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GST REBATE TRAP ON RENTAL PROPERTIES

REAL ESTATE TAXATION

With the very hot housing market in Vancouver and across the Lower Mainland, individuals are turning more towards establishing rental properties across varying neighbourhoods to earn cash flow on their properties while they let their investments increase in value. We, at Pacific Chartered Advisors LLP, find that many people who are investing in the real estate market either through individual holdings or within a corporate structure are being caught off-guard by a little known technicality within the GST rebate system upon purchase of a new rental property.

The issue at hand is that many investors locally are purchasing new residential properties with the intent to use as a rental property, may actually be under-paying upon finalizing the deal. The reason for this is that developers will often include a credit for a GST rebate in the final price which if the investor is buying for rental purposes they are not entitled to receive. The harm to the investor is that the CRA can assess for the inappropriately claimed new housing rebate plus interest and penalties. While many investors currently may not be faced with this problem, remember that the CRA may come back through a new housing rebate audit several years after closing.

For the average real estate investor this is often an honest mistake, as normally in most sale agreements the developer usually assumes that the buyer is eligible for the housing rebate and includes the rebate in the stated purchase price. The developer will often do this as it is to their advantage as it allows them to be more competitive in the marketplace and advertise the properties for sale at a lower price. For purchasers who are investing in rental real estate this places them at a disadvantage.

When you are buying new real estate with the intent to rent, under the Excise Tax Act of Canada (GST/HST) you are ineligible for the new housing rebate as you would not be using the property as your primary place of residence. You could qualify for the rental rebate, but unfortunately there is no ruling that allows a developer to include this credit in the final sales price as you must apply for the rebate after purchase. For you, as an individual investor, this is disadvantageous as you must pay for the property in full, separately apply for the rebate after purchase, and then wait for the application to be approved.

With the CRA scrutinizing even more frequently the numerous transactions that are occurring on a daily basis, it is important that the individual investor be prepared for any potential run-ins with the GST rebate. To avoid any unnecessary penalties, the correct approach is to pay the full price plus GST on closing, separately apply to CRA for the rental rebate after purchase and wait for approval.

While this approach is tedious and places more strain on your cash flow, it will also save you looking over your back and wondering if you might be subject to repaying that rebate plus interest and penalties down the road. As always, remember to consult a qualified tax professional with regards to your potential exposure.

 

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