As a real estate business, you must carefully review and understand how your operations are affected by the GST/HST, QST, PST and other indirect taxes, such as property taxes and payroll taxes. If you do not fully comply with the rules for these taxes or make an error on collecting tax, self-assessing tax or filing returns, you could be subject to additional taxes, interest or non-compliance penalties. You could also be denied input tax credits (ITC), input tax refunds (ITR) or rebates. It is also important to ensure that you are not overpaying otherwise unrecoverable indirect taxes.
As you meet your business' tax compliance obligations, there are many issues you should consider to help identify potential indirect tax risks and opportunities to reduce indirect tax related costs. These issues can include:
Different GST/HST and QST rules can apply to various types of entities, structures and legal relationships. For example, specific rules apply to partnerships, joint ventures and REITs. Also, the use of bare trusts or nominee corporations in your real estate group may have GST/HST and QST implications. It is important to ensure that the proper entity is reporting collectible tax amounts and claiming ITCs or ITRs; errors could result in significant assessments by the CRA or Revenue Quebec.
In the case of REITs, you should ensure that you recover eligible ITCs and ITRs. Because REITs are considered financial institutions for GST/HST and QST purposes, they are subject to special rules relating to ITC and ITR eligibility as well as reporting requirements. Please also refer to the section below on financial institutions.
There are circumstances where the CRA and Revenue Quebec will deny ITCs and ITRs to real estate organizations that fail to meet the documentary requirements (e.g., the name on the invoice does not match with the name of the GST/HST or QST registrant that is acquiring the property or service for use in its commercial activities). This is an area that has come under tax auditor scrutiny, and presents a significant compliance issue in the real estate industry due to the use of special structures and relationships, such as agency.
If your real estate business involves a combination of taxable and exempt activities, you must allocate common costs between your taxable and exempt activities on a fair and reasonable basis for ITC and ITR purposes. You must also determine the timing of the valuation and the effect of costs incurred after the day of the valuation on your ITCs and ITRs.
Also, the approach to valuing properties for purposes of the GST/HST and QST self-supply rules is important where:
Allocation methodologies, valuations, and deadlines are often subject to audit challenges. These issues have been the topic of court decisions in the last few years.
Where individuals buy a new or substantially renovated home from a builder, a rebate may be available for part of the GST and HST and the QST in Quebec. These rebates may be assigned to the builder. There are many other circumstances where GST/HST and QST rebates may be available for residential properties, including where there are new residential rental properties (i.e., landlord rebates). Issues around these rebates include ensuring the purchaser's eligibility and their implications for calculating the price of the homes and determining the builder's net tax calculation if the rebates are assigned to the builder, as well as the calculation of the threshold amounts for qualifying rebates where the buyer acquires extras.
Real estate entities often transact within a group of related companies, and these intercompany transactions have GST/HST and QST implications. If the companies are engaged exclusively in taxable activities (e.g., sales of new homes or commercial leases), the GST/HST and QST that apply should generally be recoverable. It may be possible to reduce cash flow costs by making certain elections or using offset measures.
The filing requirements and scope of these elections have changed in recent years. For details, see TaxNewsFlash-Canada 2016-14 "Real Estate Industry - Prepare for 2016 Federal Budget Measures" and TaxNewsFlash-Canada 2015-33 "Corporate Groups - File GST Closely Related Elections by December 31"[PDF 72.4 KB].
If the companies are involved in exempt activities (e.g., long-term residential rentals) and do not qualify for the election, it is important to consider reducing the amount of otherwise unrecoverable GST/HST and QST generated as a result of the transactions within the group (e.g., taxable property management services). There are options that may help you reduce these tax costs.
The GST/HST and QST treatment of certain transactions, such as lease inducements, rent-to-own agreements and settlement agreements, depend on how these arrangements are structured. As a result, you should consider the indirect tax implications of these transactions up front, preferably before the agreements are concluded. The tax related to these kinds of payments may represent either additional costs or savings depending on the circumstances.In addition, the 2016 federal budget introduced special reporting requirements for builders that sold newly constructed homes or substantially renovated homes that were grandparented from an HST rate increase or the introduction of HST in provinces since 2010. Reporting requirements are now limited to certain purchase prices and an election is available until the end of 2016 for builders to correct past misreporting and avoid potential penalties.
Many large businesses (i.e., where an entity and its associates' taxable sales made in Canada exceed $10 million) are subject to recaptured ITC rules for the provincial component of the HST in Ontario and Prince Edward Island on certain purchases (e.g., energy costs and telecommunications). These rules also apply to joint ventures and partnerships. Landlords should review their lease agreements to determine if certain costs subject to the ITC recapture rules are included in these agreements and how the recaptured ITC rules apply to those costs. Similar rules for QST purposes known as the ITR restrictions can also apply.
The phase-out period of the recaptured ITC rules under the Ontario HST began July 1, 2015. Businesses must ensure that they apply the rules and recoverable rates correctly to help manage the tax costs.
If you have a GST/HST or QST registered financial institution in your group of companies or an entity that is deemed to be a financial institution for GST/HST and QST purposes (e.g., a holding company with more than $1 million in financial income, such as interest and dividends from unrelated parties) that entity, and possibly others in your group, may have to file GST/HST (and QST) annual information returns.
Also, other rules specific to financial institutions may apply. Some financial institutions must use the special accounting method ("SAM" formula), which requires them to track all the GST/HST and QST paid and calculate many adjustments for specific items including transitional rules and recaptured ITCs and restricted ITRs. Other financial institutions must allocate tax paid between taxable and exempt activities to claim credits while other entities, like REITs, may have some of their credits significantly restricted.
Many real estate businesses have to apply complex GST/HST and QST pension plan rules. However, there is a relieving measure that could reduce the complexity for some companies. The 2016 federal budget also introduced measures which may change an entity's status as a financial institution for GST/HST purposes, thus changing reporting obligations.
The acquisition or disposition of properties or operations and reorganizations, including amalgamations, mergers and wind-ups can have significant implications for indirect taxes including GST/HST, QST, PST and payroll taxes. It is important to consider the indirect tax implications of these transactions in advance, including:
Owners and occupants of real property pay significant amounts of property tax each year. These persons should review the assessment of the property they own or occupy to ensure it is accurate, both as to value and classification, and confirm that they are applying for all available municipal rebates. Non-profit organizations, religious organizations, hospitals and similar entities should ensure that any property they own or occupy benefits from all available property tax exemptions and that registered charities are applying for the property tax rebate if they own or occupy commercial or industrial properties.
For the real estate industry, many indirect tax issues can depend on the type of entities involved in a transaction and the nature of that transaction. We can help you carefully navigate this maze of complicated rules and help you meet your requirements and reduce related compliance risks and overall tax costs. KPMG's indirect tax professionals take an integrated and comprehensive approach to transactions in the real estate sector including, where necessary, working with our income tax and advisory colleagues as well as legal counsel in KPMG Law to help you manage tax and other business implications.
For more information, contact your KPMG adviser.
Information is current to April 26, 2016. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500