Real property refers to land and anything permanently affixed to it that can be purchased or leased including mobile homes, commercial buildings, apartments, homes and offices.
If you are a non-registrant and make a taxable supply of real property you may need to self assess the GST/HST on the transaction. This is particularly true if you are engaged in business or other non-commercial activity and have not been billed for the tax by your supplier.
Definitions
Real property in GST/HST parlance includes not only buildings and structures but also rights and interests in the land itself. The real property may be owned by individuals or trusts, businesses or public bodies.
The GST/HST rules on real property can be complicated and are often misunderstood. If you’re dealing with a builder or purchasing or selling property and don’t understand the GST/HST rules, it’s a good idea to seek guidance from a tax lawyer who has experience with the specific real estate issues involved.
A builder is required to self-assess any GST/HST paid in connection with the construction of a residential unit or property before 90 percent of the construction is complete (or on the first day a tenant moves in). They can use a fair market value, which CRA generally considers to be the highest price, expressed in terms of money or money’s worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm’s length.
This self-assessment rule is intended to ease the cash flow requirements of qualifying real property transactions because the buyer would not have the option to remit the GST/HST if they were not registered for GST/HST. However, it also places the responsibility of the purchaser to ensure they are not paying more than they should be in a transaction.
One common mistake that builders make is to assume they will continue to recover the GST/HST paid after they have made a self-assessment. This is a mistake because the change in use rules kick in and the builder must remit the GST/HST based on the fair market value of the residence.
The simplest way to avoid this mistake is to have the building appraised at the time of the self-assessment. This can be done by using an independent appraisal service or a third-party company that is not related to the builder. Be sure to have this done before you make your self-assessment and keep it up to date so that it is accurate for the current year. This will help to prevent any penalties from being levied for late filing.
Exemptions
The GST/HST rules for a new residential property may seem complicated and overwhelming, especially when it comes to rebates on first use. If not properly handled, however, the financial implications could be devastating.
There are many rules and exemptions in place to protect the interests of both builders and new home buyers. It’s important to know the ins and outs of this complex area of the tax laws before deciding whether to buy or build.
Under the GST/HST self-assessment regime, a builder is required to assess its property for GST/HST before 90 percent of the property is completed or on the day that a tenant moves in. This assessment must be done by calculating the fair market value of the building and determining if any taxes were collected on the construction costs prior to the builder’s self-assessment.
Builders often face a tricky self-assessment because they are trying to determine the fair market value of their property and recoup any tax they paid during the construction period. They need to get a proper appraisal before they make the assessment and file it immediately afterward. If they do not, it can lead to penalties and a potential tax audit.
This process is complicated and requires an experienced professional to ensure that builders follow the law and avoid any costly pitfalls. If you are unsure about how to proceed or need help with this issue, contact your trusted Welch LLP advisor for assistance.
Subsection 221(2) of the Excise Tax Act (ETA) requires a purchaser to self-assess the applicable GST/HST on purchases of real property unless the sale is deemed to be an exempt supply. The purchaser must then report the sale and remit the tax directly to the Canada Revenue Agency. This practice is meant to protect the buyer from cash flow problems and allow them to claim full input tax credits on their purchases. But it can also lead to confusion and a misunderstanding of the rule’s requirements. It is therefore essential to seek advice from a qualified tax lawyer with experience in this area to ensure you are complying with the rules.
Reporting
Real property is land, buildings or structures on the land and any rights or interests that are attached to the land. These include leases, transfers or purchases of any interest in the real property or any portion of it.
The rules surrounding the taxation of real property can be complicated. In particular, when it comes to the GST/HST, it is often a matter of interpretation as to what is considered part of the real property and what is not.
As a result, it is not uncommon for an individual to purchase taxable real property and then find out that he or she has not paid the appropriate amount of tax. This can have serious consequences for individuals and business.
One way that the CRA is trying to address this problem is by requiring purchasers of commercial real estate (“real property” in GST/HST parlance) to self-assess their taxes when buying the real property instead of having them charged and remitted by the vendor. This mechanism is intended to alleviate cash flow issues on high dollar purchases of real property.
In addition to being required to report on their return, purchasers of taxable real property are also eligible to claim input tax credits (ITC’s) for the amount of GST/HST that they pay on the transaction. However, this requires them to use form GST 60 instead of a regular GST return.
This type of reporting requirement can be particularly difficult for a company that purchases taxable real property to rent out. This is because of the complexities of the change of use rules that apply to real property purchases.
Basically, the builder must be 100% complete with the construction of the residence at the time that the house is ready to rent out to a tenant. This can be a tricky decision for many builders.
If the builder is 90% complete with the construction of the residence at the end of the rental period, it may be difficult to determine whether or not this is a self-assessment of the tax owing. This is where a skilled tax professional can help you decide how much value to use for this particular scenario and the best course of action for the builder.
Payment
If you are buying Real Property, it is very important to understand that CRA requires you to self-assess the GST/HST payable in your transaction instead of paying the tax to your supplier. If you are not registered, you would need to file form GST 60 to self-assess the amount and remit it directly to CRA before the end of the month after the transaction occurred.
CRA introduced this rule to make it easier for purchasers of qualifying real property to meet their cash flow requirements in these large transactions. For example, if a vendor sold a piece of land for $1 million and the purchaser paid $50,000 in taxes to the vendor at the time of closing, the vendor would remit the taxes owing to CRA and the buyer would claim an input tax credit (ITC) on their next return for the amount they paid to the vendor.
The same thing is not true for a contractor who receives payment from a recipient. Rather than issuing an invoice to the recipient, the contractor can issue a certificate of payment for the amount approved under the contract and the GST/HST becomes due in respect of that amount on or after five days after the certificate for payment is issued.
As you can see, there are a lot of complicated rules and requirements to consider when buying taxable real property in Canada. This can be a frustrating and confusing process and can lead to serious problems if you are not well-informed.
However, there are circumstances where you can claim ITCs in lieu of paying the GST/HST to your supplier if you are using the Real Property primarily for commercial activities. For example, an accountant in Manitoba may buy a residential complex for $200,000 plus $14,000 in GST and use 60% of the complex as her personal residence and 40% of it in her accounting practice.
If she is a registered registrant, she can claim ITCs in the amount of $400 in ITCs as long as her personal use of the complex does not exceed 50% and she remits the remaining $500 in GST/HST to CRA.
Among many other things, David A. Grantham is a contributing author to UmassExtension West Vancouver Blo. He is a renowned expert on real estate in BC.
Born in North Vancouver, Louisiana, Dr. Grantham grew up in Lower Lonsdale. He then went on to complete his business degree at the University British Columbia. As of this writing, Grantham has completed over 100 projects, including the development of a high rise building in Vancouver.
He is a husband, father, son, brother, and friend. He was a dedicated outdoorsman and enjoyed sports such as hunting, fishing, scuba diving, and snow skiing. His wife, Alison Grantham, and their two daughters survived him. He is survived by his wife Alison Martin Grantham and two daughters.