Sales Tax Issues in Real-Property Transactions

By Matt Beck, CPA, CGA; published in CPABC in Focus
Published: January/February 2016

Real-property transactions in BC are complex, and they’re becoming increasingly valuable. Sales tax rules add complexity to a wide variety of real estate sales and leasehold arrangements. Adding to this complexity is the fact BC’s unique real estate rules—such as those related to stratified leasehold interests and assignments of lease—seldom align neatly with the federal Excise Tax Act (ETA), which means that each must be carefully reviewed in the context of sales tax treatment.

This article covers GST basics, available GST rebates, some special cases, and the documentation requirements with respect to real-property transactions.

GST basics

Unless it is specifically listed as exempt in schedule V of the ETA, the sale of real property is taxable. Exemptions are quite limited, but include:

  • Used residential complexes (unless substantially renovated);
  • Personal-use residences or land (unless the land is subdivided into three or more parcels); and
  • Residential land, such as a residential land lease or trailer park.

With respect to bare land, the GST circumstances vary as follows:

  • If sold by a corporation or partnership, bare land is always subject to GST;
  • If sold by a non-profit entity, the land is usually GST-exempt; and
  • If personal-use land is sold by an individual or trust, it is generally GST-exempt.

For GST purposes, bare land also includes any “excess land” associated with a residence, which is defined as any land not reasonably necessary for the enjoyment of the residence. The Canada Revenue Agency (CRA) administratively limits the necessary land to one-half of a hectare, subject to the minimum lot size possible in the area.

It is important to note that, generally, the GST registration status of the seller does not affect a taxable sale. Whereas sales of tangible goods and capital property by an unregistered vendor are generally not taxable, the nature and use of real property usually dictates whether a sale is subject to GST.

There are scenarios wherein a vendor who is not registered may still make a GST-taxable sale of real property. To prevent cascading tax on such properties, unregistered vendors may claim a rebate for the GST on the cost of the property using GST form 189—“General Application for Rebate of GST/HST.” The GST rebate will be the lesser of the actual tax embedded in the cost of the property or the amount of tax collectible on the current sale.

Available GST rebates

The following rebates are available for any property valued up to $450,000. The rebate is equal to 36% of the GST paid on a property up to $350,000, and diminishes to 0% at a property valued at $450,000 or above. All new housing rebate applications must be filed within two years after the end of the month in which the tax first becomes payable.

Builder-built

A constructed home that is sold to an individual who intends to occupy it as a primary place of residence is eligible for a new housing rebate. This rebate can be assigned to the builder/developer at the closing of the sale, which will permit them to collect GST as low as 3.2% on the selling price (for example, 5% - {36% x 5%}). Otherwise, the purchaser will have to pay the full GST and file a separate rebate claim.

Owner-built

Where a home is constructed by contractors on the homeowner’s land, a new housing rebate is also available; however, this rebate must be claimed directly by the homeowner—it cannot be assigned to the contractor.

Rental property

The “New Residential Rental Property Rebate” provides a rebate to long-term residential rental properties where the property is used as an individual (tenant)’s primary place of residence.

Note: For a residential rental property with multiple units, the landlord’s rebate is determined by reference to each qualifying residential unit in the complex.

Some special cases

Listed below are some of the less common transactions for real property in BC:

Mixed-use buildings – residential/commercial

A mixed-use building that contains both commercial and residential units is treated as two separate properties for GST purposes.

If the residential portion of the building is comprised of stratified or condominium units, the GST treatment of each individual residential condominium unit is determined separately. If the residential portion of the building is a multi-unit complex, it is treated as one multiple-unit residential complex.

Resort properties and vacation homes

Resort properties and vacation homes, including those involving fractional ownership, timeshare facilities, and/or memberships, are not specifically dealt with in the ETA. Rather, each transaction has to be considered carefully in light of the current GST rules, which are limited in effect to residential, personal-use, or commercial real-property developments.

Moreover, the application of the GST rules is more difficult where a proration is required based on a split for personal and investment/short-term rental purposes.

Used residential properties – change in taxable status

Where a GST registrant buys a used house GST-exempt, tears it down, and then sells the bare land, the resale of this land may be taxable. In such cases, the registrant will be able to claim input tax credits on the cost of demolishing the house; however, where the purchaser is intending the land for personal use, this will create an unfavorable tax outcome, forcing them to pay unrecoverable GST.

To avoid this scenario, the seller is best advised to resell the property with the used house on it, potentially with a contract in place for the removal of the structure. The sale of the whole property would then be GST-exempt, and only the demolition contract would be taxable.

Purchase of a house for removal and relocation

If a house is being sold without the land (for removal and relocation), the sale is not considered to be the sale of a residential complex. Further, the house is not considered to be real property, unless it is being relocated within the same legal description (lot) in which it was previously situated. The sale of a house for relocation to a new lot is generally subject to GST and PST.

Assignment of purchase and sale contract

Historically, CRA has been known to assess GST on assignment fees received following the resale of presale units prior to the completion of construction; however, GST does not apply to these assignment fees in most cases. Where the original purchaser was not a “builder” of the underlying residential complex and the purchase agreement was entered into for strictly a personal-use purpose, the assignment of the agreement is GST-exempt.

Farmland

The sale of farmland is generally subject to GST, and if the land is being purchased for personal use, a non-recoverable GST payment can add significantly to its cost.

Documentation requirements

As with all GST reporting, documentation is key. There are numerous special clauses that should be included in purchase and sale agreements, such as a certification of exempt sale or the assignment of a new housing rebate. Some other examples:

GST registration – certificate by purchaser

Generally, if a taxable sale is being made to a GST registrant, a vendor is not required to collect GST. To support the position, however, a vendor must obtain the purchaser’s GST registration number and ensure that the number is valid.

Incorrect statement of GST exemption

Vendors often rely on the “used residential housing” or “personal use property” exemptions. Where a vendor provides a purchaser with a certificate indicating that their transaction is not subject to GST, but this status is later determined to be false or incorrect, section 194 of the ETA provides the purchaser with some protection.

GST-included vs. GST-extra pricing

Unless explicitly noted, a GST-taxable sale price is considered “GST-extra” pricing, which means that GST must be added to the agreed purchase price. 

Each transaction is unique

This overview does not provide an exhaustive list of possibilities. Each real-property transaction involves a distinct set of facts, which can necessitate significantly different sales tax treatments. If you have any doubts or questions about the taxability of a specific transaction, it is best to contact your sales tax adviser.

Matt Beck is a manager with Grant Thornton LLP in Vancouver. He specializes in sales and indirect tax planning and compliance services, with a focus on the real estate, health care, education, and not-for-profit sectors.