Ch. 19 TAXES ON REAL PROPERTY

Two main types of taxes on real property that licensees must be familiar with

• taxes that apply to the purchase or sale of real property; and

• taxes that apply to the ownership or use of real property.

-These taxes include the Goods and Services Tax/Harmonized Sales Tax (commonly referred to in British Columbia as the “Goods and Services Tax” or “GST”) => a federal tax that applies in virtually the identical way across the country.

-Property Transfer Tax (commonly referred to as the “PTT”) and Property Tax, which are provincial taxes

- PTT for foreign buyers (commonly referred to as the “Foreign Buyers’ Tax”)

-Vacancy Tax

TAXES ON THE PURCHASE OR SALE OF REAL PROPERTY

-Real property transactions in British Columbia generally involve the application of GST and PTT.

-When they apply, the burden of each tax is generally borne by the buyer

Goods and Services Tax (“GST”)

-a federal tax paid on goods and services sold or provided in Canada

- 5% in British Columbia

Overview of the GST

-Tax is a broadly-used instrument that is supported by legislation. It is relied on by governments at every level to raise public funds and to achieve certain social and economic objectives and therefore comes in many different forms.

-GST is a comprehensive federal “value-added” tax: a form of taxation used to raise funds on the final value created through the production of an item

-The goal of a value-added tax is to tax final value created through the production of an item, such as new housing.

Imposition of the GST

- imposed under Part IX of the Excise Tax Act (Canada) (the “ETA”).

-GST is designed to apply to every transaction that is not specifically exempted from the tax

- most types of transactions are subject to GST, including many kinds of real property transactions.

-only where an exemption is expressly listed in the ETA that the burden of GST is removed.

• Taxable supply is “a supply that is made in the course of a commercial activity”.

• Supply is broadly defined to mean the provision of property or services in any manner whatever.

• Property is defined to mean any property, including real property.

• Real property is defined to include, among other things, every interest in real property.

• Commercial activity includes the making of a supply of real property other than an exempt supply.

-exempt supply: property or services, included in Schedule V of the ETA, which are not subject to the GST

Functioning of the GST - The Buyer’s Obligation to Pay

-tax-payer for GST purposes.

-The amount of tax owed by the buyer is calculated by applying the rate of tax (i.e., 5%) to the consideration or price paid for the supply.

-GST only applies to the amount of the deposit once it belongs to the seller (e.g., at closing).

-GST is only owed on that amount once the closing occurs and the full amount of the sale price, including the deposit, becomes taxable

Functioning of the GST - The Seller’s Obligations to Collect and Remit

-the person who is making the taxable supply.

-generally required to collect GST as an agent for the government.

-a failure by the seller to collect the tax makes the seller equally liable to the government for the amount of the tax

-one main exception in real property transactions to the rule that the seller must collect the GST. It involves circumstances where the buyer is purchasing real property – most commonly, commercial real property – and is registered for GST by the time of closing.

- there is an allowance where the rule applies for the seller to decline to collect the tax. The buyer, in turn, is required to report the tax due in its next GST return

-If the buyer is entitled to an input tax credit (discussed below) in respect of the purchase, then the buyer can claim that input tax credit on the same return, potentially leaving no net GST liability.

=> self-assessing → to address the cash flow problem

- second exception to the general rule that the seller must collect the GST; namely, where the seller is a non-resident.

Functioning of the GST - Tax Recovery Mechanisms

Input tax credit

-a GST deduction a person can claim in their GST return for the amount of GST paid by that person on the acquisition of property or services

-The input tax credit available to a person on a specific amount of GST paid is determined by the extent (expressed as a percentage) to which the person is acquiring the property or services for consumption, use, or supply in the course of their commercial activities.

-The business would be required to allocate the GST and claim an input tax credit only to the extent that the property will be used in commercial activities.

Rebates

-essentially ways that non-businesses can recover GST paid

-New housing rebates are the most common ( GST/HST New Housing Rebate)

-Sometimes, developers can agree to credit the rebate to the buyer and submit the form to the CRA, leading to a corresponding GST deduction for the developer.

Functioning of the GST - The Administration of the Tax

-dispute resolution processes.

- Once the CRA assesses – correctly or not – the amount assessed becomes a debt owed by the assessed party, such as a seller of real property, to the CRA.

-That debt is ordinarily collectible immediately, even if the assessed party intends to dispute the assessment (a determination by the CRA of the amount of tax owed by the assessed party)

-90 days from the date of the assessment to file a document with the CRA known as an objection,which sets out the facts and reasons needed to explain why the assessment must be cancelled; must be reviewed by a separate division of the CRA known as the Appeals Division.

-If an appeals officer at the CRA confirms the assessment, then the assessed party has 90 days to appeal the matter to the Tax Court of Canada

-A decision of the Tax Court can be appealed to the Federal Court of Appeal and then possibly on to the Supreme Court of Canada.

Application of GST to Real Estate - Residential Complex, the Hotel Exclusion and Excess Land

-if the property is identified as a residential complex, the seller may be required to collect the GST.

-Residential Complex includes most dwelling units (including detached homes and condominium units) other than those akin to a hotel

-Any type of home which is used for short-term rentals, particularly through Airbnb or similar marketing sites, would fall within the hotel exclusion and is generally subject to GST (which will be reported and paid by the buyer)

-Residential Complex also includes only land that is “reasonably necessary” for the use and enjoyment of the complex as a place of residence

-the GST status of excess land must be considered separately from the GST status of the residential complex

-Even if excess land must be considered separately for GST purposes, this does not mean that the excess land is necessarily taxable.

Application of GST to Real Estate - Used Residential Housing and the Concept of a Builder

-no GST exemption for used residential housing provided for in the ETA, just as there is no specific rule affirming that new housing is necessarily taxable.

-there is an exemption for sales by a person who is not a builder. (a party who holds an interest in real property while it is being constructed, including anyone who holds an interest in newly constructed property after construction is completed but before it is first occupied as a place of residence)

-If the person is an individual, then the builder definition further requires that the person be acting in the course of a business or an adventure or concern in the nature of trade, such as a developer.