Rental Investors: The GST Rebate Mixup

Investors who buy new residential real estate for rental purposes may be paying too low an amount on closing, because the developer’s price typically reflects a credit for a GST/HST rebate to which they are not entitled. The correct approach, which avoids the incurring of interest and penalties, is to (1) pay the purchase price plus full GST/HST on closing and (2) separately apply to the CRA for a rebate (of a different type).

New condominiums, townhouses, and houses are subject to GST (or HST in HST provinces). Partial rebates for the tax (up to $30,300 in Ontario) are available if the property is purchased for use as the buyer’s or a relative’s primary place of residence (new housing rebate, ETA section 254). There is also an equal rebate for new properties purchased for long-term rental (rental rebate, ETA section 256.2), which is intended to put rental housing in the same position as owner-occupied housing.

Most purchase and sale agreements for new real property assume that the buyer is eligible for the housing rebate and include the rebate in the stated purchase price. This inclusion is enabled by rules that allow the seller to credit the rebate against the tax due on closing. Builders are thus at a marketing advantage because they can advertise and sell properties at a lower (net-of-rebate) price than they otherwise would. The rebate application is typically submitted through the builder at closing, which means that the two-year application deadline will always be met.

Most investors who buy for rental are at a disadvantage. They are ineligible for the new housing rebate because they lack the requisite intention to use the property as their primary place of residence. They may qualify for the rental rebate, but there is no equivalent rule that allows the seller to credit the rebate at closing. As a result, the buyer must pay more than the stated purchase price on closing in order to cover the full tax, must apply separately for a rebate within two years, and must wait for the application to be processed. This process can create significant cash flow problems, especially for an individual investor.

What happens if a rental investor wrongly claims the new housing rebate? Even though the investor would have qualified for the rental rebate, the CRA can assess for the inappropriately claimed new housing rebate plus interest. The rental rebate can still be claimed within two years after the end of the month of closing, but the taxpayer may learn about the issue only through a CRA new housing rebate audit several years after closing.

One may ask why the CRA does not simply offset the rental rebate against a wrongly claimed new housing rebate—a solution that seems fair, since the rebate amounts are equal. Indeed, the CRA is expressly required to offset credits and rebates against assessments of net tax (subsections 296(2) and (2.1)) notwithstanding normal limitation periods. However, a rebate application technically does not result in a net tax assessment or an assessment of an unpaid amount, and so it is not entirely clear whether offset is required.

Simon Thang
Thorsteinssons LLP, Toronto
[email protected]

Canadian Tax Focus
Volume 6, Number 1, February 2016
©2016, Canadian Tax Foundation