The Excise Tax Act (The Act) contains a number of self-supply rules that pertain when a person builds a ‘residential complex’ for the purpose of renting or occupying it themselves. The purpose of these rules in the Act is to remove any GST/HST savings that might exist when someone builds their own ‘residential complex’ as compared to someone who purchases a newly constructed complex for the same use.
The self-supply rules will apply where a builder of a new or substantially renovated residential complex has either rented out the complex or if the builder is an individual, where it is occupied by the builder as a place of residence. The builder will be deemed to have made a taxable supply at fair market value and an immediate repurchase of the property. When either of these situations occur, the builder will need to self-assess GST/HST calculated on the fair market value of the property at the later of the time the construction or renovation is substantially completed and the time the lessee of the building begins to occupy the property. For example, the builder is a GST/HST registrant. The costs to construct the building are $100,000 before tax and when completed the fair market value of the building is $200,000. The registered builder, located in Ontario, will be able to claim the HST paid as input tax credits on the costs to construct of $13,000. When the building is substantially completed, the builder will then need to self assess HST of $26,000 and remit this to the CRA on the return that covers the time period when the building was substantially completed.
The CRA has stated that when it comes to determining the fair market value of the property, it would be the highest price obtainable in an open and unrestricted market between knowledgeable informed and prudent parties acting at arm’s length, neither party being under any compulsion to act. Based on our experience, this may require an external third-party valuation by an appraiser, if you are not regularly engaged in the business of construction.
After the self-supply, it may be possible for the property to qualify for the New Housing Rental Property Rebate, if the property will be rented out. The rules for this rebate can be found at http://www.cra-arc.gc.ca/E/pub/gp/rc4231/README.html.
While this covers the generalities of the self-supply rules, they can be complex and it is recommended that you consult with a professional advisor. Further information can be found in the CRA’s GST/HST memorandum 19.2.3 at http://www.cra-arc.gc.ca/E/pub/gm/19-2-3/19-2-3-e.html#P53_1524.
Article written by: Greg Sawatsky, MAcc, CPA, CA