Buying Investment Real Estate? Apply for the Correct GST/HST Rebate!

This is the first in a series of posts on the Goods and Services Tax/Harmonized Sales Tax (“GST/HST”) and real estate. Subsequent posts will cover bare trusts and joint ventures.  The rules for collection of GST/HST on real estate were covered in a prior case comment.

Condominiums at Toronto’s City Place development.

The robust real estate market in Ontario (and elsewhere in Canada) has attracted investors as well as persons buying properties for their own use. So it is worth noting a specific issue relating to Goods and Services Tax/Harmonized Sales Tax (“GST/HST”) rebates and rental investment real estate (“real property” in GST/HST parlance). New residential real property (houses, condominiums, townhouses, etc.) is subject to the GST/HST (13% in Ontario) but partial rebates (up to $30,300 in Ontario) are available if the property is purchased for use as the buyer’s (or relative’s) primary place of residence under s. 254 of the GST/HST legislation, the Excise Tax Act (“New Housing Rebate”). Generally, the federal part of the rebate is 36% of the GST up to a maximum of $6,300 once the total consideration reaches $350,000. The federal part of the rebate is progressively reduced above this amount until it reaches $0 for properties over $450,000. The provincial part of the rebate is 75% of the HST and reaches a maximum of $24,000 but is not phased out like the federal part. There is also an equal rebate for new housing purchased for long-term rental under s. 256.2 (“New Rental Rebate”).

However, rental property investors may be ineligible for the GST/HST New Housing Rebate that is included by default in most purchase and sale agreements because they lack the requisite intent to use the property as their (or their relatives’) primary place of residence. The problem is that purchase and sale agreements for new real estate typically assume that the buyer is eligible for the New Housing Rebate and factor it into a tax-included-net-of-rebate purchase price. This allows builders to advertise properties at a lower amount. This is enabled by rules that allow the builder to credit the rebate against the tax due on closing, giving the buyer immediate benefit of the rebate.

While investors who buy for rental may qualify for the New Rental Rebate, there is no equivalent rule which allows the builder to credit the rebate to the buyer at closing. As a result, individual investors must pay more than the stated purchase price on closing to cover the full tax, apply separately for a rebate within two years, and wait for the application to be processed by the Canada Revenue Agency (“CRA”) (the procedure is different if the buyer is required to self-assess, e.g., a GST-registered corporation).

Investors sometimes do not follow this approach because they are unaware or perhaps because it can create significant cash flow problems, especially for an individual investor. But the investor would have qualified for the equivalent New Rental Rebate anyway, so isn’t this just a matter of “No Harm, No Foul?” Unfortunately not.  CRA routinely assesses investors who it believes wrongly claim the New Housing Rebate instead of the New Rental Rebate. If the investor is within two years after the end of the month of closing, there is time to apply for the New Rental Rebate. However, if more than two years have passed, it may be too late.

Simon Thang, LL.B, LL.M (Taxation) is Toronto tax lawyer practising exclusively in the areas of Canadian sales tax (GST/HST, PST), and customs and trade. He is the principal of Thang Tax Law.