Understanding and accounting for the tax laws for a real estate development project is critical. This guide gives an overview of the three main types of sales taxes relevant to commercial real estate developers with projects in Canada and how to track these taxes in your project budget.
In Canada, there are three main types of sales taxes: the Harmonized Sales Tax (HST), the Provincial Sales Tax (PST), and the Goods and Services Tax (GST). Here’s a quick breakdown of how the three taxes work on a high level:
- PST: Only British Columbia, Manitoba, and Saskatchewan implement the PST, which is levied in addition to the GST. This tax is applied to both goods and services.
- GST: The GST is a federal tax that is applied to most goods and services sold in Canada. In many provinces, the HST and GST are combined.
- HST: In five provinces, the HST is utilized. This is a combination of federal and provincial taxes and is applied to both goods and services.
- Generally, property developers must charge the HST and GST when they sell real property.
Canadian taxes are complex, so it’s important to understand which ones apply to your business or personal transactions to ensure compliance with Canadian tax laws.
Canadian Taxes for Real Estate Development Projects
When it comes to development projects in Canada, the HST, PST, and GST taxes can have a significant impact on the overall cost of the project. These taxes differ depending on whether you’re a contractor or a property developer, so be sure to keep that in mind during your research.
The combined GST/HST applies to most real estate transactions, including new home construction and the sale of commercial and residential properties. When selling property, this tax is typically included in the sale price and is payable by the purchaser of the property.
During development, contractors charge the GST/HST for services performed, and the developer is sometimes responsible for taxes on construction materials. However, contractors usually don’t charge developers the PST; in fact, contractors are responsible for paying this tax on the materials purchased.
Understanding the tax implications of real estate development projects is crucial for builders, developers, and purchasers alike. Working with a tax professional can help ensure compliance with Canadian tax laws and minimize the impact of these taxes on the project’s bottom line.
Tax Exempt Status in Canada
Certain real estate development items may be tax-exempt in Canada. Some examples include:
- Land: The sale of undeveloped land can be exempt from the HST/PST if it wasn’t used for business purposes before being sold.
- Rental properties: Short-term rentals are exempt from the GST/HST, although long-term and commercial rentals are subject to the tax.
- Certain types of fees: Some government levies, taxes, and permits may be exempt from GST/HST.
- Low-Income Housing: In some cases, construction projects that create affordable housing for low-income individuals may qualify for tax exemptions or rebates.
Tracking Canadian Real Estate Taxes in Your Real Estate Development Budget
Tracking taxes in your real estate development budget can be a complex process, but there are several steps you can take to ensure accuracy and compliance with Canadian tax laws.
These steps include:
- Understand the tax rules: Make sure you understand which taxes apply to your specific real estate development project and which items may be tax-exempt. Consult with a tax professional if necessary.
- Keep detailed records: Keep accurate records of all expenses related to your real estate development project, including any taxes paid or collected. This will help you stay organized and ensure that you don’t miss any deductions or exemptions.
- Use accounting software: Use accounting software to track your expenses and revenues, including any taxes paid or collected. This will make it easier to generate accurate financial reports and track your tax liabilities.
- Separate taxes from other expenses: Make sure to separate taxes from other expenses in your budget and financial reports. This will help you see the impact of taxes on your overall project costs and make informed decisions about pricing and budgeting.
- Regularly review your budget: Regularly review your budget and financial reports to ensure that you are on track and that your tax liabilities are being properly accounted for.
Tracking Canadian Real Estate Taxes in Rabbet and Your Accounting System to Ensure Compliance
In the Rabbet platform, you can set a project-level tax rate that will automatically deduct all taxes from your invoices upon reading. This automates the detailed records of HST/PST/GST for the project and, when sent to your accounting system, your accounting software will automatically attribute the proper taxes for that vendor on that project.
When tracking tax-exempt status, ensure that your budget and accounting system properly reflect that HST/PST/GST does not apply to that invoice. Your invoice amount will be logged fully in the Rabbet system, correcting for automatically deducting taxes manually, and you’ll need to ensure that the taxes are not applied automatically when sent to your accounting system.
Rabbet will track all development funding sources and ensure you submit accurate draw requests to your equity and debt partners. Funds for the PST/GST/HST are tracked in a separate GL account in your accounting system. This GL account is used to file a GST/HST with the government for a refund of the GST paid on purchases for the project.
In short, Rabbet helps track all project budget and funding sources that do not include taxes. Your accounting system will accurately monitor the funding sources for the taxes. The one manual component will be attributing tax-exempt status. As mentioned above, the tax exemption rules can be complex and vary depending on the province or territory in which the property is located. Rabbet can help provide an item to your checklist to ensure that both Rabbet and the accounting system have accurately accounted for tax rules on that project.
While tracking taxes in a real estate development budget can be complex, using accounting software and separating taxes from other expenses can help ensure accuracy and compliance. Rabbet can help simplify the tracking of taxes and funding sources, making it easier to stay on top of tax liabilities and ensure compliance.
