Balance Magazine

Not long ago, I received a message from a realtor with whom I’ve had many prior transactions. They reached out in a bit of a panic after helping a client purchase a vacant lot. The deal seemed straightforward: vacant land, sold by what was thought to be a private individual, with no expectation that Harmonized Sales Tax (HST) would apply. But as closing day approached, the situation took a sharp turn.

The buyer was suddenly told they owed an additional HST. Understandably, everyone was caught off guard. The realtor’s client had been relying on a mortgage broker’s lawyer for the transaction, and when the tax issue surfaced, the deal’s smooth close quickly turned into a scramble for answers.

That’s when the realtor contacted me. Not to intervene in the deal itself, but to better understand how this could happen. The goal was to learn from the situation and to avoid future surprises. So, we broke it down.

Understanding When HST Applies to Vacant Land

In Ontario, the sale of vacant land can be either subject to HST or exempt, depending on a few critical factors. The Canada Revenue Agency (CRA) doesn’t look only at what’s being sold—but also at who is selling it, how they’re classified for tax purposes, and the nature of their business activity, if any.

Here are some general rules that apply:

1. Sales by Private Individuals Not in Business
   When an individual who does not operate a business sells vacant land that was held for personal use or investment, that sale is generally not subject to HST. This is often the case when land is inherited, held for future home building, or purchased and held without any intention of profit-making activity.
2. Sales by a Business or in the Course of Commercial Activity
   If the seller is a corporation, partnership, trust, or even an individual who is considered to be carrying on a business (such as land development or frequent sales), then the sale of land may be taxable. In that case, the seller is responsible for charging HST on the sale price, and the buyer must pay it—unless the purchase is structured differently in the agreement.
3. The Intended Use by the Buyer Doesn’t Always Matter
   A common misunderstanding is that if a buyer is acquiring land for residential purposes, HST shouldn’t apply. Unfortunately, the buyer’s intended use doesn’t determine tax liability. It’s the seller’s status and purpose that drives whether HST is applicable.

What Went Wrong?

In the case that came across my desk, it turned out the lots were not being sold by a private individual after all. The seller had registered the land under a business, and this key detail hadn’t been disclosed upfront. That changed everything.

Once that came to light, the seller’s lawyer took the position that HST applied, and the buyer would need to cover it in addition to the purchase price. For a buyer who had budgeted carefully—and was already at their financial limit—that additional sum on money in tax came as a major blow.

The situation was eventually resolved when the seller agreed to proceed at the agreed-upon price, with HST included. That was a fair outcome under the circumstances, but it came with a lot of last-minute stress that could have been avoided with earlier due diligence.

The Importance of Asking the Right Questions Early

We weren’t involved in this transaction from the outset, but the realtor reached out after the fact to better understand the legal and tax framework. That alone is commendable. Too often, professionals move on from deals without unpacking what went wrong.

From a legal perspective, there were a few key questions that should have been addressed at the beginning:

• Who is the registered owner of the property?
  If the land is owned by a corporation or someone who regularly deals in land, that’s an immediate flag that HST may apply.
• Is the seller an HST registrant?
  If so, they are required to charge and remit HST unless a specific exemption applies.
• What does the Agreement of Purchase and Sale say about HST?
  There should always be clarity on whether the purchase price includes or excludes HST. Leaving it silent or ambiguous opens the door to disputes.
• What is the land being used for, and how has it been held?
  Even land that looks “vacant” might have been held in a way that triggers commercial classification.

These questions aren’t just legal formalities—they’re critical to protecting the buyer’s financial interest and ensuring the deal closes without surprises.

Why Due Diligence Matters—Especially for Vacant Land

Land sales, especially of the vacant variety, can appear simple on the surface. No structures, no tenancies, no title issues. But tax issues like HST can turn a smooth file into a high-stakes puzzle overnight. That’s why conducting proper due diligence from day one is essential—starting with understanding who owns the property and how it's held.

Whether you're a buyer, seller, or realtor, it's important to work with legal counsel who knows the landscape, can spot these issues early, and ask the right questions before closing day. HST isn’t something you want to be sorting out while the moving truck is idling in the driveway.

Final Thoughts

Deals don’t unravel because people are careless. More often, they hit snags when key details are overlooked in the rush to close. This experience was a reminder that even experienced professionals can be caught off guard when assumptions are made about ownership, tax status, or contract terms.

At Nungisa Law, we treat each file like its own story—because it is. Whether you're buying a home, investing in land, or working on behalf of a client, we’re here to make sure the legal side of the transaction supports your success, not surprises it.

Looking to avoid closing day curveballs? Let’s talk early—before the countdown begins.