Are you a real estate investor? Perhaps a new condo or single family “home flipper”? In this post, we discuss the latest GST/HST as well as income tax rule changes that may affect you.
For GST/HST purposes, anyone who put a deposit down on a condo or other single-family home and signs a purchase agreement with a builder and then does not subsequently close on the purchase, will be affected by these new rules when they sell their interest to a third party. Where an assignment agreement is signed after May 7, 2022, these new rules will apply to such persons.
The impact of the rules to the first purchaser that paid the initial deposit and signed the purchase agreement with the builder, requires them to remit GST/HST to the CRA on a special return, when they sell their interest in the new property to a third party, who will ultimately finalize the purchase with the builder.
Income tax considerations
While this page focuses primarily on GST considerations, it is worth noting that the government of Canada generally considers income earned from “flipping” houses or condos as regular business income, which is subject to the flipper’s marginal (or corporate) tax rates. In certain circumstances, such as the example of ‘Joe Condo’ below, profits received from flipping a property may result in capital gains treatment (i.e. a 50% reduction in tax where the sale is coincidental to certain other factors and the flipper isn’t in the habit of flipping houses).
Budget 2022 introduced new measures that tax any profits from selling a property within 12-months of purchase as “business income”. Capital gains rates, and principal residence exemptions are not available unless the seller qualifies under one of the exemptions for life events. Exemptions include:
- A growing household
- Disability or illness
- Change of employment (like Joe Condo, below)
- Involuntary disposition.
Each circumstance is different and depends on the specific facts of the circumstance. We recommend reaching out to us if you find yourself in this position.
Consider the following example of Joe Condo who has put a $5,000 deposit down with a Toronto area builder, for a new 2-bedroom condo that Joe intends to live in once the construction is complete in a year from now. The condo’s purchase price as listed by the builder is $450,000, so Joe won’t be able to claim the GST new housing rebate from the builder due to the purchase price exceeding $450,000, but he may qualify for a rebate for the Ontario HST portion (i.e. 8%) of the total tax included in the price.
Six months before Joe takes possession of his new condo, his employer offers him a promotion to work in corporate headquarters in the US. Joe can’t pass up this opportunity, so he accepts the offer and will need to sell his interest in his condo, or if not, he may be able to rent it out as the rental market is robust. Toronto condo sales have also been soaring along with prices and Joe’s realtor friend thinks the value is now closer $500,000.
Joe lists his interest in the condo on Toronto MLS for $40,000 and has several interested buyers in the first week who want to take over the purchase agreement from Joe with the builder. Two of the buyers get into a bidding war and Joe settles on a final offer on June 15, 2022 with one of them for $50,000 which includes Joe’s $5,000 that he assigns to the new buyer. MLS listings are deemed to include “any applicable” GST/HST unless stated otherwise.
In drafting the assignment agreement, Joe gets some advice from his CPA friend that knows how these new rules work and so Joe ensures to disclose to the new buyer, that the $50,000 includes Joe’s original $5,000 paid to the builder. By doing this, Joe saves some HST as the new rules allow such deposits to be excluded from the HST calculation. If Joe had not done this, he would owe HST included in the full $50,000.
In this case, the new GST/HST rules related to scenarios like Joe’s, will require Joe to remit to the CRA, the 13% Ontario HST ($5,177) is deemed to be included in the $45,000. The amount is equal to the fraction of 13/113 multiplied by the $45,000 that Joe received from the third party, net of the deposit that does not include HST.
The new buyer takes over Joe’s purchase contract with the builder and will pay the $450,000 (including HST) that Joe originally agreed to pay the builder, when the condo is finished and the builder gives ownership and possession to the new buyer. The HST of $51,770 included in the $450,000 the builder receives is remitted to CRA on the builder’s regular GST return. Joe will do the same for the $5,177 of HST he is deemed to have collected, on a special return for people just like Joe.
From a sales tax policy perspective, the new rules solve a couple of issues for people like Joe. They simplify the analysis of whether Joe needs to register for GST/HST and remit the “applicable tax”, although Joe isn’t too happy about handing over $5,177 to CRA. It also solves a potential perceived or actual tax loss by the government under the pre-existing rules, whereby many times tax would not generally have been required to remit GST/HST in Joe’s circumstances. However, the analysis as to whether or not Joe had to register and remit the HST under the previous rules, could be arduous and not always straightforward.
The new rules accomplish what would happen if Joe’s builder just allowed him to back out of the deal and refund his deposit and then re-list the new condo for $500K, given that Joe was able to fetch that purchase price when he listed it on MLS. If the builder were to do this and had sold it on the MLS to Joe’s third-party buyer, the builder would also remit to CRA, HST equal to $500,000 multiplied by the 13/1135 fraction or $57,522.[/column] [/intro]
Some people may call the new rules a “tax grab”, but arguably it is an “equity” and “level playing field” concept as well. This is particularly true for builders that either sell to folks like Joe or that sell new and taxable residential property to other investors or landlords who may not be registered for GST/HST (or believe they don’t have to) like the builders are. If the builders have to remit GST/HST, then investors and flippers should be on the same sales and income tax footing, particularly given that they’re effectively competing in the same housing markets.
This is just one example of where new home builders are faced with unique GST/HST issues for themselves and their customers, whether they be the Joe’s of the world, investors or landlords. In future articles, we will tackle some of the other more unique, but problematic GST/HST situations that builders face in single family and multi-family new construction projects.
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