Pursuant to the implementation of Harmonized Sales Tax in Ontario in July 2010, buyers are now generally required to pay 13% HST when they purchase new housing. This consists of a 5% federal tax and an 8% provincial tax. This general rule applies to all housing types, including residential condominium units. Fortunately for buyers, there are rebates available for portions of this additional tax. This post focuses on the federal and provincial New Residential Rental Property Rebates and how the year of residency requirement applies to condo units that are purchased and subsequently leased by the buyer.
Federal and Provincial New Residential Rental Property Rebates
The federal GST/HST New Residential Rental Property Rebate (“GST/HST NRRP rebate”), which covers some of the GST or the federal part of the HST, is available to buyers who: (1) have paid the GST/HST on the purchase of a newly constructed residential complex that is, or contains at least one “qualifying residential unit”; and (2) are leasing the complex or units in the complex to another person for residential use by an individual.
In Ontario, a buyer may also be entitled to claim a provincial NRRP rebate for some of the provincial part of the HST that was paid for his or her newly constructed rental property. The conditions and restrictions for claiming a provincial rebate essentially mirror those for claiming a GST/HST rebate. However, the provincial rebate applies to qualifying rental properties across all price ranges and different rebate rates are used.
When purchasing a new condo or home to rent out, the buyer can only apply for these rebates after closing. This creates a financial burden on buyers of new rental properties, as they must pay the full purchase amount including HST upfront and suffer the interest costs until a rebate is granted. Thus, anyone who purchases a new home or condo for rental purposes should apply for the rebate as soon as possible. But when is that, exactly?
Year-Long “First Use” Requirement for Qualifying Residential Units
Any residential unit for which a buyer is claiming an NRRP rebate must be a “qualifying residential unit.” The Canada Revenue Agency (“CRA”) provides a six-part test for this term. For the full test, see page 9 of CRA’s Guide RC4231, GST/HST New Residential Rental Property Rebate. One of the notable components of this test is the requirement regarding “first use”. In order to qualify for the GST/HST NRRP rebate, it must be true, or reasonable to expect, that the first use of the unit will be one of the following:
- The applicant’s, or the applicant’s relation’s primary place of residence for a period of at least one year (or for a shorter period if, after the shorter period, the unit is leased to an individual who will occupy the unit as their primary place of residence). Note that “relation” includes a spouse, descendant or sibling under the Income Tax Act.
- A lessor’s, or their relation’s, primary place of residence for a period of at least one year (or for a shorter period if, after the shorter period, the unit is sold or leased to an individual who will occupy the unit as their primary place of residence).
- An individual’s primary place of residence if the individual will occupy the unit continuously for a period of at least one year (or for a shorter period if the unit is sold to another person for use as the primary place of residence of that person or a relation to that person, or taken by the person or lessor, or a relation of the person or the lessor, for use as their primary place of residence).
When a new condo unit is ready for occupancy, the buyer is often given possession before ownership. In other words, residents can move in to the unit, but title will not be transferred until some time later when the entire condo development is fully constructed and registered. Thus, it is important to note that the period of occupancy before final closing, or the “interim occupancy period”, is included in the one-year time clocks that are outlined in the “first use” requirement above.
The one-year time clocks are based on the first use after the unit in question is substantially complete. Where the buyer of a condo unit is given possession of the unit before title, and the first use of the unit is through a long-term lease (one year minimum), that buyer is entitled to the NRRP rebates, subject to meeting any other rebate conditions. In other words, a tenant need not be in the unit for a full year after title is granted and the unit is bought. Rather, to qualify for the NRRP rebates, a tenant must be in the unit for a full year after the start of the interim occupancy period. At that point, the buyer of the unit will be entitled to the NRRP rebates.
However, it is important to remember that the buyer cannot apply for the rebates until after the GST/HST has been paid to the builder. GST/HST is generally payable on the earlier of the day on which ownership or possession is transferred to the purchaser. However, where the housing is a residential condominium unit and possession is transferred before the condominium has been registered pursuant to the Condominium Act, the HST becomes payable when the ownership of the unit is transferred, or 60 days following the date of registration of the condominium, whichever comes first.
By way of example, if the buyer of a new condo unit first uses that unit to lease to a tenant for an entire year but GST/HST is not paid until 6 weeks before that year is up, the buyer of the unit will still qualify for the NRRP rebates at the end of that one-year lease after GST/HST are paid because the one-year clock begins running as soon as someone begins living in the unit for the first time, not when title is transferred or when the sale is finally closed.
In summary, as long as one of the persons listed in the “first use” requirement above has been using the condo unit as his or her primary residence for one year, the applicant can and should apply for the NRRP rebates as soon as GST/HST is paid to the builder.
The content of this article is intended to provide a general guide to the subject matter and is not legal advice. Specialist advice should be sought regarding your specific circumstance.