Real Property Investors – GST/HST Implications when Change of Use Occurs
The GST/HST implications of investing in real estate are not set in stone when the original intention and income producing purpose are first determined. Depending on the specifics of the change in use, there are deeming rules that can cause a self-supply to occur for GST/HST purposes, which could result in a balance due to the Canada Revenue Agency (CRA) or even the ability to claim some GST/HST previously paid as Input Tax Credits (ITCs). A taxpayer could be looking at interest and penalties or lost ITCs if they are not aware of their compliance requirements.
Ceasing Use in Commercial Activities
A change in use from commercial activities to non-commercial activities can be disastrous if a taxpayer is unaware of the GST/HST rules set out in the Excise Tax Act (ETA). Commercial use is considered to be any form of rental income from commercial operations (e.g. an office building) but also includes short term rentals where the rental term is less than 30 continuous days.
When a taxpayer that is registered for GST/HST that acquired and used real property for commercial purposes decides to cease commercial operations and use the real property for other purposes, the taxpayer is deemed to have sold and reacquired the property at fair market value. The taxpayer is also deemed to have collected the GST/HST owing as a result. This deemed transaction could result in amounts due to the CRA. This situation is often referred to as a “self supply”.
Potential Relief Available
There could be GST/HST rebates available after the change in use from commercial use depending on how the real property will used going forward. A common situation would be converting real estate to a place of residence and renting the property to an individual to use as their principal place of residence. If a lease term of at least 12 months is signed, there is the ability to claim GST/HST rebates under the New Residential Rental Property rebates program. The property is considered “new” because of the change in use transaction and the amount of the GST/HST rebates would depend on the fair market value at the time of change in use.
Commencement/Increase in Commercial Activities
When a GST/HST registrant taxpayer that is currently using real property for non-commercial purposes begins to use the property for commercial purposes, there may be the ability to claim some GST/HST previously paid as ITCs. Generally, in this situation the self-supply rules do not result in any GST/HST being deemed as collected as the property was previously used in exempt activities. If the taxpayer had previously paid GST/HST on the purchase or any renovations of the real estate, they may be entitled to claim an ITC. The ITC would be based on the amount of commercial use and whether there has been a decline in the fair market value of the real estate.
The ETA has various rules that can be complicated to navigate when there is a change in use of real estate. We invite you to reach out to one of our Commodity Tax Professionals if you need any assistance related to this matter.