HST On New-Build Rental Properties – One of the most confusing and commonly misunderstood topics in real estate

Based on my experience, the topic of HST can bring many different explanations depending on who you ask. Your accountant, lawyer, mortgage broker, real estate agent and other investors could literally each provide you with a different answer or interpretation. As with many tax rules in this country, HST is a complex topic.

In this article, I cover the HST implications of buying new-build properties, and the key differences based on whether you plan on moving into the property or renting it out. One of the first keys is that you are clear on your plan and inform your builder and real estate lawyer accordingly. The price of not being informed and transparent can end up costing you in the range of $25K plus interest and penalties.

There are two GST/HST Rebates. Let’s start with the simple one. This is called the “GST/HST New Housing Rebate”. Let’s say you buy a $500K home that you plan on moving into. You let the builder know and they will have you sign paperwork whereby you agree to allow them to apply for an HST rebate after closing (on your behalf). This keeps your life simple. Most builders follow this process. Your house cost is $500K, you pay your down-payment and get the rest via mortgage, and you move in on closing day with no additional paperwork to worry about.

Now on to the example where you plan to use the new-build as an investment property from day 1. This is called the “GST/HST New Residential Rental Property Rebate”. In this case, the builder CANNOT apply for an HST rebate on your behalf. You will need to obtain financing for the $500K purchase price the same way you did above, but now, you will need to pay the HST (typically around $25K) on closing at your lawyer’s office. (The builder will receive this HST cheque from your lawyer so they are in the same exact financial position, whether the CRA sent them a cheque for the $25K or you paid it at closing).

To receive your HST refund back from the CRA (typically within 2-6 months), there is specific information you need to send in including an application, signed 1-year lease, statement of adjustments, etc. These details are on their website. Alternatively, you can pay an “HST Rebate” company in the range of $400-$600 to complete the paperwork for you. If you google it, there are many of them. Essentially, the key difference if you do things in accordance with the rules is the temporary outlay of $25K cash that you need to make, simply because of your plans to rent out the property versus move into it.

Where many investors get into trouble is here: They find the idea of having to provide an extra $25K out of pocket at closing annoying (or impossible), so they attempt to game the system by claiming they will move into the property. In reality, they still rent it out. Well, the Canada Revenue Agency (CRA) has seen a lot of this, especially in the Greater Toronto Area (GTA) condo scene. Since there is a limited amount of time for you to apply for the HST rebate, the CRA has been using analytical tools at their disposal to reassess many investors that have applied for the wrong rebate, but they have waited until the application deadline passes, so when they notify you of your reassessment, you are now no longer able to apply for the correct HST rebate (the rental one from above).

Useful resources – If you want to estimate your potential HST payment (and rebate) on a new-build purchase, I highly recommend Andrew Lafleur’s truecondos.com HST calculator. In my opinion, this is the best HST calculator on the internet. Andrew also hosts a podcast and has had a guest, Mark Purdy from rentalrebate.ca on it twice to walk through how the two types of rebates work and what to avoid so that you do not run into issues with the CRA.

Disclaimer – This information should not be taken as legal or accounting advice. Speak to a professional before running your numbers. The information in this post is simply a gathering of data that I have assembled when I was going though this for a previous new-build property purchase.