Have You Signed a Leaseback Purchase Agreement on a Condo? You Might Owe the CRA Thousands of Dollars!
Buying a condo unit with the intent to rent it out seems like a wise decision and many condo buyers opt for this. However, if you are among those individuals who signed a leaseback agreement with a company or directly with the builders, then you might now be owing thousands of dollars in taxes, according to the Canada Revenue Agency (CRA).
In Canada, builders are selling their condo units to buyers, while also giving them an offer for a “guaranteed rental” incentive. Becoming a condo owner with a certain guaranteed amount for two to 10 years, as per the agreement, is an incredible investment. That is until condo buyers started receiving letters from the tax authority to notify them that they owed a hefty amount of money in penalties, interest and taxes.
Did You Just Become a Builder?
These letters informed the concerned condo buyers that they are considered “builders” after signing the leaseback agreement. This rental guarantee incentive drew the interest of the tax authorities, through which they are now tangling up the unsuspecting Canadians under the provision that wasn’t meant to be applicable to them.
This tax act is intended to penalize those builders trying to sell condos to their own selves at a much lower rate with the aim of generating more income by renting it out.
Let’s have a look at the act and who qualifies as a builder.
According to the Excise Tax Act, “builder of a residential complex includes a person who acquires an interest in the complex before it has been occupied by an individual as a place of residence or lodging, for the primary purpose of making one or more supplies of the complex or parts thereof by way of lease, licence or similar arrangement to persons other than to individuals who are acquiring the complex or parts otherwise than in the course of a business or an adventure or concern in the nature of trade.”
Since this provision labels individuals as builders who purchase a condo with the intention of renting it out and won’t be residing there, thousands of condo buyers are now being sent letters notifying them that they are considered to be builders for GST/HST purposes and have to pay the taxes.
The Harmonized Sales Tax (HST)
All the buyers, who are not builders, have to pay an increased amount of HST due to the process of self-assessment that the builders are supposed to do. Increasing prices of condos in recent years have made the situation worse as buyers are subjected to taxes as per the property’s market value at the time it is leased out, instead of the time of purchase.
The more time passes between the date of purchase and the leaseback time, the higher the HST buyers have to pay to the CRA.
What Can You Do?
As a condo owner who opted for a leasing agreement with a builder or developer, you don’t have any control over when the tenants move in. Just like thousands of other buyers, the leasing being handled by the developer instead of a cash-back seemed like an appealing option, since you wouldn’t have to go through the entire process yourself.
But now being deemed a “builder”, you will have to pay the tax bill, which includes potential penalties and interest, instead of the HST rebate you were expecting. Even after paying the HST percentage on the purchase price of the condo, you would be assessed on the market value of the amount once the tenant leased the condo.
Challenging the CRA on their position that a condo owner is a builder, it is essential to consult a legal representative to help you in demonstrating the main purpose of the condo and dispute the underlying assumptions placed by the CRA. This can be a complex situation for you and it is recommended to consult with an experienced real estate lawyer to establish the next course of action.
Nanda & Associate Lawyers have a dedicated and experienced legal team ready to address your concerns and determine the best possible legal solutions for you. Feel free to book your consultation today and let us guide you in this challenging situation.