GST/HST Implications for Condo Flipping
Condo flipping is becoming more common with the recent housing market appreciation rates. Some purchasers of condos are looking to capitalize on these appreciating rates to make a profit and partake in condo flipping of this nature by holding the unit, even for a short period of time with some sales to a secondary owner taking place prior to the deal even closing.
It should be noted that condo flipping carries not only income tax implications but also GST/HST implications that are coming under scrutiny by Canada Revenue Agency (CRA).
One of the GST/HST considerations for condo flipping relates to the eligibility for the GST/HST New Housing Rebate under section 254 of the Excise Tax Act (ETA). The eligibility criteria for an individual to claim the GST/HST New Housing Rebate requires the condo/residence is purchased new housing (provided we are not looking at the eligibility related to housing that has been substantially renovated or purchased shares in a co-operative housing complex) AND the residence being purchased is the primary place of residence for an individual. At the outset when the property is acquired, the intention of its use as a primary residence should be clear at with the intention that it will be resided in. Where the housing purchased is not supportable as a primary place of residence but rather is a secondary place of residence (or if the housing is not resided in at all), the purchase would not be eligible for the GST/HST New Housing Rebate.
In the case of condo flipping, though the first portion of the criteria is typically met, the second component often falls short. As a result, the individual would not be eligible to claim the GST/HST New Housing Rebate or in the event that the rebate was inadvertently claimed at the outset, the rebate will likely require repayment if it comes under the scrutiny if CRA. This data-mining is often initiated with a questionnaire from CRA to gain more information regarding the transaction. The repayment would be required immediately and interest and penalties may also be tacked on to this repayment.
A second GST/HST consideration when condo flipping is the GST/HST treatment upon the sale of the residence. The sale of real property is normally a GST/HST taxable activity as it is considered a commercial activity unless there is a specific exemption in ETA, such as the sale of used residential property from GST/HST. However, in the case of condo flipping on a newly constructed unit where the original intention of purchasing the property was to earn a profit via assignment prior to closing or flipping the deal subsequent to closing, GST/HST may be applicable when the condo is subsequently sold as it no longer meet the exemption under Schedule V.
The GST/HST treatment boils down to the buyer’s original intention for the property when making the purchase. Where that intention and/or action supports primary residency and is not profit-oriented at the outset, it is important to document thoroughly the actions and related documentation supporting this intent in the event that the transaction comes under scrutiny with CRA.