New Condo Buyers: Beware of HST and Capital Gains Tax

New Home Tax BurdenWhen a new condo is purchased,  HST of 13% must be paid, as only resale real estate is exempt from HST. In most cases, the builder includes the HST in the purchase price, so the buyer doesn’t have to come up with a huge cash payment to CRA in addition to their down payment. In return for paying the HST, however, the builder usually requires that the buyer sign over their HST rebate entitlement. The rebate is substantial, typically more than $20,000, and if the buyer is unable to qualify for the full amount of the rebate, the builder may require that the buyer pay them directly for the shortfall.

In order to qualify for the full HST rebate, the buyer must genuinely intend to occupy the condo as his principal residence at the time the purchase contract is signed. Most of these contracts are signed pre-construction, 2-4 years before the condo is ready to occupy, and many things can change during that time, including the intention to move in when it’s complete. For example, the buyer might be get married, get divorced, get promoted, lose his job or any of myriad other unanticipated life changes. As a result, the buyer might decide, or be forced, to rent or sell the condo instead of moving in. If the buyer is not able to prove that the original intention was to move in, he might no longer qualify for the HST exemption and might therefore be at risk of having to pay the amount of the rebate to the builder.

When a purchase contract for a new condo is signed by the buyer, there is a 10 day ‘cooling off period’ during which the buyer can have the contract reviewed by his lawyer. This is the opportunity to clearly understand what legal rights the builder has included in the contract regarding HST, and what the buyer can do to ensure that his original intention to move in can be proven in case things change unexpectedly before completion of the condo.

The buyer of a new condo may also be subject to capital gains tax if he sells the condo soon after completion, even if the original intention was to move in. Gains in real estate are exempt from capital gains tax if it is your ‘principal residence’, but how does the buyer prove that the condo was his principal residence, and how long does he have to live there before earning the capital gains tax exemption? The CRA does not provide simple, clear-cut answers to these questions.

Things get even more complicated if the buyer rents the new condo for a period of time before moving in, or if the buyer assigns the purchase agreement to another buyer before the condo is registered. Figuring out exactly what capital gains tax and HST liabilities might be involved can be even more difficult in these situations.

Also, with so many investors ‘flipping’ condos soon after completion, the CRA has become more and more aggressive about collecting tax. For example, the ‘flip’ may be interpreted as a business transaction rather than a capital gain, and therefore subject to taxation on the full amount of the gain rather than 50% if it were a capital gain.

The bottom line is, that if you are buying a pre-construction condo, think about getting thorough legal and tax advice before you take the plunge — or think about buying a resale condo instead!