Builders Beware! – Possible HST Implications on Used Residential Complexes
By Wendy Wong, CPA, CA, Tax Manager
Buying, renovating, and then renting (or selling) existing properties is a significant business, especially in older parts of Ottawa.
But, what many first-time investors or builders might not know is, “substantial renovations” to existing properties are not tax-free.
For Harmonized Sales Tax (HST) purposes, the newly-renovated property is subject to the same rules as the sale of a newly-built property. It is subject to HST if rented or sold.
If these rules did not exist, these developers could buy then rent or sell a substantially renovated used-residential complex exempt from HST. Yet builders of new housing properties for rent or sale would be at a significant disadvantage because they are required to charge HST to their customers.
So, what is a “substantial renovation?” According to the Canada Revenue Agency (CRA), it is when “…all or substantially all of the building that existed immediately before the renovation has been removed or replaced, with the exception of certain structural elements (i.e., foundation, external walls, interior supporting walls, floors, roofs and staircases).”
This definition can be subject to interpretation, so it needs to be evaluated by its three main components:
- All or Substantially All: Generally, it means 90 per cent or more. But 90 per cent of what? The CRA has stated that they will accept any “fair and reasonable” method to determine the percentage renovated.
- Of the Existing Building: The 90 per cent test only takes into account the liveable portions of the existing building before the renovations. If there is an addition to the existing building, it is not included in the 90 per cent calculation. As well, the calculation ignores inhabitable areas, such as the garage, crawl spaces, or any area necessary for the furnace, water or electrical equipment.
- Must be Removed or Replaced: Repairs do not qualify. With a major renovation project, the interior of the building is essentially gutted down to the studs. For example, all of the interior walls, ceilings, floors, heating, electrical, plumbing, fixtures, and cabinetry are removed and replaced. A renovation can still be substantial, even if those structural elements are not altered.
The good news for renovators that have to charge HST on their newly-renovated properties, the HST paid on building supplies can be recoverable; claimed as an input tax credit.
There are HST issues surrounding the purchase and development of used residential properties – even those renovations that are not classified as substantial.
For those getting into the renovation and rental or re-sale business, there are complex details to consider. There are several ways to ensure these ventures are profitable and do not incur unwanted penalties or interest charges from the CRA.
If you want to ensure fair HST treatment for your renovation business, we recommend that you consult a tax professional to get the full financial picture.