GST/HST on Real Estate Development

Due to continuous demographic, technological, environmental, and social changes, Canada is undergoing constant urbanization. This process of urbanization helps Canada’s real estate market, which is currently attracting many real estate investors and developers. This article discusses the GST/HST rules that are applicable to a “builder” of real estate.

Builders

For GST/HST purposes, even though a “builder” is generally an individual who constructs new or substantially renovates housing for sale, one does not have to physically do the construction or substantial renovation himself/herself to be considered a builder for GST/HST purposes. For example, a person who purchases a new house (that was not previously occupied) for resale is also considered to be a builder. As a supplier of newly built or substantially renovated houses (taxable supplies), a builder may be subject to collecting GST/HST upon sale.

GST/HST

The GST/HST is a tax that applies to most supplies of goods and services made in Canada. The GST/HST also applies to supplies of real property (for example, land, buildings, and interests in such property).A business must register for the GST/HST if it provides taxable supplies in Canada and is not a small supplier (i.e. total revenues are below $30,000). If you are a GST/HST registrant, you generally have to charge and collect the GST/HST on taxable supplies (other than zero-rated supplies) you make in Canada and file periodic GST/HST returns to report that tax. For more information on GST/HST in Canada, take a look at this article on do I have to charge GST and HST on the sale of goods to another province.

Input Tax Credits (ITCs)

Builders can also claim input tax credits on their periodic GST/HST return to recover GST/HST paid on the acquisition of supplies during construction. However, if the business’s gross revenue exceeds $10 million, the provincial part of the ITC may be limited.

Substantial Renovations

For renovations, GST/HST rules vary depending on whether the renovations are substantial or not. A substantial renovation occurs when all or substantially all (ex. 90% or more) of the interior of a building (excluding particular structural parts such as roof, floors, etc.) are removed or replaced. As well, when a building is converted from non-residential to residential use, the building is also deemed to have been substantially renovated, regardless of how much work has been done. When a GST/HST-registered builder has substantially renovated a house for sale, GST/HST is payable to CRA on the sale price and GST/HST paid on costs incurred, including related selling expenses, is recoverable as an ITC on the GST/HST return.  Renovations to basements can also be claimed, for more information consult this article on claiming basement renovation costs.  

Non-substantial Renovations

When a renovation or repair has been made to a previously occupied home which is not significant enough to be classified as a substantial renovation, any subsequent sale generally qualifies as GST/HST-exempt, only if the owner did not claim ITCs against original improvements and repairs of the house.

However, when a developer makes a non-substantial renovation to a property it owns in the course of a business of developing supplies of real property, a special self-supply rule applies to partially tax the value added under the renovation. This tax is self-assessed by the builder by calculating the renovation costs that would be included in the builder’s adjusted cost base for income tax purposes. Certain costs are excluded from this self-assessment, such as interest and other financial services, and renovation costs on which GST/HST was paid. The self-assessed tax is required to be paid at the earlier of the date of completion of substantial renovation (i.e. 90% or more and the date of transfer of ownership of the property.

GST/HST Charged on Sale to Customer

As the next step, when the newly constructed or substantially renovated housing is sold to a customer (taxable supply), the sale can be subject to GST/HST.Generally, HST applies to a taxable sale by a builder to a customer of newly constructed or substantially renovated housing in Ontario on or after July 1, 2010. However, the provincial part of the HST does not apply to a grandparented sale where a written agreement of purchase and sale had been entered into before June 19, 2009, and both ownership and possession transfer to the purchaser under the agreement after June, 2010.

GST/HST New Housing Rebate

If one builds or substantially renovates a housing that is not for resale (i.e. not in the business of supplying new constructed or substantially renovated housing), the above GST/HST rules will not apply.For instance, if one develops real property for his/her principal residence, he/she will not file a GST/HST return to claim ITCs for GST/HST paid on expenditures incurred during construction. Rather, he/shewill claim the New Housing rebate (if eligible) by filingthe New Housing Rebate Application for Owner-Built Houses. More information on the GST/HST New Housing Rebate is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/gp/rc4028/README.html . The rebate will result in refund of portion or all of GST/HST paid during construction/acquisition.

If the property is newly constructed or substantially renovated for residential rental purposes, the GST/HST New Housing rebate is not applicable. Instead, the builder may be eligible for GST/HST New Residential Rental Property rebate. More information is available regarding this rebate can be found in this article on what is the GST/HST new residential rental property rebate. Real estate development is a rapidly growing business that is currently appealing to many investors and developers. In order to be in compliance with the CRA and Income Tax Act laws, it is critical to be aware of the GST/HST rules which real estate development may be subject to.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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