Real property; GST and Rebates

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Sales of used residential complexes are generally exempt from GST/HST however; the GST/HST applies on sales of new residential properties. The New Housing Rebate and New Residential Rental Property Rebate permit recovery of a portion of the GST/HST that is paid on a newly constructed or substantially renovated residential unit. These rebates are available if certain conditions have been met.

Key Definitions

Residential complex; subsection 123(1)

Key points regarding the definition of the residential complex are that it:

  • contains includes adjacent land and common areas which are necessary for enjoyment;
  • can be a house, row house, condo unit, mobile or floating home, apartment or similar premises, student and senior residences, or residence for persons with disabilities;
  • excludes boarding house, hotel, inn, motel; and
  • must be occupied by a person as a place of residence or is intended to be occupied as a place of residence.

It is necessary to determine a reasonable portion of the land and common area that is “necessary for the enjoyment of the residential complex”. Just like the definition of a principal residence in the Income Tax Act, up to one-half a hectare of land may be included in a principal residence without question; any land in excess of this amount must be proven to be required for enjoyment of the property.

Builder

The definition of the builder includes a person who;

  • has an interest in real property and carries on or engages someone else to carry on the construction or substantial renovation of the property; or
  • acquires the interest in a residential complex before the construction or renovation is completed.

Substantial renovation

Substantial renovation makes a building look like a new building. This means that 90% or more of the whole or that part of the building (other than the foundation, exterior walls and supporting walls, floor, roof and staircases) has been removed or replaced.

Residential Real Property – Federal New Housing Rebate

The new housing rebate is designed to refund a portion of the federal component of the GST/HST that is paid on the purchase of a new or substantially renovated residential unit if the property/unit is bought as a person’s primary place of residence. Ontario offers a similar rebate regarding the provincial component of the HST and Nova Scotia offers a sales tax rebate. The rebate must be applied for within two years of the transfer of ownership date or possession.

To be eligible for the rebate the following conditions must be met:

  • A builder, as defined above, must supply the residential unit to an individual to ensure that the residential unit is unused at the time of the purchase.
  • The purchaser (an individual) of the residential unit must be using the unit as either their primary place of residence or the primary place of residence of a related individual including a former spouse. The Canada Revenue Agency (CRA) requires that the residence should be where the individual or related individual ordinarily resides. For the purposes of GST/HST, the definition of “occupancy inhabits” varies from the Income Tax Act. The CRA wants to make sure that the person or related person will use the residence more than 90% of the time and therefore, vacation homes typically will not be eligible for the rebate.
  • The individual (or related person) who purchased the unit must be the first person to occupy the unit after its completion and transfer of ownership. This means that a unit cannot be used by anyone as a place of residence during the period between completion and transfer of ownership. The only time the CRA relaxes this rule is for a residential condominium unit. In this case the individual buyer or related person can occupy the unit before the transfer of ownership because of interim occupancy agreements used in condominiums that allow for the possession before transfer of the ownership.
  • The ownership of the unit must be transferred to the individual after the completion of the unit’s construction or after the completion of the unit’s substantial renovation. If the ownership transfers before this completion then the buyer is considered a builder and not a purchaser.
  • Lastly, the first person who occupies the unit must be the individual or individual related to the person who purchased it. If a group of people bought the unit together, a person from this group must occupy the unit first.

The CRA allows builders to pay or credit the purchaser for the rebate amount if the purchaser submits the rebate within the two-year period after the ownership transfer or possession (whichever is first). Then, the builder can deduct the rebate against the GST/HST payable in their GST/HST return in the period that the rebate was paid or credited to the buyer.

The rebate amount is the lesser of 36% of the federal portion of GST/HST paid (effectively 1.8% of the pre-GST/HST price of the property) and $6,300 and applies to residential units priced at less than $450,000. Based on the formula used for the calculation, units below $350,000 normally generate the maximum rebate. However, the rebate amount steadily declines after a purchase price of $350,000 and is zero at a price of $450,000. The price for the unit includes any add-ons such as a garage but does not include provincial taxes, such as land transfer taxes imposed by B.C.

The CRA allows the New Housing Rebate for owner-built units as well. However, the rebate on these properties is capped at 36% of the total GST paid on the land and construction costs, as opposed to the GST on the price of the property.

If a builder supplies a residential complex under a land-lease agreement, the builder has to self-assess GST/HST and not charge GST/HST on the sale of the residential unit as the supply to the purchaser is GST/HST exempt. In this case the purchaser is not eligible to apply for this rebate. However, the new housing rebate is available to the purchaser as long as the land lease is for at least 20 years or contains a purchase option, but is not applicable to the land portion of the unit. Again, this rebate can also be assigned to the builder.

New Residential Rental Property Rebate

The rules for this rebate are similar to those for the New Housing Rebate. The rebate is available for single and multiple unit residential complexes, condominium units and co-operative housing units being rented out. However, the following conditions need to be met in order to qualify for this rebate:

  • The residential complex must be newly constructed or substantially renovated.
  • The rental unit has to be self-contained, meaning it should have a private kitchen, bath, and living area.
  • The first use of the unit must be for rental property.
  • The unit has to have a rental agreement for at least 12 months and be the primary place of residence of the tenant.
  • For a multiple unit complex, the eligibility is assessed on a unit-by-unit basis and the entire complex considered for the 12-month occupancy test. This means that all or substantially all of the units must be rented out for at least a 12-month period before the rebate is available. Generally, the CRA considers 90% occupancy as being “substantially all”.

Landlords or property owners can apply for the New Residential Rental Property Rebate if the landlord paid GST/HST on the purchase of the rental property or, where  required, to self-assess and pay GST/HST on it.

Similar to the New Housing Rebate, the New Residential Rental Property Rebate is calculated as the lesser of 36% of the federal portion of GST/HST paid and $6,300 for each unit. The highest rebate amount will be for units priced at $350,000, and decline between $350,000 and $450,000, to zero for rental units priced at $450,000 or above.

The landlord/property owner normally has two years from the end of the month in which the GST/HST becomes payable on the purchase of the property or the self-assessment of the GST/HST, to claim the rebate. If the landlord/property owner sells the unit before the end of the first year of occupancy and the purchaser is not using the unit as their primary place of residence, or primary place of residence of a person related to the purchaser, then the CRA recaptures the rebate plus interest, which must be repaid by the original owner.

A federal rebate is also available for land that is leased long-term for residential purposes. The rebate is calculated as 36% of GST paid. The rebate is maximized if the land is priced at $87,500 and declines until it becomes zero at land valued at $112,500 or above.

Conclusion

Planning for construction or renovation of residential complex properties allows builders, purchasers, and landlords to take advantage of available programs to decrease the cost of construction or renovation.

Faezeh Moeini, CPA is a senior auditor of Office of the Auditor General of Alberta
About Faezeh Moeini

Faezeh Moeini, CPA is a senior auditor of Office of the Auditor General of Alberta

A Publication of CPLEA