How real estate commission works in Ontario: who sets it and what the agreement must say

The short answer

Real estate commission in Ontario is not a number set by the government or by the regulator. The Real Estate Council of Ontario (RECO) says you and the brokerage decide the amount you will pay for services. It also says that amount is not fixed or approved by RECO, any government authority or any real estate association or board.

This guide is about the rules rather than the rates. We will not quote a rate here, because none of the regulator and government pages we reviewed publishes one. What those pages do cover is how commission can be structured, what has to be written down, how the buyer’s side is handled, what a holdover clause does and how tax applies. It is general information and not legal or tax advice. Your real estate lawyer and accountant can confirm how it applies to your sale.

Who decides what commission you pay?

You do, together with the brokerage you choose. RECO tells consumers that the amount is a matter of agreement. It adds a rule for agents: in dealing with prospective clients, an agent must not suggest that remuneration is fixed or approved by RECO, any government authority or any real estate board or association.

RECO also says that if a brokerage has a policy on remuneration, the agent may share that policy with you.

So for a seller in Markham the regulator’s answer is that the agreement you sign sets the amount. Read it before you sign. Our post on Markham downsizing costs shows where commission sits among the other selling and moving bills.

What must a listing agreement say about commission?

A listing agreement is one kind of representation agreement, the contract between a client and a brokerage. RECO says it must be put in writing and presented to you as soon as possible. RECO Bulletin 2.3 sets out the content a representation agreement must include:

• The date it takes effect and the date it expires.
• The method for determining the amount of any remuneration payable to the brokerage and, for seller clients, any amounts payable to any other brokerage.
• Any circumstances in which the remuneration might change, with an explanation of how it may change and whether one or more brokerages may receive remuneration.
• The method to be used for paying any remuneration payable to the brokerage.
• The services the brokerage will provide.
• Any terms related to termination, including rights and obligations.

RECO also says the expiry date must appear prominently on the first page. It says there is no set time for an agreement, so it can run for a day, a few weeks or months.

The bulletin gives an example of how payment may be handled. An agreement may require a seller client to sign a direction authorizing the payment to be disbursed by their lawyer. Ask where the money will be paid from before you sign.

Fixed amount, percentage or a mix

RECO Bulletin 2.3 says the agreement must clearly identify the method used to determine the remuneration. It may provide a fixed amount, a percentage of the sale price or a combination of the two. All remuneration for a trade in real estate must be an agreed amount or percentage of the sale price or rental price or a combination of both.

The percentage does not have to be one figure. RECO says it may be a series of percentages that decrease at specified amounts as the sale price increases.

Structure	What RECO says
Fixed amount	Permitted
Percentage of the sale price	Permitted
Combination of the two	Permitted
Series of percentages that decrease as the price rises	Permitted
Amount based on the difference between list price and sale price	Prohibited. The brokerage is not entitled to charge or collect it

Here is an illustration only. The rates are made up to show the arithmetic. They are not a typical or recommended rate and they do not describe any brokerage. Suppose a home sells for $800,000 and an agreement said 4% of the first $500,000 plus 3% of the amount above that.

Step	Calculation	Result
First $500,000 at 4%	$500,000 x 0.04	$20,000
Remaining $300,000 at 3%	$300,000 x 0.03	$9,000
Commission before tax	$20,000 + $9,000	$29,000
HST at 13% on that amount	$29,000 x 0.13	$3,770
Total with HST	$29,000 + $3,770	$32,770

The HST line assumes the brokerage is registered and that Ontario’s 13% rate applies, which we explain below. Change either assumption and the total changes. The point of the example is that you can work out your own figure from the wording in the agreement before you sign.

Who pays the buyer’s brokerage?

RECO Bulletin 2.3 says that when the buyer is a client of a different brokerage, the seller’s agreement should state two things separately: the amount the seller will pay to their own brokerage for its services and the amount, if any, the seller will offer to pay to compensate a buyer for the buyer’s brokerage fees.

The bulletin adds that the amount offered to compensate the buyer should not be expressed as a portion of the amount payable to the seller’s brokerage. The two amounts are meant to be visible as separate items so you can see what each one is for.

The words “if any” matter. RECO’s consumer page lists, among the things a seller’s agreement needs to show, the amount you agree to pay, if any, to compensate the buyer for their brokerage fees. The same page warns buyers that a seller might not offer any amount to cover the fees the buyer owes to their own brokerage.

If you do agree to contribute, RECO Bulletin 6.2 describes how it can be written into the agreement of purchase and sale. A remuneration clause is an agreement between the buyer and the seller in which the seller agrees to pay an amount to compensate the buyer for the buyer’s brokerage fees. RECO says the clause must include:

1. The parties, who are the seller and the buyer.
2. The amount the seller has agreed to pay and whether applicable taxes are also to be paid.
3. When the payment is due, for example on the transaction completion date.
4. The payor, who is the seller. The clause must also name the recipient of the payment.

Read how the clause treats the amount and the taxes. Ask your lawyer how the payment will appear in your closing figures. Our guide to closing day in Ontario covers what happens on the day money moves.

What is a holdover clause?

A holdover clause is a term that can make you owe commission after your agreement has ended. RECO says it may require you to pay brokerage fees for a purchase or sale even when the transaction happens after your representation agreement expires. It says the clause will specify how long it applies from the expiry date.

RECO gives an example. A seller whose agreement includes a 30-day holdover clause might, under certain conditions, owe the brokerage commission if the home sells during those 30 days even though the agreement has expired.

Three points from RECO are worth knowing:

• Holdover clauses are not required, but RECO says they often give rise to consumer complaints.
• There is no minimum or set holdover period.
• Agents should clearly explain a holdover clause and its terms to you before the agreement is made.

If you are thinking of ending a listing early or switching brokerages, ask what the termination terms say about the financial effect and about any holdover period. RECO says termination clauses should address the financial implications in each circumstance, including the effect on any holdover period.

Does HST apply to commission?

According to the Canada Revenue Agency (CRA), services from a real estate agent who is registered for the GST/HST that relate to selling or renting real property will generally be taxable, even when the property itself is exempt. The CRA also says the registered agent has to charge and remit GST/HST on their commission and other services, other than financial services, provided to their clients.

On the rate, the CRA’s place-of-supply page lists a 13% HST rate if the supply is made in the participating province of Ontario. Confirm with the brokerage and your accountant whether a particular sale is taxed at that rate and whether the brokerage is registered. The CRA page also says clients may be able to claim an input tax credit when the property is used in commercial activities.

Questions to ask before you sign a listing agreement

Use this as a checklist when you review an agreement:

• How is the amount worked out: fixed, percentage or both?
• Under what circumstances could the amount change and how would it change?
• What amount, if any, am I offering to compensate a buyer’s brokerage and is it shown separately?
• Are applicable taxes included in the stated amount or added on top?
• How will payment be made and will my lawyer disburse it?
• When does the agreement expire and what are the termination terms?
• Is there a holdover clause and, if so, how long does it last?
• Which services am I getting for the amount?
• What does the agreement say about commission if a sale does not close?

If you are planning a sale and want to compare how an agreement reads against this list, our sellers page explains how we work with owners. When you are ready to talk it through, contact us.