March break is underway. With the interest rate reduction announced earlier by Bank of Canada, spring market seems to be hotter than ever.
Many people are interested in investing in this real estate market, especially the condo market.
Recently I attended an online professional update course for Chartered Professional Accountant about principal residence exemption. There is so much information update surrounding the pilot project held by Canada Revenue Agency (CRA) targeting taxpayers who claim the sale of new constructed homes as their principal residence and claiming the HST rebates upon closing.
First thing first, HST rebates.
Usually when a taxpayer purchases a new construction condo, he is asked to sign a piece of paper declaring that he will be moving into the unit. This allows him to assign the right to claim the HST rebates on new housing unit to the builder.
The Excise Tax Act, the act that governs HST says that the taxpayer is qualified to claim the rebate provided that the unit is “for used as the primary place of residence of the particular individual as a relation of the particular individual.”
The term “primary” is interpreted to mean 50% or more.
A few court cases also established some factors that CRA would consider for the purpose of Excise Tax Act for HST rebates:
- Intentions with regard to the use of the unit as their primary residence
- Length of stay
- Address used for correspondence
- Timing of the personal belongings being moved in
- Insurance coverage
- What taxpayer did to his previous residence
- Other relevant factors
For example, a taxpayer purchased a pre-construction condo in 2005, it was not ready to move in until 2010, at which time the taxpayer met someone and decided to buy a house together in another city before closing of the condo.
What happened to the HST rebate that he initially assigned to the builder to claim?
If the taxpayer decided to sell the condo immediately upon closing, the taxpayer ran the risk of being caught on claiming the HST rebate he wasn’t eligible for because he never moved into the condo. If he ever got audited, he would have to repay all the HST rebates to the government, pure black and white.
If the taxpayer decided to rent out the unit upon closing, he should notify his lawyer his intention and speak to the builder with regard to the HST rebate. Unfortunately, he will likely have to come up with the additional money upon closing to compensate the builder for the HST rebate amount.
He is still qualified to claim the HST rebate back. The net amount is the same, only difference is timing. See my previous blog post here to how you can claim your HST rebate back on newly constructed rental unit.
This has not even taken into account the potential income tax consequences, which we will discuss further in the next blog post.
Until next time, have a wonderful March Break.
Cherry Chan, CPA, CA Your Real Estate Accountant
