Many buyers of new homes and condominiums may be surprised to receive a demand from Canada Revenue Agency (CRA) to repay as much as $24,000 in HST new-home rebates that they received on closing their purchases.
The CRA claim arises when a third party, who is not a close relation, has been placed on title at the insistence of a mortgage lender. This often occurs when the buyers themselves do not qualify for a mortgage.
Noah Okell is a real estate lawyer in the city of Vaughan. He told me last week that two of his clients were recently dinged for more than $26,000, including interest, because an uncle was registered as a one per cent owner for mortgage purposes.
According to CRA, this disentitles all the buyers to the entire HST rebate. The Excise Tax Act says that if even one buyer registered on title fails to qualify for the rebate because the home is not his or her primary residence and the person is not a close relation, then all the buyers are disentitled to the rebate.
Here’s how it works. The purchase price of a newly constructed home is subject to HST. Typically, the price in a builder offer assumes that the purchaser is eligible for a rebate of part of the HST, and assigns it back to the builder as required by the purchase agreement.
In order to qualify for the HST rebate, the house or condominium must be acquired for use as the primary place of residence of the titled purchaser or his or her relation.
The tax law defines a relation to mean a blood relationship, including a child and grandchild, a brother or sister, and relationships by marriage or common-law partnerships. Cousins, aunts, uncles, nephews or nieces, friends and business associates are excluded from eligibility.
As a result, if just one of the buyers does not qualify, even as the owner of a one per cent interest in the property, none of the buyers can get the rebate. If they received it on closing, and assigned it back to the builder as is typical, CRA will ask for it to be paid back, with interest. In other words, all of the buyers must qualify, not just most of them. There is no percentage allocation.
The amount of the lost rebate can be substantial. The federal portion of the rebate is calculated at 36 per cent rebate of five per cent of the price, up to a maximum of $6,300 for homes or condos costing $350,000 or less. The rebate gradually drops to zero on homes priced between $350,000 and $450,000.
In addition, there is a rebate of 75 per cent of the eight per cent provincial portion of the HST on the purchase price up to a maximum of $24,000.
Philip Davidson, of Calgary, got caught in this rebate trap back in 1999 when he bought a new duplex from a builder. The price of the unit he occupied was $131,841.50. In order for Davidson to qualify for a mortgage, the lender required that title be taken in his own name along with Carol Waterhouse, who was named as owner for mortgage purposes only.
Since Waterhouse was not a relative of Davidson, and wasn’t using the duplex as her primary residence, Davidson did not qualify for the rebate. The Tax Court of Canada ruled that he had to pay the government back the entire tax rebate.
Buyers who take title along with spouses, parents, grandparents or siblings for mortgage purposes are not disqualified from receiving the HST rebate. But aunts, uncles, cousins, nephews or nieces, friends and business associates who sign on — even for a small percentage — just to satisfy the lender’s requirements, will disqualify the buyer from receiving the entire HST rebate.
In these situations, buyers who have received past rebates but failed to qualify for them should not be surprised to receive a very unwelcome letter from the CRA audit team.
This situation is unfair and illogical. It’s time for the federal government to change the rules.
Bob Aaron is a sole practitioner at the law firm of Aaron & Aaron in Toronto and a past board member of the Tarion Warranty Corp. Bob specializes in the areas of real estate, corporate and commercial law, estates and wills and landlord/tenant law. His Title Page column appears alternate Fridays in The Toronto Star and alternate weeks on Move Smartly. E-mail firstname.lastname@example.org