GST/HST issues surrounding building multi-unit residential complexes are questions that have a large impact on cash flow and costs. Savvy real estate investors and builders coordinate the intricacies of GST/HST issues with their real estate accountants as a matter of course to avoid surprises. Builders and investors must consider at least three GST/HST areas when constructing a residential complex with three or more units:
- Recovering the GST/HST while constructing the building
- The self-assessment of GST/HST at the time of substantial completion
- Claiming the New Housing Rental Rebate
1) Recovering the GST/HST Paid During Construction
Cash flow is a key consideration when building multi-unit residential projects. GST/HST can be a part of cash flow management. When you are constructing a new multi-unit residential complex or substantially renovating a residential complex, you are considered to be a builder. As a builder, you can choose to register for the GST/HST and claim back the tax paid on construction costs as they are incurred. Depending on the size of the project, you will want to consider the frequency of filing a GST/HST return. Generally a quarterly filing is a good choice so you can receive your refunds faster. At the time of registering for the GST/HST, you must elect to file quarterly otherwise the filing frequency will default to annual filing.
When you file the first return it will likely be in a refund position. The Canada Revenue Agency is likely to request support before approving the refund. To claim back the GST/HST paid on costs, you must ensure you meet the documentation requirements. This is the number one audit review point for CRA. To get your money the following information must be present:
Once the first refund has been approved any subsequent returns should be processed relatively quickly.
2) Self-Assessment of the GST/HST at the time of “Substantial Completion”
When construction of a new multi-unit residential complex has reached 90% completion, and the first tenant has moved in, there is a deemed sale and purchase of the property. The significance of the deemed sale is that a builder must self-assess the GST/HST on the fair market value of the complex at that time. This is referred to as “reaching substantial completion”. The purpose of the self-assessment is to level the playing field from a financial perspective between a builder and a person that purchases a new complex without being considered a builder. Ensure that you get a valuation based on a date that is at substantial completion –not based on what the bank will lend or the value of the building when it is complete.
Reporting of the self-assessment must be completed on the next return to be filed by the builder and payment will be due by the due date of the return. Once substantial completion is reached the builder is not entitled to recover any of the GST/HST paid to complete the complex. Any additional tax becomes part of the capital cost of the complex.
Up to this point, the process is the same no matter where you live in Canada. When you are constructing a complex in a province where the HST applies the numbers involved can be significant. If only GST applies, the cash flow and timing is not as significant. However, if you do not consider the implications before construction begins, the GST/HST can be a surprise.
3) GST/HST Rebates
The federal GST/HST rebate allows for some relief of the tax paid on the complex where the fair market value of units within the complex is under $450,000. A rebate is available to a maximum of $6,300 or 36% of the GST payable on a unit that is $350,000 or less. Where a unit has a value between $350,000 and $450,000 the rebate is clawed back. For a unit with a fair market value in excess of $450,000, no federal rebate is available.
Ontario is the only province that offers a partial rebate of the provincial component of the total tax paid on newly constructed rental properties. A builder that qualifies for the federal rebate will qualify for the provincial rebate. The provincial rebate is calculated as 75% of the 8% paid on the self-assessment to a maximum of $24,000 per unit. The difference with the provincial rebate is that there is no claw back of the rebate once the maximum is reached.
Deadlines are critical. A builder has up to two years to file for both the federal and provincial rebates. These deadlines are strongly enforced by the CRA and supported by numerous court cases. CRA reviews every rebate application so it is imperative to be accurate and timely in the information you provide to support the rebate applications.
(Note: Read more details on GST/HST rebates.)
Scott Merry, CPA
Senior Manager, Indirect Tax
You can contact Scott and his team at smerry@bdo.ca for help with your GST/HST issues.
Great explanation of a complex topic.
I have a question: if a builder experiences financial difficulty, and has to sell the building before substantial completion:
1) Is HST payable on the sale price?
2) Would the builder still be eligible for rebates?
Thanks!
Where a builder sells a building before substantial completion HST is payable on the sale price. If the purchaser is registered for the HST and provides evidence of the registration the purchaser would self-assess HST.
The New Residential Rental Property Rebate is available at the time of substantial completion and first occupancy, so the new buyer is entitled to the rebate if they still own it at that time.
Scott
Hello,
I had a few questions about a multi-family rental building.
– Does this apply to rental buildings or only to units that are being sold?
– When you refer to “substantially renovating a residential complex”, is there a minimum amount required to be spent on the renovation or is it a percentage of the value of the complex. For instance, if completely renovate an apartment (new kitchen, bathroom, windows, etc …), can we apply for the rebate? How about if we repave the parking lot?
Thank you in advance for your help.
These three considerations apply equally to rental buildings that are being constructed by a real estate investor and rented by the same person as they do for a property being sold. At the point of 90% completion, there is a change in use causing a deemed sale.
The term substantial renovation refers to the extent of work completed on the existing unit, the Canada Revenue Agency looks to see if 90% or more of the unit has been renovated, excluding exterior and supporting walls. Another point of consideration is what constitutes a unit, for example a building under one title (an apartment building) would have to have 90% or more renovations completed on the entire building to qualify. In contrast a condominium complex, each unit has separate title and so each unit within the building would be treated as a unit.
Repaving a parking lot would not qualify for a rebate.
Scott
Hello,
I purchased a condo last year with the intention to have my son leaving in it for a while after university graduation. However he will not move back home as he pursues a carrier somewhere else. I have decided to rent the condo. I became aware I should re-pay the HST rebate. How do I proceed?
Hello,
I purchased a condo last year with the intention to have my son leaving in it for a while after university graduation. However he will not move back home as he pursues a carrier somewhere else. I have decided to rent the condo. I became aware I should re-pay the HST rebate. How do I proceed?
Thanks for your feedback.
Hi Anton,
Technically you should still be entitled to the New Housing Rebate as your intent was for a family member to live in the condo, subject to all other requirements being met. However, there have been challenges by the Canada Revenue Agency on whether that was the intent from the beginning, it is hard to prove intent.
There should still be a rebate available to you as long as no individual has lived in the condo prior to the renters taking possession. Given there is a two year limitation on filing a New Residential Rental Rebate Application my suggestion would be to prepare and file a NRRR with the Canada Revenue Agency attaching a letter outlining why you are filing this rebate application.
We would be happy to work with you to prepare and file the documents.
Scott Merry
smerry@bdo.ca
I am constructing a new apartment building costing me $10m. Can you provide me with the net HST that I would be required to pay for the entire project?I have different views from my accountants.
.1_ Initial HST minus what I claim back
.2) Self assessment HST…I assume this is the difference between cost and value after construction. Let’s assume after construction the value is $12m
.3) The amount of Rental rebate. I will be paying 15%
When constructing an apartment building you are defined to be a builder for HST purposes. Builders are entitled to claim all the HST as an input tax credit on all costs directly related to the construction of the building up to substantial completion (see below), engineering costs, land surveying, labour and materials, etc.
The self-assessment of HST at the time of substantial completion is based on the fair market value of the property at the time of substantial completion. You want to pay attention to the timing of substantial completion, there are two conditions that must be present for this to occur. First is the first tenant must have moved in and second the building must be substantially complete (generally referred to as 90% complete). As an example, if you are constructing a four story building, the shell is complete, floors one and two are ready for occupancy and the first tenant moves in, self-assessment is not required at this time because floors three and four are not substantially complete. As a caution there are also provisions that say you cannot unduly delay the final construction to avoid paying the HST.
The amount of the rebate will depend on the value of the units within the building and which province you are contructing the apartment.
Scott Merry
Partner, Indirect Tax
BDO Canada LLP
Hi Scott,
Thanks for the article, after hours of research, your article seems to be the most concise on the subject. I have a question:
I am the builder of a multiunit (2 rental units) complex but the appraisal came out to be fairly close to the cost, therefore the difference between the ITC’s and the Self-assessed HST is less than the rebate amount (qualifies for ON rebate only), making it appear I am actually collecting back more HST than paid. Is this possible?
Thank you.
Yes it is possible to look like you are getting more back but in fact you are not. You have to remember you already paid HST on the materials and services you purchased to construct the property. The claiming of ITCs related to the purchases brings you back to zero HST paid, then you self-assess HST and claim a rebate, the difference between the self-assessment and the rebate is your HST cost.
Scott Merry
Great Article Scott.
We are building a rental building in Ontario under the government’s Initiative for Affordable Housing program.
We are contractually obligated to offer units at below market rents and to residents who qualify by reason of income (or lack of).
Aside from the impact on valuation this restriction has, do you know of any other rebates that may apply in reducing the HST exigible when we self assess, or just the standard 75/36 rebates? We are NOT a non-not for profit organization. Thanks
You’re welcome and thank you for the feedback. Based on your post it would appear you have a very good understanding of the HST as it relates to the construction of new residences that are rent-geared-to-income. Unfortunately there is nothing more that can be done to reduce the HST cost.
Regards,
Scott
Does this apply when it’s a single family dwelling (taxable self supply)?
These three steps do also apply where a single family dwelling is being constructed. Where a “residential unit” (single residential unit or a condo unit) is being constructed for purposes of renting the unit under a long-term lease there is a requirement to self-assess the HST on the fair market value at the time of substantial completion. The key point to consider when constructing residential units is to determine if you are a builder. In simple terms a builder is defined to be a person that is constructing residential units for purposes of earning income on those units.
Regards,
Scott
Hi Scott
If I construct a senior’s residence (independent supported living) am I correct in assuming this is deemed a multi-unit residential property and that I will need to remit the self assessed HST upon substantial completion.
Upon completion the intent is to operate the senior’s residence and rent out the various units to seniors.
Will I be able to recover any of the self assessed HST paid with respect to the construction as input credits on future HST returns? Or is the self assessed HST a sunk cost that is non-recoverable?
Thanks
Hi John,
You are correct – the construction of a senior’s residence is considered to be a multi-unit residential complex and a self-assessment of the HST will be required at substantial completion.
A portion of the self-assessed HST should be recoverable, depending on the nature of the organization and the value of the units within the complex somewhere between 60% and 70% of the HST should be recoverable through a rebate application.
We’d be pleased to assist in the process should you require assistance.
Regards,
Scott Merry
Partner Indirect Tax
BDO Canada LLP
519-622-7676
I plan to build a residential complex but I am afraid that I will not be able to sell all the units when completed. I want to rent out the unsold units and sell them later. It sounds like I have to self assess at 90% complete??
Hi Kevin,
As soon as the units have a change in use from newly constructed inventory to a rental unit there is a deemed sale or change in use, that change in use will trigger a requirement to self-assess the HST on the fair market value of the unit at that time. The short answer to your question is yes.
Scott Merry
Hey I was wonder if I am building 3 units, so a triplex
would a rebate be applied per unit? the same way you have to pay development fees per unit. Secondly is there a number I can contact you on?
Hi Tony,
Scott can be reach at smerry@bdo.ca or 1-519-622-7676 Ext 1957. I will pass along the rest of your question to him as well. Thank you!
Hi there, if I am building 2 towers (with 1 building permit and 1 contract with the contract), and one of the towers is completed in 2020, even if there will be partial occupancy permit granted for the first tower, since the second tower will not be completed until next year, is it correct that I only need to self-assess the GST when the two towers are substantially completed? Thanks
That is a great question and has a number of components that should be considered when making the determination when HST applies. It is important to review the contracts and other supporting documentation to conclude on the application of HST.
Regards,
Scott