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 firstname.lastname@example.org for help with your GST/HST issues.