When a developer or builder advertises their housing, they do so under the premise that the “typical” buyer will be purchasing the house or condo as their primary residence, as such they reduce the “sticker price” of their properties by the amount of the GST HST Rebate. They are able to do this by having the purchaser “assign” the developer or builder the HST Rebate which they receive directly from the Canada Revenue Agency (CRA).
Individuals or corporations that purchase a property for investment purposes must pay the equivalent of the HST Rebate upfront, thus making the all-in purchase price higher than developers or builders advertise. In many instances buyers are unaware of this additional financial burden until it comes time to close on the rental property. Purchasers of investment properties, have the ability to reclaim most, if not all, of their GST HST Rebate, thus ensuring that property-buyers who purchase investment properties will most likely not pay more for the property than they would if they were buying the property as a primary residence.
Who Is Eligible For The New Residential Rental Property GST HST Rebate?
The New Residential Rental Property Rebate is made available to any landlord who purchases a new house or a condo for rental purposes. This allows the landlord to claim back most, if not all, of the HST Rebate once the property has closed and the landlord has secured a lessor for a period of one year.
The primary differences between the New Housing Rebate and the New Residential Rental Property (NRRP) Rebate is that with NRRP Rebate, the purchaser must pay the equivalent of the rebate upfront on the rental property and they are responsible for applying for the rebate, instead of the developer or builder handling the rebate on the purchasers’ behalf.
What Else Do I Need To Know?
Like the other rebate programs there are a number of specific rules, regulations, and deadlines that must be adhered to in order to qualify for the NRRP Rebate. The four key rules that Landlords need to understand are:
- Rental properties need to be occupied by a tenant that has signed a minimum one-year lease on the property;
- No one except the tenant should occupy the property before it has been leased;
- Rebate applications must be filed within two years of the final closing; and
- The rental rebate can only be claimed once the acquisition of the property has closed – interim closings do not qualify.
How Does Fair Market Value Affect My Rebate?
It is very important for purchasers of investment properties to understand that the New Residential Rental Property Rebate is calculated based upon the Fair Market Value (FMV) of the property at closing, while the FMV that is used by builders and developers to calculate the HST Rebate as part of the closing documents, is the FMV of the rental property for rebate purposes is the negotiated price minus HST. Given the time to complete some new residential developments, especially condos, this timeframe can be significant. In the recent past we were filing rebates for clients who had waited 8 years to close on a condo development. This increase in FMV could potentially reduce the amount of the NRRP Rebate that the purchaser receives.
The CRA defines Fair Market Value (FMV) as “the value of both the building and applicable land. It is normally the highest price that can be obtained in the real estate market between unrelated parties and should be comparable to the values of similar housing in the local real estate market. It does not include provincial land transfer taxes or any GST/HST that may be payable on the FMV.”
A property with FMV of less than $350,000 may qualify for a maximum Federal rebate of $6,300. A property with a FMV of more than $450,000 does not qualify for a Federal rebate. And properties between $350,000 and $450,000 will receive a prorated amount. Note that Provincial rebates do not use FMV to calculate the rebate amount.
For New Housing GST/HST Rebate’s the rebate calculation is straightforward. How the FMV is used to calculate the New Residential Rental Property GST HST Rebate is a little more complex. At the time of closing the builder’s solicitor will prepare a Statement of Adjustment which will calculate the HST Rebate that the purchaser must remit based upon the purchase price of the property minus the HST paid. This amount is used by the builder to calculate the rebate amount. A disconnect happens when the buyer submits their rental rebate application. The buyer needs to use the FMV of the property at closing which could be significantly higher than it was when the original purchase transaction happened. As a result your actual rebate could be lower than what you paid the builder at closing.
If you used the FMV as calculated by the builder, or even the actual price paid for the property, to file your rebate, your application will most likely be reviewed and the FMV amount will be adjusted to reflect a more realistic value. By not providing a sensible estimate of a current FMV you can expect significant delays.
What Happens if I Purchase An Investment Property & Say It Is My Primary Residence?
Our experience has shown that some purchasers have chosen to tell the developer or builder that the property that they are purchasing was their principal residence as opposed to an investment property. While this saves the purchaser the need to outlay the amount of the HST Rebate at the time of closing, it could lead to additional costs in the long run.
Given the complexity of the Canada Revenue Agencies (CRAs) systems there is a significant chance that the CRA will identify the property as a rental and note that the purchaser did not pay the New Residential Rental Property Rebate at the time of closing. At such time the CRA notes the anomaly, they will contact the purchaser to verify that the property is being occupied as their principal residence. If the purchaser is unable to do so then they will required to pay the New Residential Rental Property Rebate, plus they will be assessed a penalty and interest.
We have helped numerous Landlords that may have found themselves in this situation and we can help you minimize the costs associated with having to reclassify your GST HST rebate. Contact us, we would be happy discuss your situation further with you.
If you had to borrow against your mortgage to pay the GST HST Rebate, you can use the proceeds from the GST HST rebate to eliminate the borrowing, or reduce the principal amount of the mortgage as long as you have taken out a mortgage with a “prepayment” option.
Do I Qualify For The New Residential Rental Property Rebate?
When you purchase a new rental property, you must pay GST HST Rebate upfront and then apply for the rebate from the Canada Revenue Agency yourself with in 2 years of closing. In order for the purchaser to be eligible for the GST HST rebate, the first occupants to live in the new property must be tenants, not the purchaser.
If you decide to sell the property within one year of closing, you may be required to repay the GST HST rebate to the CRA. The only exception to this would be if you sell the property to a person who intends to occupy the dwelling as his or her principal residence.
Applying For The New Residential Rental Property Rebate
When you purchase a new rental property, you must pay the equivalent of the GST HST Rebate upfront. While the rebate process can appear quite daunting, our experts will simplify and expedite your application (especially if you are a first time landlord) guiding you through every step of the process. Our experts have years of experience dealing with the various nuances and intricacies of GST HST rebate programs and maintain constant contact with the Canada Revenue Agency.
The nuances of rebate applications are quite unique, as such a number tax firms and lawyers refer their clients to us. Our experts will ensure that the correct paperwork is submitted correctly and timely.