Flipping houses is predicated on the resale of valuable assets, and the high transaction costs that take place come with multiple tax implications. In particular, businesses in this field must understand the nuances of the goods and services tax.
GST is substantial, has available rebate programs and is coming under increased scrutiny of the Canada Revenue Agency. In Ontario alone, the agency audited 28,578 filings totaling $495.2 million for GST/HST-related matters between April 2015 and December 2018. Much of the increased attention has been specifically looked at paid and unpaid GST on house flipping transactions.
With regards to GST and house flipping, there are two sides of the tax that businesses have to consider. The first is the GST they pay for any renovations made to homes, and the second is any GST that’s charged to homebuyers. In both matters, of course, the goods and services tax is combined with the provincial sales tax into Ontario’s harmonized sales tax.
The GST/HST New Housing Rebate refunds GST paid for new home construction or substantial existing home renovation if the house is used as a dwelling place. The rebate is most often claimed by homeowners who are purchasing their primary residence, but it can sometimes be claimed by other parties.
Under the program’s provisions for other parties, businesses that pay GST on house flipping projects which involve renovations may be able to reclaim a portion or all of their paid GST. There are multiple criteria that must be met in order to claim the GST/HST New Housing Rebate when flipping homes, but the biggest one is that a renovation must be “substantial.”
“Substantial” renovations are defined as those that either:
Most house flipping projects don’t meet the first criterion, but renovations of fixer-uppers may meet the second depending on the state of the house when purchased and level of renovations performed. For businesses that pay GST on house flipping fixer-upper projects, getting some of the paid GST back is a major benefit as a lot of goods and services are usually paid for during these projects.
In total, businesses that flip a house with a qualifying renovation project may get up to $6,300 back from the federal government and $30,000 back from Ontario.
When the time to sell a flipped property comes, most businesses are required to charge the buyer GST. There are a couple of exceptions that may apply to this general rule, but they are the uncommon exception rather than the norm.
First, businesses that have minimal income might not be required to charge GST. In select instances, businesses that make less than $30,000 annually aren’t required to charge GST/HST.
Businesses that flip houses, however, frequently make more than $30,000 in the years that they sell properties. Barring a major mistake or downturn in the real estate market, most businesses that successfully flip houses expect to make over $30,000 a year. In fact, it’s fairly common to make that much on a single sale.
Even if a business does make less than $30,000 in a year, there are still incentives for charging GST. Charging GST is normally a prerequisite to taking advantage of any available Input Tax Credits, which many businesses rely on.
Second, homeowners who sell their primary residence at a profit don’t need to charge GST on the sale of their home under the principal residence exemption. A number of individuals and businesses have tried to take advantage of this program when flipping houses by claiming a house is a primary residence when it really doesn’t meet the exemption criteria. This is the type of evasiveness the Canada Revenue Agency is investigating more frequently and thoroughly.
In order to qualify as a primary residence, individuals must:
Consistently living in the property typically requires moving in shortly after the purchase and any necessary renovations are complete, and remaining there for some time. Additionally, living mostly in another residence isn’t allowed.
In the event that a house was a primary residence for a portion of the time that an individual owned the property, a portion of the sale may be exempt from GST. For example, a homeowner that lived in a house for four out of five years can likely claim 80 percent of the property’s appreciation as exempt.
After all requirements are considered, most businesses in this field must charge GST on house flipping sales. Businesses are then responsible for remitting that payment to the Canada Revenue Agency, and failing to do so can lead to financial and legal consequences.
GST, however, doesn’t necessarily need to be a barrier that keeps people from buying houses. Those same federal and provincial GST/HST New Housing Rebate programs that house flippers can sometimes take advantage of are only more widely available to home buyers. Many home purchases qualify for these rebates so long as the home will be used for someone’s primary residence (regardless of whether that person is the owner or a tenant).
Thus, buyers of flipped houses can often get a large portion or all of the GST they pay during a home sale back. If businesses simply make sure buyers are aware of this rebate program, potential buyers will understand that GST is charged but returned. It’s not a cost that really adds to the net purchase price once the rebate is paid back.
While these broad guidelines are generally true, the laws regarding GST and house flipping are detailed and complex. To make sure your business is in compliance with all applicable laws and taking advantage of every program available, work with a law firm that specializes in GST on house flipping.
Nathaniel completed his Juris Doctor degree at Osgoode Hall Law School and is our senior associate. He articled with us in 2014 and was called to the bar in 2015. He successfully completed all of the requirements of Osgoode’s Taxation Law Curricular Stream
Kevin earned his Juris Doctor from Osgoode Hall Law School and became an articling student in 2017. He has been with us as a tax lawyer since his call to the bar in 2018.
Ian Thomas joined our Toronto tax law firm as an articling student (student at law) in July 2016 and stayed with us upon becoming a Canadian tax lawyer in June 2017. Ian earned his Juris Doctor from Osgoode Hall Law School and graduated in 2016.
Ildi has joined the law firm of Rotfleisch & Samulovitch PC in June, 2000 and brings over 25 years of legal secretarial experience to the firm. She started as a Legal Secretary and after obtaining Certificates from The Institute of Law Clerks of Ontario
Jason earned his undergraduate degree at Wilfrid Laurier University with a History and Classics Double Major with an English Minor and joined our team as a paralegal in 2018.
Denise is our first responder who cheerfully answers the phones and generally interfaces with clients. She has been with us since 2016.
Paul Zhang was a summer student with us in 2018 and joins us as an articling student in 2019.
Jamin Chen joined our tax law firm as an articling student in September 2016 after earning his Juris Doctor from Allard Hall at the University of British Columbia and continued to practice tax law with us after his call to the bar in 2017.