Joe the contractor buys a small house, fixes it up (cosmetics mostly) and then sells it for a profit. As a contractor Joe is registered for the GST/HST. Is the sale of the residential house subject to GST/HST? As a contractor, Joe has claimed the GST/HST paid on the renovations, but that could be reversed if necessary. Joe would rather not have to add 15% to the sale of the house as it could sit for a long time in the declining market.
The sale of used residential housing is not taxable unless “substantial” renovations have been done. Cosmetic repairs don’t count. Tax already claimed has to be reversed.
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Section 192 of the Excise Act deals with non-substantial renovations.
Where the renovation is not considered to be substantial, generally the sale of the property is exempt from GST/HST as the sale of a used residential complex.
Unfortunately, for Joe the contractor, it’s not quite as simple as not claiming the GST/HST paid on the renovations. He must adhere to the special self supply rules contained in section 192. He will pay the GST/HST on the value added.
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CRA’s wording is VERY confusing, thus my question.
Item 68 says “Non substantial reno is exempt
Item 72 says “expenses are capital costs and there is no GST?HST on profits”
Item 73 says GST/HST does not apply on markups
Item 74 says GST/HST liability arises on completion or change of ownership, whichever comes first – which contradicts items 68, 72, 73
Item 75 says not entitled to GST/HST ITC since the sale is exempt, which also contradicts the aforementioned items.
So, 4 out of the 5 items say GST/HST inputs and charges do not apply and yet one item says it does.
Very confusing in deed.
Pat Gamborg
PAT’s OFFICE
1354 Fed Rd.
Bear River NS B0S 1B0
902-467-3358
68 - The sale of a residential property is considered exempt from GST/HST if the renovations to the property were not considered substantial.
72 - There is no requirement for Joe to self assess GST/HST on anything that would have otherwise be considered general repairs and maintenance (painting walls, patching drywall holes). In a normal situation these would be written off as repairs & maintenance, however, in the prospect of a sale they get added to the ACB of the property.
73 - There is no requirement for Joe to self assess GST/HST on his “ordinary” markup. I suppose if a subcontractor charged 15,000 to replace windows but Joe the contractor added 18,000 to the selling price because of windows there is no need to self assess the GST/HST.
74 - The date that Joe the contractor is required to self assess and remit his GST/HST is the earlier of the date he finishes the renovations or the date the property is sold.
75 - Joe the contractor is not entitled to claim GST/HST Input tax credits on GST/HST he has paid out with regard to the renovations (materials and subcontracts)… which is in line with what @jhd.hemeon has mentioned.
Essentially speaking;
The rule effectively bridges the gap between adding some value to the property and completing a substantial renovation.
Under this self-supply rule, a person who completes a non-substantial renovation is subject to GST/HST on the value of the renovation, calculated as follows:
The costs that would be included in the adjusted cost base of the property less:
- the original acquisition cost of the used residential real property;
- the interest and the costs of other related financial services; and
- the costs of renovations that were already subject to GST/HST.
As a result of this calculation, the self-supply of GST/HST generally applies to the labour component of such a renovation (see items 70 & 71).
Edit: For greater clarity, self-assess means that Joe the Contractor essentially collects the HST from himself (as if he was the customer) and remits this amount to the CRA. Joe the Contractor does not claim any ITC on his renovation expenses and he may owe HST on the value of his own contribution to the project. The customer who ultimately purchases the house pays no HST and has no involvement in any of this.
The GST/HST rules are complex and often confusing. Whenever I run into something I haven’t encountered before, I call GST/HST Rulings, 1-800-959-8287. There’s No waiting on hold and you’ll get an answer along with various references to check.
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You must get replies from different folks that I get. When I call, even if I ask for a senior agent, they grill me and then say “oh this has to go to a senior agent.” Then I get a call back maybe the following week and they never say why they are calling and I have to figure out which one of my calls I am getting a response to. Then they have to go and look things up and they come back with exactly what is readily available online which seemingly contradicts itself.
I thank you for your input.
Pat Gamborg
PAT’s OFFICE
1354 Fed Rd.
Bear River NS B0S 1B0
902-467-3358
So, if I understand this correctly, the following would be the scenario:
Purchase of property $120,000
Renovations including HST $ 11,500
Interest etc. $ 5,000
Landscaping including HST $ 11,500
Total ACB $148,000
Selling price $200,000 no HST
Must self assess HST on $52,000 = $7,800
My brain is getting tired of the merry go round. Do I have this scenario correct?
Pat Gamborg
PAT’s OFFICE
1354 Fed Rd.
Bear River NS B0S 1B0
902-467-3358
Not exactly; I think that if Joe the Contractor did not do any of the renovation work himself, but paid subcontractors for all of the Renovations (11,500) and Landscaping (11,500) then he would not claim any of the HST paid as an Input Tax Credit and would not need to self assess any HST.
If the value of labour provided by Joe or his employees was 20,000 towards the renovation then presumably he would need to self-assess the provincial HST rate on that 20,000.
But Yes;
Selling Price would be 200,000 with no HST to be collected
ACB or property or Inventory of property would be 148,000
Gain (or more likely business income?) would be 52,000
Thank you. I knew the ACB was correct, just the HST that my head is spinning on. Some of the reno and landscaping would be Joe, some would be hired out to subtrades.
It would seem the simplest treatment would be all expenses including the HST, no ITC claimed. Sell the house for whatever, no HST, and claim no HST on realtor and legals since it is residential.
I need to retire soon. Some things are just getting too complex for my tired little brain. LOL!
Pat Gamborg
PAT’s OFFICE
1354 Fed Rd.
Bear River NS B0S 1B0
902-467-3358
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If the intent is to buy and sell for a profit, wouldn’t it be a business transaction because it’s going to be business income if there is any at the end? If that’s the case, there should be GST at the time of acquisition?
Definitely business income. Thus my feeling HST would be on the $52,000.
Pat Gamborg
PAT’s OFFICE
1354 Fed Rd.
Bear River NS B0S 1B0
902-467-3358
I think GST should be self assessed first at the time of acquisition
Whether the sale of the used house is capital in nature or business income to Joe the Contractor does not change the nature of whether GST/HST should be charged on the sale nor does it change the application of Section 192 of the Excise Tax Act.
I don’t quite understand what @jyliucpa is saying about GST at time of acquisition.
There is no GST/HST on the purchase of used residential property.
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If the property is not capital property or personal property which result in capital gain, wouldn’t the property be inventory purpose only in a bona fide business transaction? If it becomes inventory, the seller might be selling a used property, not subject to GST, the buyer, which is a business in this case, should have to pay GST on the transaction. Because it’s acquired for business purpose. That’s why I am saying self assessed
So many angles to explore. The property was definitely purchased with the intent of fixing it up and selling it for a profit, thus a business transaction. But, because it is residential housing, the sale may not be subject to GST/HST. Who would buy a small house for $XXX plus 15% HST on the whole $XXX? Especially in the depressed economy of rural NS?
On the other hand, CRA does not care if an area is depressed or thriving, their rules apply the same everywhere. Trouble is, their own people have difficulty understanding and interpreting the rules. I have had them disallow (on review) a senior’s claim for Nova Scotia Seniors Pharmacare which, by law, is claimable. The second year they wanted to review the same lady (living in a Nursing Home) I reminded them to allow the Senior’s pharmacare and they did. But they ignored my request to claim it again in the previous year.
Working with CRA is a merry-go-round these days.
Pat Gamborg
PAT’s OFFICE
1354 Fed Rd.
Bear River NS B0S 1B0
902-467-3358
GST/HST is only applied on new builds. This is a long established rule with CRA.