What is GST and How Does it Affect the Purchase of Your Property?
What is GST?
The goods and services tax (GST) is a multi-level, value-added tax introduced in Canada on January 1, 1991. This 5% tax is imposed on the supply of goods and services that are purchased in Canada, except certain items that are either “exempt” or “zero-rated”.
Who pays the GST?
Almost everyone is required to pay the GST on purchases of taxable supplies of goods and services, including real estate, (other than zero-rated supplies). However, certain persons may not always pay the GST on taxable supplies. These exceptions include First Nations Citizens and certain provincial and territorial governments.
The GST is ultimately the responsibility of the seller of a good or service in that they must collect and remit to the government, usually by passing the tax on to the buyer of their good or service as an addition to the purchase price.
GST on New Builds
When purchasing a newly constructed home, condominium or townhouse, the entire purchase price including land is taxable supply. If the home is going to be your primary place of residence, you may qualify for a partial GST rebate, depending upon the sale price. If the property is to be rented to tenants, the full 5% GST is charged on the purchase price. For more information on potential GST Rebates please follow this link.
GST on Property Re-Sales and the Exemption of GST
The most commonly invoked GST exemption used in Real Estate purchases is called “Used Residential Real Estate”. This is interpreted to mean that any property that is not brand new, and has been used for residential purposes, for example as primary residence, whether as an owner or long-term tenant, then this exemption applies. The SELLER would claim the exemption on the purchase, meaning they do not need to collect GST from the buyer, nor remit anything to the government. This is the case in the vast majority of real estate transactions in British Columbia.
GST on Nightly Rental Properties
Properties that are used for nightly rental revenue purposes are classified as commercial assets and therefore do not qualify as “Used Residential Housing” and thus do not qualify for a GST exemption. Sellers of these properties must collect and remit GST on their sale.
There are tax rules that allow for an investor to claim a “Capital Acquisition Input Tax Credit” on the purchase of a nightly rental revenue property by becoming a GST registrant and using that tax credit to satisfy the requirement to pay GST on the purchase.
In other words, if the purchaser is acquiring a property for which the seller needs to collect, and remit GST and the buyer intends for the property to be entirely a revenue generating property, the buyer may assume liability for remitting the GST on the seller’s behalf, and then pay the GST with the input tax credit. This means the buyer does not need to come up with an extra 5% in cash upon purchase.
This is often referred to as “deferring the GST” though there is no actual deferment taking place. This is simply a poor use of language that has become common in the industry.
In any situation regarding GST liability, the advice of a professional tax accountant is highly recommended.
GST and Real Estate Deals
GST applies to most of the services provided in completing a real estate transaction. For example, 5% GST is applied to the real estate commission. The person responsible for paying the commission – usually the property seller, pays the tax. GST applies to many other services involved in real estate transactions such as inspections and lawyer’s fees.