Telf Maynard

If you are planning on buying or selling a piece of farmland in British Columbia, and the sale price is one million dollars, *someone* may have to pay $120,000 in HST. (This is in addition to the roughly 2% Property Transfer Tax (PTT) that the buyer will have to pay on the purchase.) If the farmland is worth $4 million, we are now talking about well over half a million dollars in tax. You can see how it might be important to figure out the details ahead of time!

The Harmonized Sales Tax (HST) is being implemented in British Columbia effective July 1st, 2010. This new tax on goods and services will replace the 5% Goods and Services Tax (GST) and the 7% Provincial Sales Tax (PST) with a single tax – the 12% HST.

While the PST had many exemptions, with few exceptions the new HST will apply to everything to which the GST used to apply. One of the things which was previously exempt from PST, but to which the HST is not exempt, is the sale of farmland.

With all the confusion and apprehension regarding the implantation of this new tax, we asked the Canada Revenue Agency (CRA) for some answers. The following Q&A is a conglomeration of answers kindly provided to Equus Estates by Mr. Mel Bellefontaine of the CRA’s GST/HST Rulings Centre, and information retrieved from the CRA website.

While we are not tax experts, the following information is correct to the best of our knowledge. For information regarding your specific situation, we highly recommend that you speak with a Tax Accountant, a Tax Lawyer, or the Canada Revenue Agency.

Q. When does the HST have to be paid on the sale of a property?

A. Generally speaking, the HST is payable on the sale of new residential properties, some bare land, and most non-residential properties. “Farmland” is considered to be non-residential property.

“Farmland” generally means land that is regularly used by a person for the purpose of gaining or producing income from a farming business carried on by the person. Farmland also includes any portion of vacant land (e.g., a bush area) that may not be used directly in a farming business. In addition, any fixtures on the farmland (e.g., a barn or a corral) form part of the farmland.

The sale of farmland by an individual is usually taxable although there are limited circumstances when it is exempt.

Q. What if I live on my farm?

A. Where a sale of farmland includes a residence or house, the sale is viewed as two separate sales:

1. the portion that includes the house plus the land that is necessary for the use and enjoyment of the house, and
2. the remaining portion of land.

Q. Is there a relationship between “Farm Status” for BC Assessment/Property Tax purposes and being classified as a “farm” for HST purposes?

A. No. You can qualify as a farm under HST rules but not Property Tax rules, and vice-versa. Each has different rules and different definitions of “farm”. Property Tax Assessments are Provincial, and the HST is Federal.

Q. I own a hobby farm on land that has never been subdivided or severed. I carry on limited farming activities on the farm without making, or expecting to make, any profit. I have decided to sell the farm and my house that is located on it. Does the GST/HST apply to the sale?

A. No, the GST/HST does not apply when you sell the land on which your hobby farm is situated, since it was not used primarily in a business in which you had expected to make a profit.

Q. When does HST apply to the sale of farmland?

A. In general, HST applies to the sale of farmland that was used to operate a farm business with a reasonable expectation of profit.

Q. What classifies as a “reasonable expectation of profit”?

A. Long answer. Here’s an excerpt from the CRA GST/HST Memoranda Series:

1. The discussion in the next paragraphs is expressed in terms of an individual’s activities. These remarks apply equally to the activities of a personal trust as defined in subsection 123(1) of the Excise Tax Act.
2. A determination of whether or not an individual has a reasonable expectation of profit must be based on an analysis of all the facts and an assessment of the activities actually undertaken by the individual. Such a determination cannot be made solely upon the fact that the individual is engaged in particular activities with the intent of gaining a profit from the activities. Rather, in addition to the individual’s intention to profit, there must be an objective determination as to whether the profit expectation is reasonable under the circumstances. Determining if an activity carried on by an individual constitutes a business with a reasonable expectation of profit requires an analysis of the activity using some or all of the factors below. In assessing the situation against these factors, it is important to remember that it is the “expectation” of profit that is being assessed not the actual realisation of profit. In addition, the term “reasonable” refers to the expectation of profit, and not to whether the profit or profits are reasonable.
3. Generally, the following factors should be considered when determining if an activity engaged in by an individual has a reasonable expectation of profit:
   • the profit and loss experience in past years;
   • the amount of gross income, if any, reported over several years;
   • the length of time over which a profit could reasonably be expected to be shown must be relevant to the nature of the activity, e.g., in the case of a tree farm, the relevant time period might be longer than for a vegetable farm;
   • the extent of activity in relation to businesses of a comparable nature and size in the same locality;
   • the amount of time spent on the activity in question;
   • the individual's qualifications, such as experience, training and education, including eligibility for membership in a professional association;
   • the qualification of the individual for public assistance given to those who are carrying on a business in that field of activity;
   • the individual's intended course of action, as evidenced by efforts showing an intention to make a profit, e.g., the preparation of a business plan;
   • the capability of the venture as capitalised to show a profit after charging depreciation, and the development of the operation and commitment for future expansion according to the individual's available resources, including the ability to secure proper and reasonable financing in order to make the venture a viable business capable of showing a profit;
   • the degree of effort in promoting and marketing the products or services supplied by the individual as, for example, the registration of a trading name and the opening and maintaining books and records;
   • the type of expenditures claimed and their relevance and reasonableness to the activity, e.g., will the expenditure enhance the ability to make a profit; and
   • the nature of the product or service supplied, such that it has a profit potential, e.g., a market exists or can be developed.
4. None of these factors is more important than another and generally no single factor determines whether or not an activity is carried on with a reasonable expectation of profit. Each factor should be weighed in light of the whole. The individual's failure to meet any one particular factor will not in itself prevent the individual's activities from qualifying as a commercial activity. However, in certain circumstances only one factor could be sufficient to determine if an individual has a reasonable expectation of profit. For example, an individual may have access to large amounts of capital, may be willing to spend extensive amounts of time on the activity, may have the relevant experience, but if it is clear that there is no market nor potential for a market for the product or services being offered, there is no reasonable expectation of profit.

Q. I own farmland and a farmhouse in the country and I am thinking of retiring from the farm business but will continue to live in my farmhouse. Will I owe the government any GST/HST because I am no longer farming but rather using my farmland only for my personal use?

A. No, you are not required to remit any GST/HST in this circumstance provided the farmland had been used solely for your farming business and not for any other commercial activity.

Q. What if I decide to sell my “personal use property” which was previously a farm?

A. The HST may, or may not, apply. Speak with your Tax Lawyer, or call Revenue Canada’s HST Rulings Hotline for more information or a formal decision.

Q. For sales of residential property, there is an HST rebate available. Does this apply to farmland?

A. There is no rebate on the sale of farmland. However, if the farmland is being sold to someone who plans to use it for purely residential purposes, then the full HST will likely have to be paid on the sale, but the Buyer may also be eligible for the rebate.

Q. Are there other exemptions available?

A. Yes, definitely. In some cases, an exemption is available for the sale of farmland to a relative, or the sale of farmland as part of a business. Ask Canada Revenue Agency whether the exemption applies to your specific circumstances, or talk to your Tax Lawyer or Tax Accountant.

Q. Who is responsible for paying the HST – the Buyer or the Seller?

A. By law, the “Recipient of a Taxable Supply” (the Buyer) is responsible for paying it. But the Seller is responsible for remitting it to the government. In practice, this means that where the money comes from is negotiable in the Contract of Purchase and Sale. It may be paid by the Buyer in addition to the purchase price, or written into the contract that the Seller will pay it out of the proceeds. Simply put, the contract determines whether it is included in the sale price or not. It makes no difference whether the Seller is registered for the GST/HST or not – it is still their responsibility to remit the HST to the government, when required.

Q. If the Buyer intends to continue using the property as a Farm, is the HST still payable?

A. If the Buyer is an HST registrant, and intends to continue using the farm in the course of their business, it may be possible to avoid paying the HST, or to get the HST back later, through the use of Input Tax Credits and/or deferring the tax. For specific advice on your particular situation, you *need* to talk to a Tax Lawyer and/or Tax Accountant. When thinking of selling, it is critical to get this advice in advance, preferably before the property is even placed on the market, and in every case should be a term in the Contract of Purchase and Sale.

Q. Does the HST apply to the sale of *my* farm?

A. We don’t know for sure. But Canada Revenue Agency would be happy to tell you! They have a hotline setup to answer specific technical HST questions. Believe it or not, they answer fairly quickly (we tried).

You can reach the HST Rulings Hotline at 1-800-959-8287.