Ask The Expert: Do I Pay GST on a Never-Occupied Unit?
A little-known tax loophole means that if you buy a resale unit that has never been occupied, you’re on the hook for the GST, explains local agent Barry Magee
Q: I'm looking for a newer condo, and I know that if I buy a new presale unit, I would have to pay GST on the purchase price. So if I were to purchase a resale property that is a couple of years old and has never been occupied, am I excluded from having to pay GST on it?
A: With the amount of development happening in Vancouver and the political talk around affordability that is ongoing, this is definitely an intriguing question. The perhaps-surprising answer to your question is no, you are not excluded from paying GST in this scenario. There are a number of situations where paying GST will still be applicable.
Most people don’t know this, but if the unit has been left unoccupied, it is still considered new upon resale of the unit. The federal government considers this transaction a transfer of unoccupied inventory from one developer to another, so GST would be payable upon the resale transaction.
So this brings a whole new issue into play. With vacancy being a target of the recent taxation scheme proposed by UBC professors to address housing affordability, this could be a loophole that can be exploited by an astute real estate investor.
An example I heard recently was one where an investor purchased a property for $500,000 and paid $25,000 GST on the unit. They decided not to occupy or rent the unit, and were able to sell it a year and a half later for $600,000, because of Vancouver’s increasing prices.
The new buyer wasn’t aware of this, but because the unit had been left unoccupied, the purchase was subject to paying five per cent tax, even though the building had been completed a year and a half ago. In addition to this, the seller was able to get their original $25,000 GST refunded to them from the province. So the investor made a clear $100,000 profit. A perfect example of real estate speculation at its best.
Another exemption is when someone uses a property for a business purpose for more than 50 per cent of their ownership. So if you are buying from someone who used the residence to generate income, you need to check whether or not GST is payable on the unit.
Yet another situation where you may be forced to pay GST on a resale unit is when it has claimed input tax credits or has undergone a substantial renovation.
You can find out more about the how the government views these situations on the CMHC website here.
While it’s unlikely an investor would buy a unit specifically to exploit this loophole, as a buyer it is something you should very much be aware of. Getting a bill for $30,000 when you aren’t expecting it isn’t on anyone’s priority list. And with the amount of new developments we see being constructed around the city, I think more people will come across this as they purchase units that are a few years old.
If we see any new tax system implemented like the one being discussed at the Sauder School of Business these days, I think it’s very likely we will see an increase in the amount of inventory available, especially in the newer developments we see everywhere around the city, as investors offload their units to avoid the vacancy tax.
As a buyer of one of these resale/new units, you should definitely make sure you are fully informed what the status surrounding GST on the unit is before becoming invested in the property.
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