The BDO Real Estate Investor blog is for the small to medium-sized real estate investor. George Dube and Peter Cuttini are real estate investors and accountants who want to share their knowledge to help other investors improve their businesses.
In an effort to address housing affordability in British Columbia, and catch unreported tax revenues in the condo market, the provincial government has introduced a real estate condo registry. The condo registry was created to regulate pre-sale property flipping and help reduce tax evasion in the B.C. real estate market. Our real estate and construction team shares an overview of what pre-sale property owners in B.C. can expect this year and onward. Other provinces have also expressed interest in the policy and will likely see a similar change in the future.
Condo and Strata Assignment Integrity Register (CSAIR)
The Condo and Strata Assignment Integrity Register (CSAIR) is a database for assignments of purchase agreements of all residential condo and strata lots in B.C., including both pre-sale lots and completed lots. Strata properties are commonly known in B.C. as housing under a strata corporation. They primarily include condominiums, duplexes, townhouses, and fractional vacation properties. However, they can also include single-family homes under a strata corporation subdivision.[i]
A pre-sale purchase agreement refers to acquiring the right to purchase a condo or strata lot from a developer before the building is completed and registered with the land title office. An assignment is the transfer of the right to purchase the condo or other strata lot. The filing fee per assignment is $195.
The CSAIR captures information about assignments of purchase agreements of condos and other strata lots, including certain information on the assignors and assignees. Developers are responsible for collecting and reporting this information on all assignments of purchase agreements entered into on or after January 1, 2019. Moreover, this information, along with any new updates, is required to be filed by the developer in a quarterly report.
Information in the CSAIR is kept “confidential” by the Ministry of Finance, but is shared with other agencies, such as the Office of the Superintendent of Real Estate and Canada Revenue Agency (CRA), to ensure assignment transactions are reported and the appropriate taxes assessed. The information collected is also used to inform future housing and tax policy.
Addressing past challenges
Prior to the introduction of the condo registry, many owners doing flips of their pre-sale properties before the completion of their construction would not disclose these exchanges, making it impossible to know how many of these transactions occurred annually. In many cases, owners weren’t paying all the appropriate income taxes or property transfer taxes. All this has been a contributing factor to rising real estate prices and has enabled tax evasion across the province, or allowed people to escape taxes unknowingly. Given the CRA’s ongoing focus on the condo market with their audit teams, the new B.C. registry will allow them to further crack down on uneducated condo flippers in the B.C. market who ignore already established rules.
Ensuring future compliance
The registry was introduced to avoid such issues in the future. Flipping properties, no matter what stage of construction they’re in, is a popular practice in the real estate industry. B.C. is the first province in Canada to launch this type of condo registry. As previously mentioned, other provinces have expressed similar interests and are likely to follow suit in the future.
BDO offers support in a multitude of real estate accounting services. For any additional information on the new registry, please reach out to our team.
Like many other industries, those in real estate and construction are affected by the 2019 Federal Budget update. A general synopsis of the budget can be found here.
Many business owners and investors are aware of the seemingly never-ending series of budget deficits. This is particularly ironic given that government and other organizations encourage Canadians to decrease their debt and buy homes that they can afford should interest rates increase.
Now that some time has passed to analyze the budget in-depth, our team would like to weigh in on specific 2019 Federal Budget elements that are relevant to real estate and construction.
Home Buyer’s Plan (HBP) limit increase and marriage breakdown resets
With a stated desire to make home ownership more available to first time buyers, the government announced that the $25,000 withdrawal limit will increase to $35,000. The HBP allows qualifying buyers to draw down up to $35,000 (or $70,000 between spouses) from their RRSPs, and in turn repay these funds over 15 years. There is also the option to slowly take the amount into income over this period.
For those who have had a breakdown in their marriage or common-law relationships, the HBP may be more accessible for acquiring a new property or buying out a former spouse. In this instance, various conditions apply.
Having access to a larger deposit, assuming buyers are able to save sufficient funds to benefit from the program, can allow for increased sales and higher prices for homes. With more people waiting longer to buy houses, and parents potentially looking to help their older children out of the family home into their own, the program has the potential to be more widely used. While not the stated intent of the program, increased sales volume and prices may be in store for the real estate industry, outside of other factors.
First-time home buyer incentive
While details are still forthcoming, the government expects to have a shared equity program for new home buyers in place for September 2019. Increased home ownership is expected if buyers can reduce their monthly ownership costs by having 5% or 10% of the initial home price initially paid by the Canada Mortgage and Housing Corporation (CHMC). The lower rate will apply to the purchase of existing homes whereas the 10% will apply to new homes. Family income levels will need to be under $120,000 per year and the amount of the mortgage plus incentives must be no higher than four times the annual household income.
Capping the home values at four times may actually decrease the value of a home many first-time buyers could have qualified to purchase. Ratehub.ca pointed out that on average, new home buyers could see a 15% decrease in the value of a home they are qualified to purchase. As an example, they outline how a family earning $100,000 per year could qualify for a home costing approximately $480,000, If they were to use the program, they would be capped at approximately $405,000 to keep the government incentive/mortgage at $400,000 (below four times their income).
Ultimately, the funds must be repaid at the time of sale. Further details of the program will become available at a later date. The real estate industry could see this as an opportunity to increase sales volume and prices for qualifying properties. Decreases to the prices on borderline homes may also be necessary to qualify for the program. Seeing the impact on spring and summer sales will be interesting as there are a number of Canadians waiting for the fall months to see the details of the program. It’s uncertain if and how the program will continue if the desired results aren’t met. Will the program be cancelled shortly, as happened in British Columbia where a similar program was attempted without the desired results? How would you feel if you were sharing ownership of a property with the government and potentially restricting what can be done with the property for financing purposes later on (for example, using the home equity as leverage for investment purposes).
Multi-unit residential property change
The government is looking to put taxpayers who own multi-unit properties in a similar position to those who own single-family homes when there is a change in use of a unit in the property. A change in use occurs where a property/unit changes from personal to rental/business use, or vice versa. Provided certain conditions are met, where a home has this change, the taxes that would otherwise be owing on the deemed disposition and reacquisition can be deferred. However, the rules require the entire property to be changed, as opposed to a unit of a duplex or a fourplex for example, to qualify for the deferral. Following this year’s Federal Budget update, a unit may have a change in use deferral after March 19, 2019, versus an entire property. This is a positive change.
Beneficial ownership disclosure
Reminders in the 2019 Federal Budget exist for prior efforts to learn more of the true ownership of federal companies and beneficiaries of trusts. Rules relating to federally incorporated companies (with various provinces indicating a willingness to have similar legislation created) are already in place and will be amended. For family trusts, these rules will come into force in 2021. For the most, this will not be an enormous issue; simply just a little more paperwork to watch for. These changes may make it easier for the government and law agencies to identify, track, and seize assets in a timely fashion.
The budget documentation notes efforts to combat mortgage fraud and money laundering within the real estate and construction industry. With regards to money laundering, British Columbia was specifically noted as a target. Through Statistics Canada, the government will begin a two-year project of gathering additional information to help attack tax compliance and anti-money laundering. Unquestionably, the government is looking to access more and more data and from this to develop further measures for addressing tax concerns, and additionally mortgage fraud, money laundering and the like.
Accelerated tax deductions for specified electric, hydrogen, and hybrid vehicles
Consideration for a qualifying energy-efficient vehicle is now virtually a requirement. New vehicles purchased before 2024 may qualify for a 100% write-off in the first year of ownership. And up to $55,000 plus sales taxes are eligible as compared to the more predominant $32,000 plus sales taxes for many vehicles. However, more qualifying construction-oriented vehicles may not have this limit. Additional details will be available in the near future, but it’s worthwhile to consider acquiring a vehicle shortly before your fiscal year-end.
Personally creating a proprietorship may be warranted, if needed, to eliminate personal automobile benefits of corporate-owned vehicles. Assuming you will be able to drive the vehicle exclusively for business use for the given period of time, you can avoid a large personal proration to the deduction which would reduce your claim. Moreover, there is a $5,000 purchase incentive for electric or fuel cell vehicles that cost up to $45,000, although this incentive cannot be combined with the 100% deduction.
Real estate audit teams
There will be an additional $50 million dollars invested into four real estate audit teams, expected to focus on British Colombia and Ontario. Presumably, this is a result of prior successes, as well as the statistics indicating the large tax recoveries that have arisen between income and sales taxes.
In particular, they will focus on the following:
Transactions made on flipping activities to ensure profits are recorded as income (vs. capital gain or non-taxable)
Ensuring commission income is reported as income
Failure to report the disposition of principal residences
Inappropriately claimed principal residence exemptions
GST/HST on residential properties
Likely this should come as no surprise, but the audit list is virtually identical to the targets provided to me on my initial interview with the leader of the first real estate audit team a few years ago, with the exception of reporting principal residence transactions which at that time wasn’t a requirement. They were experiencing, and continue to experience, success on “low hanging fruit”. Why change what is working?
If the ultimate result of these efforts is removing inappropriate activities, the real estate industry will benefit. The challenge will be in differentiating legitimate planning from inappropriate. As we’ve been warning for a number of years, the real estate industry has been a growing target. Investors and business owners in real estate need to ensure everything is done the right way, know where they stand with compliance quality, and be clear on the level of aggressiveness of their planning.
Supply and demand
Budget 2017 introduced the National Housing Strategy to help Canadians find affordable housing. This was to be a ten-year program where $40 billion dollars was invested to build 100,000 new affordable housing units plus repair 300,000 additional units. To date, seven of the provinces and territories have signed agreements with the federal government related to the program, with various spin-off programs created. Federal Budget 2019 looks to expand on this and “increase fairness in the real estate sector.”
The First-Time Home Buyer Incentive will see the government allocate $1.25 billion to the program. Conceptually, Canadians can buy homes that they can afford according to the budget release. While they are actually borrowing more because the funds must be repaid, cash flow is made easier on purchasers. For example, if you were to stretch out vehicle payments over more years, the vehicle doesn’t become more affordable; there’s simply a different financing plan in place. Albeit the home plan doesn’t appear to come with horrendous interest rates and may in fact decrease the price of the homes being acquired so can still make plenty of sense.
To the government’s credit, they recognize that there is also a “supply” side to the equation in providing affordable housing. While we may disagree on the quality of the programs trying to provide housing, and whether other federal, provincial and municipal activities and policies run counter to the strategy, there is a supply side to the problem/opportunity.
Past vs. present efforts
With the 2017 efforts, the Rental Construction Financing Initiative was developed as a four-year program to provide low-cost loans for new housing to modest and middle-income Canadians. Enhancements were made in 2018 to build 14,000 units. To date, the budget indicates that only 500 units have been approved across the country in relation to the 2018 enhancements.
For 2019, the Rental Construction Financing Initiative will be extended to 2027-2028 with $10 billion of funding aiming to create an additional 42,500 new units nationally. Historically, the real estate industry hasn’t seen many incentives compared to the requirements to receive the funding. Perhaps it’s time for a fresh look into the programs with a more targeted geographic focus.
2019 Federal Budget announced that a Housing Supply Challenge will be established with a $300 million budget. Details of the programs are still being developed for the summer. According to Budget 2019, the aim is to “provide new resources to find new solutions to enhance housing supply and provide a platform to share these models” across Canada.
Smaller announcements include allocations from the CMHC to provide $4 million to a Federal-British Columbia initiative called the Expert Panel on the Future of Housing Supply and Affordability. An additional $5 million is reserved for modelling and data collection.
Investing in Canada plan
In the 2016 budget, $14.4 billion was allocated to infrastructure upgrades while the 2017 budget committed to an additional $81.2 billion for public transit, green infrastructure, social infrastructure and infrastructure that supports trade, transportation, and rural and northern communities.
Overall, the 2019 Federal Budget provides little change from a tax perspective. Spending plans have not been developed in a way that’s comprehensive or considers a balanced budget. Competitive tax rates with the United States, including further commentary on tax reform, have not been addressed at this time. But significant considerations for the real estate and construction industry were made.
If you are interested in any further clarification surrounding Federal Budget 2019 or require support in preparing your business and investing activities for this budget, please get in touch.
George E. Dube, CPA, CA
Tax Partner, BDO Canada
Central Canada Industry Leader, Real Estate and Construction email@example.com
Given the U.S. tax reform in 2018, we’ve been providing extensive advice on U.S. purchases being made by Canadian real estate investors. Indeed, they are by far the largest investors into U.S. real estate, contributing roughly USD$20 billion per year. So they must ensure they’re properly navigating the U.S. Tax Reform changes to protect these investments. If done right, there’s potential to maximize on tax savings and asset protection.
After getting some feedback from our real estate tax professionals, we wanted to share a few tips on how to approach U.S. real estate if you’re a Canadian investor and how U.S. tax reform can impact your investment.
Choose your investment structure
One of the first things you’ll want to consider is what ownership structure to use. For things like associated legal risks, costs, timeline of ownership, intended use of property, and future acquisition plans, the proper ownership structure is imperative. Below is a brief overview of what your options are for investing in the U.S. as a Canadian.
Individual Ownership: The simplest of all the structures—where all ownership is on you personally.
Canadian or U.S. Partnership: Allows for allocation of income to multiple partners and may lower overall estate tax.
Canadian or U.S. Corporation: Owning the property through a corporation can limit exposure to estate tax and lessen personal legal liability.
Specially Drafted Trust: Cross-border or residence trusts can help minimize the exposure to U.S. estate taxes.
As far as structures go, there is no ideal or one-size-fits-all solution. It’s the responsibility of the investor to consider the implications of all the options. We recommend that Canadians buying residential rental properties in the U.S. use an ownership structure that best suits their particular needs. Sometimes legal and operational requirements, such as ability of obtaining U.S. financing, may outweigh the need for high tax effectiveness.
Review the impact of U.S. tax reform
Up to now, ownership of U.S. real estate through partnerships or Canadian corporations seemed to be the most popular choice among Canadians. In these structures, and thanks to the tax treaty, Canadians were able to recover most of the U.S. tax cost of property ownership through foreign tax credits claimed in Canada. The reduction of the U.S. federal corporate income tax rate to an average of a flat 21% from 34% means that the tax cost of owning U.S. real estate through a U.S. corporation is now less expensive.
Canadians investing in U.S. rental real estate through U.S. partnerships or personally may also benefit from the new 20% deduction on the qualified business income. There are certain restrictions on when and how the deduction is available, but the availability of this tax incentive may make personal ownership of U.S. rental real estate appealing, especially since it can also reduce structuring cost.
U.S. tax reform severely limits interest deductibility. Before the law change, interest paid to third parties, such as mortgage lenders, was fully deductible for tax purposes. As of the 2018 tax year, interest deductibility is limited to 30% of taxable income. These limitations will have an immediate impact on Canadian owners with highly mortgaged U.S. properties.
All U.S. taxpayers can benefit from the new 100% deduction, allowing them to write off certain capital assets that were placed in service after Sep 27, 2017 and have useful life of less than 15 years. This bonus depreciation, as it is referred to, may reduce the cost of U.S. property investment by reducing the cost of property upgrades (for qualified assets), especially if the newly purchased U.S. property needs to be furnished and renovated.
Do your due diligence
The U.S. is a big place. Some states may be better options than others. A great starting point when considering real estate investing is to research specific state regulations and tax rules. Some states may levy special taxes in addition to income taxes, such as hotel tax for short-term rental.
Income generated from rental of U.S. real estate is subject to U.S. tax. Therefore you can expect extra filing and set-up costs when you have real estate investments in the U.S. Particular attention should be paid to U.S. real estate owned through Canadian or U.S. corporations. Personal use of such property by shareholders and their family members may create rental income to the corporations.
Also, remember that sales of U.S. real estate property usually attracts U.S. tax withholding of 15% on the gross amount of the sale price at the time of the sale or property transfer. In certain circumstances, the withholding amount can be reduced. This, however, may require the assistance of an experienced cross-border U.S. tax specialist.
Thorough research and planning is imperative to your success. That’s why it’s important to be in touch with an experienced professional through all steps of the process—especially if this is your first U.S. real estate investment.
Know what to avoid
Unlike U.S. residents, who also have an option of purchasing real estate through a Limited Liability Corporation (LLC), Canadians are better off avoiding direct interest in LLCs since these types of entities are not tax efficient in the cross-border setting. However, Canadians are not altogether barred from using LLCs for their investments if proper organizational structures are put in place.
There are also certain types of U.S. partnerships that do not receive favourable treatment under Canadian tax law. The income from these partnerships can be taxed differently than it would from regular partnerships. The entities that should be avoided by Canadians are U.S. partnerships that provide ‘super’ liability protection such as LLLPs.
Combat challenges with proper planning
Ultimately, Canadians can benefit from a U.S. real estate investment if all the right precautions are taken. It’s important to consult U.S. tax professionals along the way to ensure you’ve taken all the right steps. If you’re interested in learning more, you can contact John McCrudden below.
John joined BDO in 2008 as a member of the firm’s U.S. tax practice in our large market region. With experience in Canada/U.S. cross-border corporate tax work, his practice focuses on serving Canadian corporations and operating in the U.S. His expertise is in planning for mergers and acquisitions, repatriations of assets, and tax structures that allow his clients to efficiently conduct their U.S. activities. John has worked with companies in a variety of industries.
The need to carefully consider who is entitled to the GST/HST New Housing Rebate has been emphasized in recent court cases involving trust agreements.
A trust agreement is an agreement between two parties where one party has done something on behalf of the other. We see these agreements in real estate where an individual has entered into a purchase and sale agreement “in trust” for another party, generally a company. It’s good to take a look at specific instances to better understand how trust agreements affect those applying for the GST/HST New Housing Rebate. Here’s a look at a couple examples that illustrate trust agreements in which the purchasers do not qualify.
Trust agreements with an unrelated individual
In a case decided at the Federal Court of Appeal in February 2018 (The Queen v. Cheema), a taxpayer had assistance from an unrelated individual to obtain a mortgage. The individual co-signed the mortgage and was a co-purchaser on the agreement of purchase and sale. The individual acted as a bare trustee who had no interest in the property itself. A bare trustee is someone that holds title to property on behalf of another person; the other person is the beneficial owner.
Although the individual acquired the property only as trustee, this was of no consequence for GST/HST purposes. The rebate rules require a particular individual (or his or her relation) to have the intention to use the property as the “primary place of residence” at the time that particular individual signs the agreement of purchase and sale. For GST/HST purposes, the test as a primary place of residence is different than defined by income tax. You cannot elect to claim a property as your primary residence. Instead, you must occupy the property more than 50% of the time to qualify for the rebate.
Because the individual had signed the agreement of purchase and sale but never intended to occupy the residence, the taxpayer was not entitled to the rebate.
Trust agreements with a known co-purchaser
In a second case decided by the Tax Court of Canada in April 2018 (The Queen v. Duyo), a taxpayer and his wife signed an agreement of purchase and sale but were unable to obtain financing. Their friend agreed to be co-mortgager on the land and a registered owner on title for them to receive financing.
The friend was added as a co-purchaser to the agreement of purchase and sale and an acknowledgment of trust was signed. Since all signatories to an agreement of purchase and sale for a newly constructed home must have the intention to occupy the residence to qualify for the rebate, the taxpayer’s appeal was dismissed.
In each of these cases the co-signors owned only 1% of the property and did so only to assist the factual owners to obtain mortgage financing. However, there is no contemplation of this common situation in the Excise Tax Act that would allow for the New Housing Rebate to be eligible. This is among many things to consider if and when applying for a rebate with the CRA.
If you’re unsure about your eligibility, you can find some more in-depth information about the New Housing Rebate here. Or you can contact us to discuss your particular situation and see what your options are.
We have been warning for many years now that the Canada Revenue Agency (CRA) has been placing a renewed focus on real estate audits. These real estate audits can cover real estate investors, realtors, developers, and contractors, among others, across the country. This is resulting in a significant uptick in taxes and penalties for those in the real estate sector found offside the rules. Headlines are reflecting this:
With programs like the condo audit project in Toronto and Vancouver, the CRA has been identifying, and issuing reassessments and penalties in greater numbers. Pre-construction assignment sales and the real estate sharing economy (vacation rentals) adds complexity and the CRA wants to ensure the tax obligations are met in these cases.
The CRA recently noted:
CRA audits identified $592.6 million in additional taxes related to the real estate sector in the past 3 years.
CRA auditors reviewed over 30,000 files in Ontario and British Columbia, resulting in over $43.7 million in penalties in the past 3 years.
In 2017-2018, CRA assessed $102.6 million more in additional taxes than in 2016-2017, and penalties increased $19.2 million.
These numbers can be daunting and highlight to real estate investors that they must have their accounting, tax, and record-keeping practices in top shape.
What does the CRA focus on for real estate audits?
Here are just a few examples of the tools and triggers that the CRA is using when conducting real estate audits:
Legal tools such as “unnamed persons” requirements to uncover unpaid income taxes – property developers and builders must release information about purchases in pre-construction assignment sales.
New reporting requirements on personal tax returns when you sell a principal residence.
Owning expensive properties but having a low income (although this can be perfectly legitimate).
GST/HST on assignment sales of condominiums.
Comparison of utility usage at places claimed to be a primary residence. If the utilities aren’t in your name, utility usage is abnormal, you were never in the building, and so on, the CRA is not going to look kindly on this tax avoidance strategy. For investors claiming that a property is a personal residence, vs a real estate rental, to avoid a capital gain, or an inclusion into income for a flip, recent cases have come down hard on those who are perceived to be cheating the system.
Asking construction stores, such as Rona, for a list of their contractors.
Multiple years of tax losses claimed on properties.
What can you do to avoid problems with real estate audits?
Be honest and ethical in your business dealings and reporting to the CRA, but also be smart.
Get the right advice before completing transactions. Getting final tax advice from your realtor on whether GST/HST applies to condo assignment fees (it does), is not a good strategy.
For property flipping, ensure you are reporting the income correctly. This is not normally a capital gain, where you are taxed on 50% of the gain. Instead this must be taken into income at 100% of the profit, which may be good or bad.
Ensure you have a good system in place to manage your record-keeping. If the CRA finds you cutting corners in one area of your real estate business (e.g. improperly filed GST/HST rebates, late-filed returns, or challenges in finding requested documents), this can lead them to look, and potentially find, more areas to audit and reassess. If nothing else, it absorbs time and money.
Get help with your documentation if you are in doubt, particularly for high-audit transactions such as GST/HST rebates.
George E. Dube, CPA, CA
Tax Partner, BDO Canada
Real estate accountant, real estate investor, speaker, author firstname.lastname@example.org
As we head into vacation season, we often get questions related to GST/HST on cottage or vacation property rentals using services such as Airbnb. For example: “I purchased a cottage that is closing on June 1st. I plan to rent this out for short-term rentals on Airbnb. I am also planning to turn another cottage I own from personal use to Airbnb rentals. What are the GST/HST implications of this?”
How the cottage or vacation property will be used – short- or long-term rentals
When considering how GST/HST applies to a vacation property, you must be aware of the primary use of the property. Is this a residential property (longer-term rentals or personal use) or a commercial property (shorter-term rentals)?
Residential property – this would be longer-term continuous use of the property. It can be occupied as a principal residence or a vacation property but without pause in the tenancy. Generally these leases are exempt of GST/HST and the purchase or sale of the property would be exempt of GST/HST.
Commercial property – this would include shorter-term rentals, less than 30 days in length. For example, a cottage property where you are renting it out under-30 day stays, through services such as Airbnb.
Changing a cottage or vacation property from residential to commercial: GST/HST
Where a property changes from a residential property to a commercial property, such as your purchase of the cottage to turn it into an Airbnb rental, there are no GST/HST implications other than allowing for GST/HST paid on the purchase of the property to be recovered. Given you did not pay GST/HST, this is not an issue.
Changing a cottage or vacation property from commercial to residential or selling: GST/HST
Where the problem arises is in the future, when you either change the use of the property from commercial to residential or sell the property. Where you change the use of the property there is a deemed sale of the property at current fair market value and GST/HST is payable. A rebate may be available to offset some of the GST/HST.
Below is a mathematical representation for a property purchased in Ontario:
Rent it for short-term rentals for one year.
FMV one year from now
You start to rent it as a long-term rental
$71,500 ($550,000 * 13%)
In Ontario, a rebate may be available if the property is going to be occupied as a principal residence.
In this example a purchaser in Ontario would have made $65,000 on the appreciation of the property, but owed $71,500 in GST/HST. On GST/HST alone, the property would be sold at a loss of $6,500. (This does not take into account other taxes, transaction fees, and so on.)
For vacation properties situated in provinces west of Ontario the tax owing would not be as significant.
Get advice on your cottage or vacation property rental
For vacation properties, whether purchasing, changing their use, or selling, please ensure that you seek out the proper advice from a GST/HST expert. The GST/HST costs can be incredibly significant if not handled properly. If you have further questions on the GST/HST implications for your cottage or vacation property, please contact Scott Merry at email@example.com.