Wednesday, September 14, 2005
The Goods and Services Tax (GST) and Real Estate: what You need to know.
When you buy a newly-constructed home, whether it is a single-family unit, a townhouse or a condominium, the purchase price is taxable. If you plan to rent to Tenants, the full seven percent GST is charged on the purchase price. If, on the other hand, you intend to use your acquired real estate asset as your primary place of residence, then you may qualify for a partial GST rebate depending on the sale price. For real estate costing CAD $350,000 or less you will receive a rebate of 36 percent of the GST paid to a maximum of CAD $8,750. This means that you will end up paying approximately 4.5 percent GST on the purchase price, as opposed to the full 7 percent. New housing selling for CAD $450,000 or more does not qualify for GST rebate.
To better illustrate different scenarios where GST is applicable, let's examine the following cases:
GST and the Land
Buyers of bare land such as builders and independent contractors may have to pay GST on the purchase price depending on who owns the land and what it is used for. For instance, when they build a new home on the land they will pay GST on the construction of the house minus any applicable rebate. The rebate would be the same as for a new home. That is, when the total value of the land and house is CAD $350,000 or less, the rebate would be 36 percent of the GST paid on both building and land up to a maximum of CAD $8,750. When, on the other hand, the total value of both building and land exceeds CAD $350,000 but is less than CAD $450,000 a proportional formula for calculating the GST rebate applies. As with the other new home purchases, GST rebates are not available for land and building valued at CAD $450,000 or more.
GST and the Resale of Real Estate Assets
There is no GST tax payable on the purchase price of a used residential property. Canada Customs and Revenue Agency (Revenue Canada) defines "used residential property" to include a previously occupied house, apartment, townhouse, vacation property or non-commercial hobby farm. They refer to 'used' as residential property occupied as residence before it was sold. "Used property" also refers to a recently built house that is substantially complete and has been sold at least once before you buy it. For example, if a new condo is purchased and then resold before being occupied, the resale price will be normally exempt from GST. A owner-occupied property is considered a residential property when the owner uses it mainly as his residence - not necessarily his primary residence. So therefore, if you are self-employed and you purchase a resale home that includes an office, the entire home still qualifies for the GST exemption. If, conversely, a owner-occupied home is not used mainly for residential purposes - for example a retail store with a small apartment on the upper floor - then only the residential portion is exempt from GST on resale. The non-residential portion of the purchase price is taxable. If you plan to purchase a resale home, the Seller will supply you with a certificate stating that the property qualifies as used for GST purposes. As with most taxes, there are exceptions to the GST rules regarding resale housing. For example, most sales of real estate property done by charities, non-profit organizations and public service agencies are exemp from GST.
GST and the Rent
GST is not payable - and not chargeable either - on residential rents. If, however, you employ the services of a property management company to rent your property, GST is charged for property management, repair and maintenance services.
To finish, GST is normally payable when the real estate transaction is completed at closing. In certain circumstances, GST is payable after completion on transfer of possession. For more information the Canada Customs and Revenue Agency maintains an extensive website at www.ccra-adrc.gc.ca .
Luigi Frascati
Real Estate Chronicle
