Excise tax act vacant land

HST on Vacant Land in Ontario

The rules surrounding vacant land in Ontario can be tricky. There are many factors to consider when purchasing and selling a vacant plot of land, especially those that determine the applicability of HST to the property in question.

The applicability of HST to vacant land can either be taxable or exempt under the Excise Tax Act. This Act sets out the situations where HST is applicable to sales of vacant land and the requirements for land to be exempt from HST. It will help to determine if the land was entirely a personal asset of the vendor or if it was related to a business of the vendor. The following situations will determine whether the sale of your vacant land could be subject to HST or not:

The sale of your vacant land can be subjected to HST if:

1. The vacant land was used primarily in carrying on a business where the vendor had a reasonable expectation of profit. The sale of the land need not be the source of the profit for the business, the land simply needs to have been primarily used by the business.
2. The sale of the vacant land was made in the course of a business of the vendor. Factors that are considered include the frequency with which the vendor engages in these types of sales and the amount of time and effort expended in activities related to the sale of the property.
3. The property was created by the vendor by subdividing a parcel into more than two parts, excluding any parts conveyed to an authority having the right to expropriate, and the vendor is selling to an unrelated party.

The sale of your vacant land can be exempt from HST if:

1. The land was used for personal use by the vendor.
2. The land was an adventure or concern in the nature of trade by the vendor. This is when a vendor had a primary or secondary intention to resell the property at a profit, when they purchased, but the vendor does not regularly engage in these activities as a business and did not expend significant time and effort on activities related to selling the property or preparing it for sale.
3. The vendor subdivided a parcel into no more than two parts or, where the vendor has subdivided a parcel into more than two parts, to a transaction where the vendor is selling a part to a relative for personal use.

What to look out for:

If you are purchasing vacant land, be cautious if the vendor notes that HST will be “in addition to” the purchase price in the agreement of purchase and sale. This is often a red flag that the vendor believes HST will be applicable to the transaction and they are attempting to transfer the responsibility to the purchaser. It is also prudent to inquire whether the land has been severed and, if so, how many parts have been severed by the vendor. If the vendor has severed multiple lots, it is another indication that HST is likely to be a factor. Finally, consider whether the vendor appears to be carrying on a business from the land or whether they frequently flip parcels. In the event any of these risk factors are identified, it will be important to protect yourself through a well-worded agreement of purchase and sale.

HST Reporting on a Sale Transaction:

The burden of collection and remittance of the HST on vacant land is the responsibility of the vendor unless the purchaser is an HST registrant, If the purchaser is a registrant, the purchaser will have to self-assess the tax and remit the HST owing to the CRA on their HST return. However, it is up to the vendor to ensure that the purchaser is a registrant and that the purchaser’s HST number is valid before allowing the purchaser to self-assess and remit HST. If the purchaser provides an invalid HST number, the vendor may be held liable for the HST remittance under section 221(1) of the Excise Tax Act, as was the case in Maloff &Henriksen v. The Queen, 2004 TCC 537.

If you have any further questions on the tax eligibility of your vacant land, or you would like to speak with someone about your purchase or sale of your vacant land, please contact Woitzik Polsinelli’s lawyer Colin Lyon at colin@durhamlawyer.ca or you can call him at 905-668-4486 for assistance with this matter.

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see or speak to a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”

This blog was co-authored by Angela Victoria Papeo*

[i] Back to Basics: Understanding HST and LTT in Residential Real Estate Transactions, Law Society of Ontario, January 22, 2020.