GST Treatment of Builders and Purchasers

This discussion is related to the GST problems real estate builders and their customers face. Careful tax planning with a Chartered Accountant is necessary in all circumstances. Contact Keith Anderson CA at (780) 447-5830 if you need advice. 

Click HERE for background information on GST New Housing Rebate.
 

Determination of GST Status and Intent

The first step in determining what and how the GST should be applied to a particular transaction, is to determine what the GST taxable status of the purchaser is (i.e. non-registrants vs. registrants – both corporate and individual) and the intent of the purchaser on the use of the property.  

Non-Registered Status - Individuals

Normally the purchasers will be individuals purchasing the property primarily as a residence for themselves or a relative. In this situation the purchaser may qualify for the GST New Housing Rebate which can be either assigned directly to the builder, in which case the total purchase price is reduced by the amount of the rebate, or the purchaser can apply directly for the rebate without assigning it to the builder. For properties that cost up to $350,000, the rebate is 36% of the GST to a maximum of $8,750.  For properties that cost more than $350,000 but not more than $450,000 there is a formula calculation as follows:

($450,000 less Purchase Price)

___________________________  X  (lesser of $8,750 and 36% of the GST actually paid)

 $100,000

There is no rebate available for properties with a cost of more than $450,000.

In the event that the purchaser agrees to assign the rebate to the builder, the purchase price is then calculated as follows:

    Assumed Cost of Property      -                        100,000  (A)

    GST @ 6%                            -                           6,000

      Less: New Housing Rebate

      (If (A) is less than 350,000)

      (36% of the GST to a maximum of $ 8,750)      ( 2,160)

        TOTAL COST TO PURCHASER                   103,840

If the purchaser does not agree to assign the rebate to the builder, then the builder will charge the full $107,000, which includes the GST, and then the purchasers can then make their own application for the rebate.

In both situations, the form GST 190 E, (New Housing Rebate Application), will need to be completed and the purchaser signs the application. If the buyer agrees to the assignment, then the Rebate form must be filed with the Builders regular GST return. The builder claims the 6% GST charged and then claims the rebate on line 111 of their GST return.

Non-Registered Status – Corporations/Partnerships

In the event a non-GST registered corporation or partnership purchases a unit, the New Housing Rebate is NOT available to them and the full 6% GST is charged to the purchaser. However, the purchaser may qualify for the New Residential Rental Property Rebate if the intent is for the purchaser to act as a landlord and will rent it out as a residential property. It must be reasonably expected that the unit will be rented out for a period of at least 12 continuous months as a primary place of residence in order for the rebate to apply. The rebate can only be claimed by the purchaser and CANNOT be assigned back to the builder.

If the intent is for the non-GST registered corporation or partnership to make the unit available for commercial rent (as opposed to GST exempt residential rents), then the corporation or partnership is now making a GST taxable supply and the normal GST rules apply. If the commercial rent exceeds $30,000 in a consecutive 12 month period, the corporation or partnership must register for GST. If the rents are less than the $30,000, the corporation or partnership has the option of not registering for GST but may want to voluntarily register so that GST input tax credits on expenses can be claimed. Once GST registered, then the discussion under “registered status” below applies.

Registered Status

When the purchaser of the unit is registered for GST, the Builder DOES NOT charge the GST on the purchase price. The buyer self-assesses the GST on their GST return to include the GST charged. The builder’s responsibility in this type of transaction is to ensure that they obtain the GST Registration Number of the buyer. The GST status can be confirmed by the builder with CRA to ensure that the GST number is valid.

If the intent of the purchaser is to lease it out as a commercial property (as opposed to GST exempt residential rents), then the GST Input Tax Credit (ITC) on the purchase can be claimed on the GST return of the buyer which fully offsets the GST inclusion on the purchase (no net GST on the purchase).

If the intent of the purchaser is to rent it out as a residential property they will NOT be able to claim the full Input Tax Credit on their GST return but may qualify for the New Residential Rental Property Rebate discussed below. If they qualify for the rebate, the amount is claimed on line 111 of their GST return.

GST New Residential Rental Property Rebate

This rebate does not apply if the purchaser is an individual who purchases a unit for use as a primary place of residence either for themselves or a relative. In this case, the New Housing Rebate should be claimed.

In order to make the New Residential Rental Property Rebate claim, the purchaser will file Form GST524. To qualify for this rebate the purchaser must act as a landlord with the intent to rent it out as a residential property. It must be reasonably expected that the unit will be rented out for a period of at least 12 continuous months as a primary place of residence in order for the rebate to apply. The value of the rebate is the same as the New Housing Rebate discussed above. Consequently, there is no rebate for purchases over $450,000.

 Example

If the builder retains a unit in the complex and leases it out to an individual for residential purposes, then the builder will self-assess as having acquired the unit at its Fair Market Value (FMV) at that time. The builder will self-assess the GST on the purchase price (i.e. 6% x FMV) and will claim the GST on their GST return. Because the unit qualifies as a residential unit and that residential leases are exempt from GST, the builder cannot claim the full Input Tax Credit on the purchase. But, they can apply for the New Residential Rental Property Rebate if they qualify.

Conversely, if the builder acquires a unit for commercial lease, then it will be required to collect the GST on the commercial rental receipts and will also be able to claim the full GST on the acquisition of the unit.   

GST and Deposits Received

Under the GST Act for the purposes of determining when the tax is payable, a deposit is treated as security for the performance of a future obligation. These deposits may or not be refundable.

A deposit is NOT treated as consideration paid for a taxable supply until the supplier applies the deposit as consideration for the supply (i.e. applied against the purchase price), unless the deposit is forfeited, in which case the company will be required to remit GST equal to 6/107 of the forfeited deposit.

Example

On January 30^th, 2005 and individual and the builder enter into an agreement for the sale/purchase of one of the units, and at that time the builder receives a $ 5,000 deposit, with the remaining balance to be paid on June 30^th, 2005, when ownership and possession of the unit transfers to the purchaser. The deposit in this example will be applied against the consideration for the sale on June 30^th. The liability for the GST in respect to the sale occurs on June 30^th. In the event that the deposit received is forfeited and not returned to the individual, the company will then remit the GST on the deposit (6/107 x Deposit).

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