son is HST exempt.
Analysis: The land was previously used by the father for agricultural activities for profit-making purposes – planting and selling corn, but there has been no business activities in the past two years, only basic management, so the farm is no longer considered a business asset; the son also holds it for personal entertainment rather than business, so this transaction does not involve HST.
Example 2 – David has a farm and grows vegetables mainly for exercise. After the harvest, neighbors come to buy and he charges a symbolic amount, but most of the time he gives away vegetables for free so that neighbors can have a taste. This year he sold the farm to his brother. This transaction is HST exempt.
Second, the farmer changed the use of the farmland from agricultural operation to personal use and enjoyment. This change of use is also HST exempt.
Commercial land
In most cases, the transaction of a piece of commercial land involves HST, especially when the seller is a company or partnership. The only exception is NPO (because NPO has no commercial purpose). HST i
s collected and paid by the seller. If the buyer has an HST number during the transaction, the buyer will self-assess.
As for GST/HST “self-assess”, what is it all about? Please see another article