Category: Construction & Real Estate

ENHANCED GST RESIDENTIAL RENTAL REBATE: Increased Incentives

Posted on by Edixon

On September 14, 2023, the Department of Finance provided details on a proposal to enhance the existing GST rental rebate. In general, the existing rebate provides a 36% rebate of the GST component of the price paid by landlords to construct, or purchase newly constructed, rental property. The existing rebate begins to be phased out for properties valued at over $350,000 and is eliminated at $450,000.

The proposal would increase the rebate from 36% to 100% and remove the phase-out thresholds for properties with a value over $350,000. The proposal would apply to certain rental housing projects that begin construction between September 14, 2023, and December 31, 2030, inclusive, and complete construction by December 31, 2035.

To qualify for the enhanced rebate, new residential units would need to meet the requirements for the existing rental rebate and be in buildings meeting the following criteria:

  • the property must contain at least four private apartment units (units must have a private kitchen, bathroom, and living area) or at least 10 private rooms or suites (examples of residences for students, seniors, and people with disabilities were provided); and
  • at least 90% of the residential units in the building must be designated for long-term rental.

Projects that convert existing non-residential real estate, such as an office building, into a residential complex would also be eligible if all other conditions are met. Public service bodies would also be eligible to access the enhanced rebate.

The enhanced rebate will not apply to other properties, such as individuallyownedcondominiumunits, single-unithousing, duplexes, triplexes, or housing co-ops; however, the existing rebate would still be available. Substantial renovations of existing residential complexes would not be eligible.

On September 21, 2023, the Bill to enact these measures was introduced in the House of Commons. This Bill did not include all the criteria for eligible projects but provided that the remaining specifics would be set by regulation in the future.

ACTION: If involved in developing multi-unit residential rental property, consider whether you are eligible for this enhanced GST rental rebate.

Removal of GST on Purpose-Built Rentals in Canada

Posted on by Edixon

In a significant step toward improving housing affordability and accessibility, the Canadian government recently announced the removal the Goods and Services Tax (GST) on purpose-built rentals.  The GST is being removed by an increase to the GST New Residential Rental Property rebate from 36% to 100%.

Why Remove GST on Purpose-Built Rentals?

The decision to eliminate the GST on purpose-built rentals stems from the government’s commitment to address the housing crisis in many parts of Canada. High housing costs and limited availability have made it increasingly challenging for individuals and families to secure housing. Removing the GST on purpose-built rentals helps contribute to making housing more accessible and affordable for Canadians.

Impact on Property Developers

For property developers, the removal of the GST on purpose-built rentals encourages investment in rental properties, which were previously seen as less profitable due to the GST and HST burden, as neither were fully recoverable and therefore resulted in sunk cost.

This move could lead to an increase in the construction of purpose-built rental units, thus expanding the housing supply and helping to meet the growing demand of Canadians.

Impact on Renters

Canadian renters, especially those in urban areas, have grappled with the rising cost of housing. By eliminating the GST on purpose-built rentals, the government is helping to ease the financial burden on renters. This move will likely result in more affordable rents.

Important date – the enhanced rebate will apply to projects on or after September 14, 2023, and on or before December 31, 2030, and complete construction by December 31, 2035.

While this policy change alone may not solve all housing-related challenges, it is a step in the right direction.

Replacement Property Rules Pertaining to Real Estate and Business Properties

Posted on by Edixon

When a taxpayer (including a corporation) disposes of real estate for more than its cost, the capital gain must be reported on the taxpayer’s income tax return.  If the taxpayer previously claimed capital cost allowance (CCA) on the building, then that CCA will be recaptured and included in income as well.  However, the Income Tax Act permits a taxpayer, in certain conditions, to elect to defer the recognition of recapture of CCA or capital gains where a property was involuntarily disposed of, or a former business property was voluntarily disposed of, and a replacement property is acquired.  

Requirements for the replacement property rules to apply

There are a number of requirements in order to take advantage of the replacement property rules.  They are as follows:

  • A replacement property can be acquired before or after the former property, as long as it meets the other conditions.
  • For involuntary dispositions such as an expropriation, the replacement property must be acquired before the later of:
    • the end of the second tax year following the year proceeds become receivable for the former property; and
    • 24 months after the end of the year those proceeds become receivable.
  • For voluntary dispositions of a former business property, the replacement property must be acquired before the later of:
    • the end of the first tax year following the year proceeds become receivable for the former property; and
    • 12 months after the end of the year those proceeds become receivable.
  • To qualify as a former business property, the property must be used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business. A rental property does not qualify as a former business property unless it was rented in the year of disposition to a related person who used the property principally for gaining or producing business income.
  • The replacement property must be acquired to replace the former property, have the same or similar use as the former property and, if the former property was used for the purpose of gaining or producing income from a business, the replacement property must be acquired for the purpose of producing income from the same or a similar business.
  • A taxpayer must make a valid election to use the replacement property rules.
Reporting requirements

A taxpayer is required to report any recaptured CCA or taxable capital gain arising from the disposition of a former property in the year of disposition. However, where a replacement property is acquired in a subsequent tax year and within specified time limits, the taxpayer may request a reassessment of the income tax return for the year of disposition of the former property. This will generate a refund in respect of the income tax paid on income arising on the disposition.

Election to use the replacement property rules

A taxpayer must elect to have the replacement property rules apply. The election should be made as follows:

  • If the disposition and replacement take place in the same year, the taxpayer’s calculation (in the income tax return for that year) of the recaptured CCA or the capital gain by virtue of subsection 44(1) will be considered to constitute an election.
  • If the property is not replaced until a subsequent year, the election should take the form of a letter attached to the income tax return for the year the replacement property is acquired. The letter should include a description of the replacement property and the former property, a request for an adjustment to the recapture of capital cost or the taxable capital gain reported, and a calculation of the revised recapture or taxable capital gain.
  • If the replacement property is acquired prior to the year of disposition of the property, the election should take the form of a letter attached to the income tax return for the year in which the replacement property is acquired. The letter should include descriptions of the replacement property and the property that is to be replaced. If the taxpayer late-files such an election, it will be accepted if it is filed in the income tax return for the year in which the former property is disposed of, provided it is evident that the new property qualifies as a replacement property.

The calculation of the tax deferral can be complicated.  The new capital cost of the replacement property is reduced by the capital gain of the former property that was deferred. As a result, when the replacement property is eventually sold in the future, the now lower capital cost is used in determining the capital gain to be realized.  The amount eligible for capital cost allowance purposes will also be reduced, as it is affected by both the deferred capital gain and the deferred recapture.  We at DJB are here to help you work through this complicated tax filing to give you the best tax filing position.

Cash Management Strategies for the Construction Industry

Posted on by Edixon

The construction industry operates in a project environment that often involves progress payments from their customers.

Contractors typically submit invoices at specific stages of the project. Customers then may have 60 to 90 days from acceptance of the invoice to pay for the services performed.

Therefore, matching cash inflows against outflows can be challenging.  In this short article, written by RSM, they explore a few strategies that can help to reduce liquidity risk in construction entities. 

Read Article

Work in Process (WIP) Valuation Strategies

Posted on by Edixon

In many industries – and especially in construction – the method by which a company chooses to value its work in process and consequently recognize revenue on projects can have a large impact on the timing of the related tax that it owes. It can also significantly impact the value of the company at a given point in time and its standing in relation to any debt covenants that the company may have. Identifying the optimal accounting method to report income and expenses is not always an easy task and making the incorrect choice can negatively impact your business.

In some cases, it is simple to determine the timing for when revenues are earned. That is, once ownership of a product is transferred or a service is complete, revenue is considered to have been earned. If your projects are relatively short in nature, waiting till the contract is complete to recognize the revenue (known as the Completed Contract Method) may be the appropriate option.

However, if you have a longer term project, delaying the recognition of revenue until the end of the contract could cause problems, for example, tying the direct cost of the project to the revenue it relates to.  The solution to this problem is often the Percentage of Completion method of revenue recognition.

Completed Contract Method

Under the Completed Contract Method, revenue is recognized when the sale of goods or the provision of services is complete or substantially complete. This method is appropriate when the performance of a contract consists of the execution of a single act or when company’s management cannot reasonably estimate the extent of progress toward completion of the contract.

Since most construction contracts involve the execution of many acts by a contractor, the Completed Contract Method is not appropriate in many circumstances. It is likely only in exceptional circumstances that the stage of completion of a contract cannot be reasonably estimated. Nonetheless, some smaller contractors have adopted this method for the following reasons:

  • It is simple and it is easy to determine when a contract is virtually complete;
  • There is no need to estimate costs to complete a project (i.e. costs are all known when the profit is booked); and
  • Assuming that the contractor is profitable, the income tax is deferred to the end of the contract.

As previously mentioned, depending on the type of contracts you have, your completion status at the end of the year and any other specific factors, this method may not be appropriate.

Percentage of Completion Method

The Percentage of Completion Method is generally the preferred method of revenue recognition for larger companies with longer term contracts.

This method matches revenue from the long-term contracts with their respective costs, calculating estimated revenue and gross profit at various stages of construction.

Calculating gross profit on individual jobs on a regular basis allows contractors to track their progress more accurately in these circumstances. This can also provide profitability benchmarks at key points in the year.  Having this information regularly can be helpful for planning purposes by avoiding surprises at the end of the year with respect to the amount of income being reported and also help to provide timely feedback to allow management to control costs and identify the most profitable types of jobs to pursue in the future.

Regardless of the method of revenue recognition being used or the type of projects you are undertaking, having a strong costing system in place to track the profitability of your jobs is very important. In addition, the ability to make accurate estimates with respect to items such as overhead cost allocations and stage of completion are equally important. Although these items can be very complex and specific to your business, refining these things can play an integral role in your company’s success.

The good news is that you don’t have to develop this alone, DJB’s Construction industry professionals can assist you with building a successful strategy for revenue recognition.

GST/HST and Damage Payments

Posted on by Edixon

Given the vastness of the GST/HST rules, it is wise to check the GST/HST rules for all transactions, especially those that are non-routine, such as damage payments.  Generally, damage payments do not constitute consideration for a taxable supply under the Excise Tax Act (ETA), so GST/HST is normally not payable. However, section 182(1) of the ETA deems certain damage payments to be consideration for a taxable supply, and inclusive of GST/HST.

Generally, subsection 182(1) applies under the following conditions:

  • there must be a breach, modification, or termination of an agreement for the making of a supply subject to GST/HST, of property or a service in Canada (other than a zero-rated supply);
  • an amount must be paid or forfeited to the supplier, or a debt or other obligation of the supplier must be reduced or extinguished;
  • that amount must be paid as a result of the breach, modification, or termination, and not as consideration for a supply; and
  • exceptions referenced in subsection 182(3) cannot apply (i.e. the section 161 late payment provisions).

The application of this provision is limited, in that it does not apply to damage payments, which are made by the supplier to the recipient.  These rules would seem to apply for the liquidated damages, which can occur in large dollars in construction contracts.   There are common situations that the CRA comments on in Policy Statement P-218, where the rules under subsection 182(1) would not be met, and they include:

  • no prior agreement for the making of a supply existed between the parties;
  • the original agreement was for the making of an exempt or a zero-rated supply;
  • the amount is not paid or forfeited to the person making the original supply, or used to reduce or extinguish a debt of the supplier, e.g., where the person making the payment is the supplier of the original supply;
  • the original agreement was for the making of a supply by a person who was not a registrant;
  • the payment is consideration for the supply under the agreement; or
  • the amount is paid otherwise than as a consequence of the breach, modification or termination of the agreement for the making of a supply.

The CRA does provide a number of examples as to when these rules would and would not apply. If your payment does fall into this provision, subsection 182(1) provides that the place of supply rules that applied to the original supply also apply to the deemed consideration. Thus, if the original supply was zero-rated, the deemed supply under subsection 182(1) will also be zero-rated and no tax will be remittable by the registrant. Furthermore, if the original supply was made in the participating province, then the deemed supply will also be made in the participating province.

We often see contracts where subsection 182(1) of the ETA is not considered in advance; and as this provision deems the payment to be inclusive of GST/HST, it can result in the monies you actually receive to be reduced by 5/105 or 13/113 in Ontario.  If this oversight in the contract is noticed after the fact, as this is a deeming provision, even if the person receiving the damages payment separately is charged GST/HST, this will result in GST/HST being paid twice, as this provision deems GST/HST to have already been included in the damage payment.   Thus, resulting in GST/HST to have been paid twice; first by virtue of the deeming rule discussed above and secondly by virtue of the separate invoice that charged GST/HST in error.

If you are the party making the damage payment, this deeming provision allows you to claim an ITC for the GST/HST deemed to have been paid pursuant to section 182 of the ETA.   If you have made these payments in the prior 4 years, it would be prudent to see if the damages met the rules under 182 of the ETA to recover any GST/HST deemed to have been paid.

Overall, when drafting agreements, it would be wise to contemplate the rules in section 182 of the ETA that apply.  If they do apply, the agreement should ensure the damage payment as calculated in the agreement is grossed up by an amount equal to the GST/HST applicable to the transaction.  Therefore, when the payment is received and GST/HST is calculated into the total payment, you will not be out of pocket the GST/HST.

New Prompt Payment Toolkit and Resource Centre

Posted on by Edixon

Prompt payment and adjudication are processes provided under Ontario’s Construction Act to help contractors to get paid on time. Prompt payment legislates mandatory timelines for payment and adjudication.  It is a dispute resolution process that allows a contractor or subcontractor to enforce claims for payment in a more efficient and less expensive way than going through the court system.

To further support the process, the Council of Ontario Construction Associations (COCA) recently launched a Prompt Payment and Adjudication Toolkit as an online resource centre.

The Prompt Payment and Adjudication Toolkit features downloadable documents with clear, concise information for owners, contractors, and subcontractors alike. Prompt Payment Adjudication 101, provides an overview of the act in layman’s terms, covering information about holdbacks and proper invoicing. The webpage also has a prompt payment webinar and links to government resources.

The intention of the resource centre is to get contractors and owners familiar with the legislation so that they can create their own internal processes and easily access the tools if and when there is a dispute over payment.  The online resource centre is intended to provide information and should not be considered legal advice.  We encourage those with further questions to contact a lawyer.

For more information and to access the toolkit, please visit: https://www.coca.on.ca/advocacy-prompt-payment/

New Amendments to Foreign Buyer Ban Regulations

Posted on by Edixon

On March 27, 2023, the Federal Government announced that they are amending some of the problematic aspects of the Prohibition on the Purchase of Residential Property by Non-Canadians Act’s associated Regulations, which we highlighted in an earlier article: New Regulations Prohibit Builders/Developers with Whole or Partial Foreign Ownership from Purchasing Canadian Residential Property.

The government has amended the Regulation to include an exception that allows for all entities, including those with some foreign ownership, to purchase residential property for the purpose of development, which will now enable all business entities in Canada, regardless of ownership structure, to contribute to increasing Canada’s housing supply.

The announcement also repeals section 3(2) of the Regulations. This section formerly prohibited Canadian entities with more than 3% foreign ownership from buying vacant land for residential development, thereby negatively impacting many Canadian-based business entities from contributing to the much-needed housing supply for Canadians. Vacant land zoned for residential and mixed-use can now be purchased and used for any purpose by the purchaser, including residential development.

Other changes announced today include increasing the foreign ownership threshold to 10% from 3%, though this threshold will no longer be an issue for builders/developers/renovators looking to add to Canada’s housing supply given the previous changes listed above.

Read the government’s full announcement.

UNREPORTED REAL ESTATE DISPOSITIONS: Multiple Issues

Posted on by Edixon

A September 12, 2022, Tax Court of Canada case reviewed the gain on a residential property purchased in 2007 and disposed of in 2011. The property was substantially rebuilt during the ownership period. The proceeds, cost, and gain were all determined by CRA as the sale was unreported. These amounts were largely unchallenged by the taxpayer and accepted by the Court. The Court noted that the taxpayer’s tumultuous relations with her ex-husband, whom she divorced in 2014, resulted in “an off-again/on-again cohabitation” during much of the relevant period.

Although the taxpayer argued that the property was her principal residence, CRA denied it, assessing the gain as an adventure in the nature of trade and, therefore, fully taxable. CRA also assessed outside the normal reassessment period of three years and applied gross negligence penalties.

Capital property or adventure in the nature of trade?

The Court accepted that the taxpayer lived at this property from time to time during the ownership period, a personal use inconsistent with a business venture of acquiring, improving, and selling the property for a profit. In addition, the taxpayer was a teacher not connected to the real estate sector. Her marital difficulties demonstrated a plausible reason for acquiring this larger residence for personal use as a residence in which to start a family. There was no suggestion that the reconstruction was undertaken for purposes other than for personal use. The nature of the property, length of ownership, lack of prior or subsequent activity in real estate, and her personal circumstances all led to the conclusion that the property was acquired for personal use and not resale, so it was a capital property.

Principal residence?

The property was used as an intermittent refuge and was never occupied with regularity. In the absence of evidence such as a change of address, domestic expenses beyond mandatory utilities, or other permanent hallmarks, the Court could not conclude that the property was ordinarily inhabited, preventing it from being the taxpayer’s principal residence. As such, the taxpayer could not claim the principal residence exemption on the disposition.

Statute-barred?

The Court acknowledged that a fully exempt principal residence sale was not required to be disclosed in the taxpayer’s 2011 personal tax return. However, the taxpayer provided no details to show a reasonable basis for believing the gains were fully exempt. Without such evidence, she could not support her defense that the failure to report the gain was based on a reasoned and thoughtful assessment of her filing position rather than a result of carelessness or neglect, as CRA asserted. As she could not disprove CRA’s assertions, the return could be assessed outside the normal reassessment period.

Note that all principal residence sales were required to be disclosed in an individual’s tax return starting in 2016. If not reported, the individual could not claim the principal residence exemption on the disposition of the property and would be liable for the tax on the gain on disposition. As the taxpayer’s disposition was in 2011, this issue was not addressed in the Court case

Gross negligence?

The Court noted that CRA’s gross negligence penalty assessment (50% of the understated tax) was linked to three factors: the conclusion that the property was held in the course of an adventure in the nature of trade; the assertion that the taxpayer never lived in the property; and the magnitude of unreported income. All three of these assertions were incorrect. The taxpayer’s belief that she could navigate the tax laws related to personally held real property was incorrect; however, it was not tantamount to a deliberate act demonstrating indifference to compliance with the law. The gross negligence penalties were therefore reversed.

ACTION ITEM: Ensure to report all dispositions of real property, whether it is eligible for the principal residence exemption or not, on your personal tax return.

New Regulations Prohibit Builders/Developers with Whole or Partial Foreign Ownership from Purchasing Canadian Residential Property

Posted on by Edixon

On December 21, 2022, the federal government released the Prohibition On The Purchase Of Residential Property By Non-Canadians Act.  This new regulation came into force immediately on January 1, 2023, for a period of two years.

Although the Act when initially announced was intended to prevent the purchase of housing units by non-Canadians (and curtail the rising housing costs), the publication of the Regulations states that it also applies to Canadian companies with more than 3% foreign ownership. 

The act will prohibit affected entities with partial foreign ownership from buying vacant land for residential development, or purchasing properties with less than four units on them (hence inhibiting assembling parcels of land for multiple-unit construction). This also precludes buying farmland to develop communities. 

In reviewing the publication of the Regulation, it has been noted that there is an unintended consequence in its wording that also directly affects the development industry, specifically builders/developers with partial foreign ownership, preventing them from buying or assembling land for the development. This Regulation will not affect companies that are 100% Canadian-owned. 

There are significant penalties for non-Canadians in violation of the Act, and for Canadians that knowingly assist a non-Canadian in violating the Act. The penalties include both a fine of up to $10,000.00 and a court-ordered sale of contravening property.

The federal government’s ban on residential property purchases by non-Canadians is part of a broader effort to address rising housing costs that includes federal tax changes for residential property flipping (also in effect as of January 1, 2023) and underused housing (in effect as of January 1, 2022), and provincial and/or municipal taxes on vacant homes or land speculation.

If you are a builder/developer with whole or partial foreign ownership and have questions on how this new regulation may affect you, please contact one of our Construction Industry Professionals.