It can be a confusing and frustrating task trying to figure out which real estate deals the 5% goods and services tax (GST) applies to.
There are some examples that are not in question for paying GST. These include new construction from a developer, a brand-new lot, and a new condominium or house.
The grey areas arise with the following circumstances:
- A significantly renovated home (75% or more of the home was renovated)
- The criteria for these homes are difficult as each house and renovation is different; tough to get a straight answer
- GST will probably apply if there is an extension/square footage is added to the home or if it changes the exterior
- GST will also probably apply if the owner is in the business of buying a home and significantly renovating/flipping it (especially if you do not move into the property)
- In new construction, sometimes not only the first owner but also the second owner must pay GST
- This depends on the first owner’s intent for the property
- GST may or may not apply to land purchases
It is important to note that the intent of the owner is crucial in determining whether GST must be paid.
For example – let us say that Bob buys a new construction condo in 2015 that completes in 2019.
Once completed, he decided that he wants to sell. In the time that it took for the condo to be built, the condo’s worth increased. If Bob’s initial intent was to have it as his primary residence, then the GST does not have to be paid on the increase in price. If his intent was to sell for a profit, then GST is applicable.
If Bob were to have a tenant rent out his condo for a year and claim it as an investment property, then that can change whether the GST must be paid. However, be careful with this as if it is done too often, there could be consequences. The longer the unit is an investment property, the better.
This is only one scenario with relatively little information – every real estate deal can have its own challenges, so it is best to seek out an expert who can help guide the transaction properly.
- When searching for properties, look at how the property is represented and if it states whether the GST has been paid or not.
- In deals where it is unknown if GST must be paid, real estate agents should ensure that a GST clause is put into the contract so that it is the buyer who is obligated to pay the taxes. This stops the seller from proactively paying the GST, and instead puts the responsibility on the buyer who is less likely to pay it if deemed unnecessary.
In any circumstances where it is unclear whether the buyer will have to pay GST, it is beneficial to talk to an accountant or someone who is an expert in the tax field. They will ask all the necessary questions and help navigate the process. Real estate agents will do their best to help their clients, but they may not have the expertise for each specific situation.
Listen to The Garbutt+Dumas Real Estate Podcast: The Grey Area of GST in Real Estate episode to listen as James and Denny talk about their experiences with the goods and services tax in their property deals.
Do you have questions regarding when to pay real estate taxes, investment properties, the fine print in contracts, and what a significantly renovated property is? We would love to hear from you – contact us and we can help you with some of the specifics.