Fair Market Value on CRA appraisals are inclusive of GST/HST for builder‑landlords
A recently obtained Canada Revenue Agency (CRA) internal communiqué – dated May 17, 2023 – states “effective the date of this communiqué, CRA appraisers will report Fair Market Value (FMV) as inclusive of GST/HST.” This is good news for builders, reducing appeals and objections resulting from disputes with the CRA on FMV as it relates to self‑supply of residential complexes.
In recent years, in an apparent policy change, it was common practice for auditors to apply the self‑supply GST/HST amount on top of the CRA‑appraised amount (i.e., the appraisal was treated as a GST/HST‑exclusive amount). This resulted in additional GST/HST payable and, sometimes, lower housing rebates due to ceilings and grinds applied on the calculation of rebates, which are impacted by FMV increases. This invariably resulted in incremental GST/HST taxes payable by the taxpayer, leading to appeals and objections filed with the CRA due to this policy change.
Some context
Section 191 of the Excise Tax Act was created to level the playing field between builders and landlords. This section deems there to be a self‑supply of a residential complex (single or multiple unit) when a newly constructed or substantially renovated complex is substantially completed or occupied.
This self‑supply is meant to put a builder‑landlord in the same position as a purchaser‑landlord. A purchaser‑landlord would pay GST/HST to the builder on the value of the completed residential complex. However, without this section, a builder‑landlord would have no GST/HST liability on completion of the residential complex, therefore gaining a tax advantage – mainly, the construction costs (such as labour, financing and profit) would not attract GST/HST, which would otherwise be payable by the builder upon sale.
To promote fairness, section 191 deems the builder to have made and received a taxable supply by way of sale of a residential complex, and to have paid as a recipient and collected as a supplier GST/HST in respect of that supply, calculated on the FMV of the residential complex. Generally, this means the builder will pay GST/HST at the relevant rate (five to 15 per cent, depending on province) and be eligible to claim any applicable housing rebates (assuming all other conditions are met).
Since timing of the self‑supply (relevant date), valuation methods and housing rebates remain unchanged in light of this communiqué, they are not discussed here.
Changes
The CRA has confirmed all approaches to value should state the conclusion of value as “inclusive of GST/HST” and its auditors will take the reported FMV and “back out” the appropriate amount of GST/HST before determining the GST/HST payable due to the self‑supply rules.
Conclusion
Builders engaged in or who have recently completed construction of a residential complex should ensure the FMV is treated as GST/HST‑inclusive, with proper adjustments made to ensure a tax‑exclusive value is used in calculating the self‑supply amount.
We can help with this process, including determining eligible input tax credits you can claim, accessing available housing rebates and providing support for CRA audits or disputes. If you have any questions or concerns regarding these changes, simply contact your Baker Tilly advisor for further clarity and guidance.
Meet the Author
Diana Cameron
Information is current to April 11, 2024. The information contained in this release is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.