Many real estate investors in Ontario have been leaving money on the table, often not becoming aware of their blunder until well after the fact. That needn’t be the case, though.
Investors are entitled to the (New Residential Rental Property Rebate), for which they must apply within two years, if their unit is leased out for one year. Sounds simple, right?
“There are a number of people who call me two years afterwards and say they wish they knew about it, and it happens more in the rental market than the build market,” said Michael Sproule, principal of Sproule & Associates. “About 25% of them don’t take advantage of the rebate, or they don’t file correctly, or they wait too long, or they don’t have the proper terms and agreements.”
In order to obtain the rebate, a Statement of Adjustment and a rental agreement for one year are required as proof. Sproule added that the latter is imperative, but many investors are either unaware of the stipulation or they make a critical error in judgement.
“The renter of the property has to have a one-year rental agreement with you, and if you do not have a one-year agreement you will not get your rebate back,” said Sproule, who warned about another frequent mistake.
“Sometimes, the builder or developer says, ‘We’ll sell you a condominium and once you close we will find you the tenant,’ and in those situations, you will not qualify for the rebate because, the way the CRA interprets it, that’s an arm’s length arrangement integral to the purchase of the property.”
If an end-user is purchasing the property, they’re eligible for the rebate—which the developer holds back on the property buyer’s behalf, unlike the investor who pays it upfront—through the New Home Rebate, but what if circumstances change—as they often do in the half-decade between purchasing and closing?
“A lot can change before occupancy, and the problem with the program is that it’s based on intention, but your intention when you close can be very different from what it was when you bought the unit,” said Mark Purdy, an HST consultant and real estate investor with www.rentalrebate.ca, adding that the hypothetical end-user, whose HST payment was waived by the builder, may change their mind and rent out the property instead. “Well, the CRA will come back and say, ‘You’re not living there, so we want that money.’ I’d say there’s a clawback 40% of the time. Things change, so now they don’t move into the unit because they found somewhere else, or they got married, or they have kids and the place no longer makes sense.”
While Sproule believes around a quarter of condo landlords leave that HST rental rebate on the table, Purdy says it’s more like 50-60%.
According to the rules of the rebate, fair market value is the price paid for the residential property—say, $400,000—but in the rental property rebate, there’s a mechanism that requires fair market value based on the present-day valuation.
“If I bought the property for $300,000 but it’s worth $500,000 when I close on it, there’s going to be a disconnect with the HST,” said Purdy. “On $300,000 as an investor, I’m going to pay roughly $24,000, but because it’s now worth more than $450,000, I’m not going to get the whole $24,000 back. I’m going to get around $21,000.”
The HST rebate is involuted in nature, but Sproule and Purdy advise investors to study the programs lest they leave five figures on the table.