Condo buyers could face major unexpected tax hit over leaseback purchase incentives
Condominium buyers who took advantage of a popular purchase incentive in recent years are finding themselves in the crosshairs of the Canada Revenue Agency.
The rental guarantee incentive drawing the tax authority’s interest is commonly known as a leaseback arrangement, and became popular around 2015 amid jitters that an oversupply of condominiums in some areas would make them difficult to fill with tenants.
Some buyers who took up the incentive that was offered by many developers — including Minto Group Inc., one of Canada’s largest — have received letters from the tax authority advising them they have been deemed “builders” and potentially owe thousands of dollars in taxes, interest, and penalties, according to tax lawyer Dale Barrett at Barrett Tax Law in Toronto.
In an interview, he said he thinks the leases at the heart of the incentive arrangements are ensnaring “common everyday Canadians” in a provision of the tax code that was never intended for them.
They’re capturing people under a provision that shouldn’t have been applicable to them
tax lawyer Dale Barrett
“The intention of the (tax) act is to penalize builders who sell to themselves at a lower rate” with the primary purpose of renting it to someone else in order to generate income, Barrett said.
“The problem is … regular condo buyers who aren’t in the building/development industry are now being required to pay more in HST (harmonized sales tax) as a result of the self-assessment process that actual builders are required to do.”
Rising condo prices are making matters worse, Barrett said, because the buyers are being assessed taxes on the fair market value of the property at the time it is being leased to a tenant — once the condo is built — rather than at the time of purchase, which can be months or even years earlier.
“The greater the difference between the value of the property at leaseback time and purchase time, the more HST is payable to the CRA,” he said.
There are at least 50 projects in Canada from various developers that offered a rental guarantee incentive at some point, Barrett said, which could leave thousands of people susceptible to being reassessed by the CRA.
According to promotional materials compiled by Barrett Law, builders and developers that offered the incentive around Toronto and southern Ontario included Torbel Group, Polocorp Inc., CTN Developments, Podium Developments, and IN8 Developments.
A spokesperson for the CRA said the tax agency “is seeing an increasing number of these arrangements,” which come to light only when the residential unit is constructed — sometimes years after the leaseback arrangements were negotiated between the condo developer and buyer.
“Leaseback arrangements, when encountered in our risk-assessment process for new residential rental rebates, are automatically selected for screening to determine eligibility,” said CRA spokesperson Dany Morin. “In some cases, further examination is required through the audit process.”
Morin did not provide the number of affected taxpayers or details of how many audits have taken place, but said taxpayers “have the right to object (to) the assessment if they don’t agree with the assessing decision and have 90 days from the notice of assessment to exercise this right.”
Barrett, who wrote an article in The Lawyer’s Daily about the CRA’s recent interest in leasebacks, explained that builders or developers that acquire a condo for the purpose of renting it to others through a third party — with the primary intention of earning income — must “self assess” under a provision of the tax code that deems them to have essentially sold the property to themselves. This triggers an HST payment. HST rebates are available to some condo buyers, but these are calculated separately, he said.
Barrett said his position is that the leaseback or rental guarantee was not the primary reason many people bought their condos — it was simply an added incentive — meaning they should not be captured by the “self supply” provision of the tax rules aimed at builders.
He added that he has been in contact with the tax authority, but sees no sign they will be willing to accept his argument.
“The unfortunate thing is that they’re capturing people under a provision that shouldn’t have been applicable to them,” Barrett told the Financial Post.
He said he expects more people will be facing reassessment due to the rental guarantee incentive. As a result, his firm’s website is promoting a “reasonable fixed group rate” to those affected.
A 40-year-old Toronto resident, who spoke to the Financial Post on condition that his name would not be used because he fears his identity could open him up to further potential liability related to his real estate transaction, said he received a letter from the CRA after purchasing a downtown condo for investment purposes and to have a residence in the heart of the city paid for by the time he’s ready to retire. The CRA’s position means that rather than the HST rebate he’d been expecting, he’s now facing a tax bill including interest and potential penalties.
The condo owner said he paid the 13 per cent HST on his condo’s purchase price of $300,000 but is now being assessed on a fair market value of $450,000 established when a tenant moved in — even though he had no say on when that would happen.
“I had no control of that,” he said.
The condo owner said the two-year rental guarantee offered by the condo developer through the leasing arrangement was more appealing to him than a cash-back option that was available at the time. He knew he wanted to rent the condo out initially and liked that it would be taken care of for him and he’d get paid even if demand dried up for the residence.
A 2015 article on the website truecondo.com said the rental guarantee incentive was particularly popular in the pre-sale condo market — where a buyer puts a deposit on a unit that has not yet been constructed. It was marketed by developers and builders in Ontario and Alberta, according to the list compiled by Barrett Law.
For example, Minto promoted a two-year rental guarantee to buyers in a 660-unit development called Minto Westside near Toronto’s waterfront in 2015. The incentive provided a six per cent return on the purchase price, so if a buyer paid $400,000 for a suite, they would be guaranteed $24,000 or $2,000 a month in income, according to the company’s website.
Troy Dosman, vice-president of construction operations at Minto, told the Financial Post that Minto officials “have not been made aware of the Canada Revenue Agency contacting any Westside purchasers who took advantage of this incentive.” He noted in an emailed statement that the leaseback incentive program was “a first” for Minto and was only offered over a four-month period.
“We do not have any plans to offer similar program at this time,” he said.