A residential real estate project in mind? Be aware of the GST/QST costs!

GST/QST poses many challenges to businesses and individuals interested to invest in real estate. These challenges can be especially costly in the residential sector. The risk? Having the project’s profits eaten away by an unforeseen GST/QST cost!

Beware of a few instances where non-recoverable GST/QST costs may occur: construction of a new residential building, substantial renovation of a used residential property, land flips, and change of use of a building.

I. Construction of a new residential building

Newly-built residential buildings are generally taxable. Consequently:

• If the builder sells the new unit(s), it must collect GST/QST. The builder may credit the New Housing Rebates to the purchaser for a portion of the GST/QST paid, if all applicable conditions are met;
• In the case of a rental building, the builder must generally self-assess the GST/QST calculated on the fair market value (“FMV”) of the entire building as soon as the first unit is rented. The builder may be entitled to claim new rental rebates for a partial refund of the GST/QST, if all applicable conditions are met.

II. Substantial renovations

A building that is “substantially renovated” is considered a new building for GST/QST purposes. Thus:

• If the building is sold after the substantial renovations, GST/QST apply; or
• If the building is leased for residential purposes, after substantial completion of the renovations, the owner will be required to self-assess the GST/QST calculated on the FMV of the entire property.

The tax authorities consider that a residential building is “substantially renovated” where 90% of the existing building, with the exception of certain structural components (the foundation, external walls, interior supporting walls, roof, floors and staircases), has been removed or replaced. The tax authorities do not only look at the relative costs of the renovations to determine whether a building was substantially renovated. In case of audit, the onus is on the owner to demonstrate that the substantial renovation threshold is not met.

III. Transactions on vacant land

Transactions on vacant land can be considered as business ventures, even when done by an individual. The resale may be taxable. Whether the purchaser can claim a refund of the tax paid depends on the use of the land.

IV. Change of use of a building

A commercial building that is converted to residential use is treated similarly to a new construction. The person planning to invest in such a project must take into account that there will be unrecoverable GST/QST costs associated with this operation.

Please contact a member of Crowe BGK’s indirect tax team should you need any assistance to confirm the GST/QST implications of your next investment in real estate.

About the Author:

Marie-Gabrielle Bronsard, M.Tax, is an Indirect Tax Manager at Crowe BGK.

Connect with her: [email protected]