To Charge Or Not To Charge

Questions2

The Tax Issue

The place of supply rules that govern the rate at which the GST/HST should be charged contains a specific rule with regard to services performed that relate to real property situated in Canada.

The rule stipulates that the GST/HST rate that applies to services performed with respect to real property is determined by the location of the property.

This begs the question: what type of service is considered to be “in respect of” real property?

More specifically, this question comes from an accountant who performs the service of preparing tax returns on behalf of non-resident owners of real property situated in Canada. Every non-resident who earns rental income from real property in Canada must file a Canadian income tax return on which only income from the Canadian property is reported.

Are the services of an accountant to prepare tax returns on behalf of a non-resident subject to the GST/HST?

The Answer

Generally, services rendered to a non-resident person are considered to be zero-rate (not taxable) under the GST/HST. The rule relating to services in respect of real property is an exception.

The CRA describes a service as being in respect of real property in the following circumstances:

(a) the service is physically performed on the real property (e.g., construction and maintenance);

(b) the direct object of the service is the real property; that is, the service enhances the value of the real property, affects the nature of the real property, relates to preparing the real property for development or redevelopment or affects the management of the real property, or the environment within the limits of the real property (e.g., engineering, surveying, management services);

(c) the purpose of the service is: (i) the transfer or conveyance of the real property or the proposed transfer or conveyance of the real property(ii) related to a mortgage interest or other security interest in the real property; or(iii) the determination of the title to the real property.

The relationship between the service and the real property must be more direct than indirect in order for the service and the property to be considered “in respect of” each other. The direct object of the service is the real property in the sense that the service enhances the value of the property or affects the nature of the property.

Based on the above, the CRA has stated that accounting and tax services relating to the reporting of rental income from real property situated in Canada has an indirect relationship to the property, but is not directly in respect of the property as described above.

Therefore, the provision of these accounting services is zero-rated.

GST and Real Estate

Transactions involving real estate seem to attract hectares of GST questions. Surprisingly, the basic rules are fairly straightforward. Unfortunately, there are many “out of the ordinary” situations that complicate matters. Happily, those will not be covered here. The rules discussed below deal with most transactions practitioners will ever encounter.

Before purchasing real estate, make sure to check the GST rules

What is Taxable?

Real estate transactions fall into two main categories: Supply by way of “lease or licence” (i.e., “rentals”), and supply by way of sale.

Generally, as is the case with all GST questions, the first rule is that every supply is taxable unless it qualifies for an exception. Thus, most commercial real estate transactions involving businesses will be taxable. The major GST exemptions will involve supplies of residential property.

The long-term rental of residential property is generally exempt.

A sale of property is exempt if it qualifies under the definition of “used residential” property. Generally, a residential property is considered used if it was previously occupied or intended for use by an individual as a personal residence.

New Residential Property

A sale of a new residential property is taxable. Generally, it is a “builder” who will make such a sale. Since the builder is himself carrying on a commercial activity, he will be claiming input

tax credits (“ITC”) on his construction costs, and then charging the GST when he sells the property.

The purchaser of a new home will be eligible for a “new housing rebate”. This rebate is equal to 36% of the GST paid up to purchases of $350,000. Between this amount and $450,000, the rebate is reduced, and is eliminated thereafter (for the QST, the dollar limits are $200,000 to $225,000).

Self Supply of Residential Property

If a builder, rather than selling a completed residential complex, decides to retain it as a rental property, the “self supply rules” will apply. He will be deemed to have sold himself the property. He will self-assess and remit GST based on the fair market value of the property, including the land. This tax is not eligible for an ITC, since it is an acquisition of a residential property. It will, however, qualify for the residential rebate. If the complex is an apartment building with many units, its value will likely exceed the $450,000 limit. However, these limits will apply to each unit based on its square footage. Accordingly, if a builder completes a 5 unit apartment whose value is $1 million, each unit might be valued at $200,000 and will qualify for the full rebate.

These self-supply rules will apply equally to a “substantial renovation” of a residential property.

Input Tax Credits

Generally, any GST registrant carrying on a commercial activity is entitled to an ITC for expenses. If the activity of the purchaser is part commercial and part exempt or personal, then the ITC must be apportioned in a reasonable manner.

For capital property other than real estate, if the property is used more than 50% in commercial activities, it will be eligible for a full ITC.

A purchase of real property is subject to unique rules. Generally, the ITC must be apportioned based on commercial use. If the purchaser is an individual, no ITC is available at all if the property is used primarily (>50%) as a residence. Thus, an accountant who uses 20% of her home as an office cannot claim any ITC on the real estate purchase.

Who Collects

Generally, a vendor of real property is responsible for collection and remittance of the GST. However, this is not the case where the purchaser is a GST registrant. In this case, the purchaser will self-assess the GST and simultaneously claim any eligible ITC. The vendor should verify the purchaser’s registration number with the government.

If the sale of real property is exempt, it will be because of the vendor’s history with the property. The purchaser should insist on a written confirmation of exempt status from the vendor. Otherwise he will be liable for the tax if such status is subsequently denied for any reason.