August 15th 2022
If you own or are considering purchasing vacant land, you will be glad to know that most of the sales do not require the seller to collect and remit HST to the government. However, there are exceptions to this rule that are worth considering, so it is important to have the right advise before you buy or sell vacant land. This article will cover a few of these situations.
Most sales of vacant land are exempt because the owner only kept the land for their personal use. In other words, when a land has been used for commercial purposes, such as farming or other business activities, the sale may attract HST. Knowing whether or not HST matters, because a purchaser must be aware whether HST is “in addition to” the purchase price, which can be a surprise on closing if a 13% increase shows up on the statement of adjustments.
When it comes to purchasing a new home from a builder on land that was previously vacant, HST will apply. The good news is that there is some relief from the impact of HST when buying a new home constructed on vacant land as contracts for new builds often provide that the HST is included in the purchase price. For contracts where the HST is in addition to the purchase amount, there are credits available to you from the CRA. While the maximum amount of this credit varies depending on the purchase price, the rebate could be as high as $30,000. It also means that if you build on vacant land that you already own, that you can apply to the CRA for HST credits.
There are situations where HST can be a serious liability for a seller. If the sale of the land is made in the manner of course of a business, meaning the seller frequently engages in land deals and expends significant effort in activities related to the sale of such properties, the seller may have an obligation to collect and remit HST to the government as they themselves are treated as deriving business income from the sale. If a seller represents the land is personal use when the contract is entered, HST is likely exempt, unless there are questions regarding severance, HST should be included in the purchase price without issue. If a seller refuses to represent that the vacant land is personal use and insists on HST being in addition to, a buyer must be cautious entering the contract. HST may apply and 13% may be added to the purchase price on closing. The seller must remit this amount to the CRA. If HST applies and the buyer is an HST registrant, the buyer can provide an undertaking and indemnification to the seller with respect to the HST. The seller is not required to collect the tax. The purchaser must self-assess and remit the tax themselves using a form GST 60 or through their regular HST return calculations. Speaking with an accountant as to how building on vacant land impacts your situation is highly recommended in this situation.
Additional questions must be asked if the land is severed. When land is severed there are rules that impact whether HST applies. If you wish to sell a part of your land, and you have never previously subdivided this land from another part of the land that you owned, and the land is divided into only two parts, then the sale of each part is exempt. In other words, severing land that you have owned as personal use into only two pieces will not attract HST on their sale.
If a larger piece of land contains vacant land and a residence, the sale is viewed as two separate transactions for the purpose of HST assessment. A calculation must be made with respect to the value of the land which includes the residence and all the land that is necessary for the use and enjoyment of the house, and the remaining portion of land. HST is taxable on the portion of vacant land if the vacant land was not ‘personal use’ without commercial activities such as farming. Importantly, the history of the use of the land determines whether HST will apply, not the intended use by the buyer.
If you own or are considering buying vacant land, be sure to speak with a trusted real estate professional. The team at Liddiard Law has experience with closing transactions which involve issues that are the topic of this letter, so do not hesitate to reach out today.
Michael Liddiard, BA MA JD