Understanding the HST Rebate When Buying From a Builder - Part 1

In this article I would like to discuss and address key questions in regards to the HST rebate that many investors have when buying a property from a builder and renting it out.

This HST rebate program can be summarized as follows:  If you bought a brand-new property (a condominium, semi-detached, townhouse, or a house) directly from a builder, and have immediately rented it out then you will qualify to receive back up to $30,000 in HST rebate from the government.

Though this may sound like a simple process, there are a number of factors that one has to be mindful of when making a decision to buy a brand-new property for rental investment purposes.

One of the most important things to understand is that before receiving the HST rebate, you will first have to pay that amount to the builder through your lawyer at the time of the closing of your property.  The fact, that first you have to pay this money to the builder from your own pocket, and then get it back from CRA is the most confusing part of this whole process.  Let me address it in more detail before answering any of the other common questions.

The CRA through the provincial and federal governments have two incentive programs in operation designed for the purchasers of brand-new properties:
1. HST New Housing  Rebate (we’ll call it a Personal Rebate) – designed for the owners that are buying for their own use and a primary residence.
2. HST New Residential Rental Property Rebate (we’ll call it a Rental Rebate) – designed for investors that decide to rent out their brand new properties.

When you are making the initial purchase of a condominium, the builder assumes that you are buying it with the intention to live there or use it as your primary residence.  Based on this assumption, they discount the purchase price of the property by the amount of the Personal Rebate.  Once you close the property and become its owner, the builder applies to the government on your behalf for the Personal Rebate and gets this rebate back on your behalf.  You only see this rebate mentioned to you when you are closing the property on the Statement of Adjustments, where it is clearly shown that this amount of a rebate is deducted from your final purchase price.  Thus, even though you never touch the money you are still getting a discount that is equivalent to the amount of the Personal Rebate.

In the situation when you decide to purchase the condominium as an investment property and rent it out, you are required by the law to declare this intention at the time of closing through your lawyer.  Once you make this declaration, the Personal Rebate program no longer applies to you.  This means that the discount that the builder has given you (remember, they assume that all the units are being bought for personal use and apply these discounts to everyone automatically) no longer applies to you because the builder can no longer receive that money back on your behalf from the government.  Thus, they ask you to pay them back the amount of the initial discount.

The amount of the rebate will be indicated in your Statement of Adjustments and will be included in the final closing costs payable to your lawyer at the time of closing.

It is needless to say that many people are not forewarned about this extra cost ahead of time and find themselves in a serious scramble for an extra $20,000 to $30,000 at the time of closing their property.  As a result, many resolve to mislead the builder and the CRA about their intent to the usage of this property.  Many people choose to say that they intend to use it personally, but then end up renting it out.  This is not a very smart practice, because once CRA will find out about this, they will audit you, disallow the rebate, and bill you for $20,000 to $30,000.  They will also place your name on their list under their collections department.  We will talk more about this in the next article.