When is GST Payable on the Sale of Residential Property?

Knowing and understanding when tax applies to your real estate transaction is a critical part of the entire process of buying or selling any home. The Excise Tax Act (the ETA”) is a federal statute that imposes taxes (GST) in connection with the sale or production for sale of certain goods, which also includes real property. In Alberta, GST is collected at a rate of 5% and it applies to every supply of real property unless there is an exemption provided for in the ETA (this is found in Part 1 of Schedule V). A supply of real property includes but is not limited to a sale, lease, an option to purchase, an assignment of a lease, as well as an assignment of an agreement of purchase and sale. Whether such an exemption is applicable to the transaction is dependent on the nature of the property and use by the vendor. This is not dependent upon the type or the nature of the purchaser.

The most common exemptions are a sale of a used residential property and farmland sold to children who are acquiring the property for personal use and enjoyment. While the sale of a used home is normally exempt from GST, this is not always the case. Within the ETA there is no actual definition of “used residential house” and there isn’t a GST exemption for the sale of used residential house. The exemption applies to the sale of a “used residential complex” (i) by a person who is not a builder of the property and (ii) the type of property under this definition is either a detached house, semi-detached house, rowhouse, apartment building, residential condo unit, mobile home or and even a floating home. Typically, used residential properties are sold by the owners and not the original builders. However, the definition of builder does not solely mean a construction worker or developer building houses for a living. It turns on the type of work actually done to the property and you can be deemed to be a builder if you completed a substantial renovation to your property or have “flipped” a house. If this is the case, your used residential complex will be treated as a new house and GST will be payable under the ETA. 

What’s a substantial renovation?

Subsection 123(1) of the ETA provides for what is considered a substantial renovation to a used residential complex. In simple terms, a substantial renovation is to have taken place where all or substantially all of the interior of a building with the exception of certain structural components (the foundation, external walls, interior supporting walls, roof, floors and staircases), has been removed or replaced. Generally, all or substantially all is interpreted as 90% or more, meaning that at least 90% of the building that existed before the renovations began must be renovated (to some degree) and only include habitable areas. Every renovation is different in nature and an independent review of the property should be considered in order to determine if it meets the definition of substantial renovation, thus falling outside of the tax exemption.

By Steve Nicholsen, Associate Lawyer, Real Estate, Corporate, and Estate Planning

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