In one of our previous articles we highlighted an area of GST compliance with regards to the rental rebate and how it might affect the average Joe. Given recent provincial regulation with regards to shadow flipping and the new 15% tax on foreign buyers, one would think that it is just a matter of time before a large host of tax compliance issues start making their way into the news. One of these areas will be GST compliance on the sales of assignment fees of contracts for real property by individuals and corporations.
To enjoy the surge in market prices a common practice by individuals and developers in recent years has been to sell or “flip” the rights of a property to a third party to turn a profit. For individuals, this normally has involved the purchase of a condo unit where a deposit is made on the pre-sale of the property and then after a few months to recognize the gain, the contract is sold to a different buyer for a fee and recovery of the deposit. What most individuals do not realize is that the “gain” or “fee” portion of the sales price is subject to GST as the transaction involves real property as defined under both the Excise Tax Act and Income Tax Act, even if the unit is not finished. This same concept applies to contracts for bare land, commercial and new residential real estate where GST is applicable in normal cases, thus catching many developers and corporations under the same obligation.
Granted, to the average real estate investor the above may not be anything new, but consider that the CRA is more likely to deem that you are obligated to pay GST on the entire value of the sale and not just the “fee” or “gain” of the assignment and now you have a serious tax liability on hand. The harm to you is that you would essentially be paying GST on your deposit for the property and after numerous flips on a single property there exists the potential for double taxation.
A recent court case Casa Blanca Homes Ltd. v. R. in 2013 directly addressed this issue whereby Casa Blanca argued that they should not have to pay the GST on a recovery of their initial deposit as it would not fall under the definition of a taxable supply under the Excise Tax Act but rather the definition of a financial instrument which is exempt from GST. The Tax Court of Canada found Casa Blanca correct in that it should only be subject to GST on the taxable supply portion of the assignment fee and not the initial deposit which also comprised the sale price.
Unfortunately, despite the Court’s ruling, CRA has made it clear that if no formal documentation is apparent with regards to separation of the deposit and the fee on the sale of the assignment, it will still deem the whole sale subject to GST taking into consideration other factors. This makes it extremely costly to the taxpayer to appeal the decision.
The risk to individuals and developers, regardless of incorporation or not, is that the CRA is aggressive on assignments and will often look into GST compliance long after the transaction has occurred. This leaves you the taxpayer at a high risk with a large tax liability if the sale of an assignment fee was not properly documented for GST purposes. As always, remember to consult a qualified tax professional with regards to your potential exposure and if there exist still options to correctly report any previously unreported GST.
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