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GROWING GST RISK FOR COMMERCIAL BUILDERS?

PRESSURE TO GRANT GST REBATES NOW A HARBINGER OF AUDIT ISSUES TO COME

A good friend who’s a lawyer in the thick of things in the commercial building space recently prognosticated that with all of the pressure on Commercial Builders to close new home and (particularly) condo deals, they have been granting GST/HST New Housing Rebate credits that may not ultimately pass muster.

We review the latent liability risk that may be facing Commercial Builders below.

Two Different Rebate Delivery Mechanisms

The starting point in this discussion is that under the GST/HST New Housing Rebate regime, Commercial Builders are not just passive participants.

To the contrary, the most common GST/HST Rebate is seen first extended by the Commercial Builder as a credit to the purchase price of the new house or condo, with the right to make the rebate application assigned to the Commercial Builder. The Commercial Builder then attempts to recover the rebate from the CRA.

A less common situation sees the purchaser pay full GST/HST on closing and then file the Rebate claim directly with CRA. (This typically tends to happen in owner-built home situations and in certain self-supply situations).

Current Financial Pressures = Future Exposure?

Commercial Builders are typically granting Rebates because doing so makes closing deals a bit easier in the current housing market and is an administratively efficient process, especially for volume Builders.

From a GST/HST compliance perspective, however, this also puts the Commercial Builder in a bit of a precarious situation, since liability for proper GST/HST Rebate compliance falls squarely on its shoulders! If the Rebate is deemed “ineligible” by the CRA, the CRA will generally deny the rebate in the hands of the Commercial Builder or reassess the Commercial Builder.

More problematically, there are also a number of reasons why, well after the fact, CRA might take the position that a GST/HST New Housing Rebate was not actually available. To name just a few, and as we have reviewed here and here in the past: (1) the purchaser did not really intend to use the home as their primary place of residence; (2) was speculating; or (3) was just trying to profit from an assignment.

Accordingly, a process that appears administratively convenient (and economically beneficial) at closing comes with some real GST risk. That risk is amplified in a market where many buyers have approached real estate acquisitions as “investments” or “income properties”, rather than “homes”.

Takeaways

Commercial Builders who have credited and claimed the GST/HST New Housing Rebate are not merely facilitating a purchaser benefit. They are assuming the ultimate compliance risk for that rebate.

Where CRA later determines that the statutory conditions were not met, the reassessment will generally land on the Builder first.

Experienced GST Counsel can help with risk management and objecting to assessments where appropriate.

For help with a CRA Home Rebate assessment, please click here.

Download a PDF copy of this Blog here.