Canadian Real Estate Taxes Made Simple: A Comprehensive Guide

Understanding and accounting for the tax laws for a real estate development project is critical. This comprehensive guide gives an overview of the three main types of sales taxes that are relevant to commercial real estate developers with projects in Canada and how to better track these taxes in your project budget.

Introduction

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). The HST is a combined tax that includes both the federal GST and the provincial sales tax. Some provinces have opted to use the HST system, while others have their own separate PST system. The GST is a federal tax that is applied to most goods and services sold in Canada, with a few exceptions. These taxes can be complex and it’s important to understand which ones apply to your business or personal transactions to ensure compliance with Canadian tax laws.

When it comes to real estate development projects in Canada, the HST, PST, and GST taxes can have a significant impact on the overall cost of the project. For example, the HST applies to most real estate transactions, including new home construction and the sale of commercial and residential properties. This tax is typically included in the sale price and is payable by the purchaser of the property. However, in some cases, the builder or developer may be responsible for paying the HST on construction materials and services, which can increase the cost of the project.

Similarly, PST may apply to certain construction materials and services in provinces where the HST is not used. In these cases, the builder or developer may be responsible for paying the PST, which can also add to the overall cost of the project.

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

There are certain real estate development items that may be tax-exempt in Canada.

Some examples include:

1. Land: The sale of undeveloped land is generally exempt from GST/HST in Canada.
2. Rental Properties: The rental of residential properties is exempt from GST/HST, although commercial rentals are subject to the tax.
3. Certain types of fees: Some government levies, taxes, permits, etc. , may be exempt from GST/HST.
4. Low-Income Housing: In some cases, construction projects that create affordable housing for low-income individuals may qualify for tax exemptions or rebates.

It’s important to note that the tax exemption rules can be complex and vary depending on the province or territory in which the property is located. It’s always a good idea to consult with a tax professional to ensure that you understand the tax implications of your real estate development project.

Tracking Real Estate Taxes in Your 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:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

By following these steps, you can ensure that your real estate development budget accurately reflects your tax liabilities and helps you stay compliant with Canadian tax laws.

Tracking Real Estate Taxes in Rabbet and Your Accounting System

Within Rabbet, you can set a project level tax rate that will automatically deduct all taxes from your invoices upon reading. Therein, automating 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 HST/GST/PST for that vendor on that project. 

When tracking tax exempt status, you will need to ensure that your budget and your accounting system properly reflect the fact 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 of the development funding sources for the project and ensure you are submitting 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 of the project budget and funding sources that do not include the taxes. And 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 the Rabbet system and accounting system have accurately accounted for tax rules on that project. 

Conclusion

In conclusion, taxes play a significant role in real estate development projects in Canada, and understanding the tax implications is crucial for builders, developers, and purchasers alike. The Harmonized Sales Tax (HST), Provincial Sales Tax (PST), and Goods and Services Tax (GST) can all impact the cost of a project, and it’s important to keep accurate records and consult with tax professionals to ensure compliance with Canadian tax laws. 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. Additionally, Rabbet can help simplify the tracking of taxes and funding sources, making it easier to stay on top of tax liabilities and ensure compliance.

About Rabbet

Rabbet is a cloud-based construction lending platform that helps lenders streamline their processes, increase efficiency, and better serve their customers. With its powerful automation and collaboration tools, Rabbet helps real estate developers reduce risk, improve transparency, and accelerate their construction finance process. The company was founded in 2017 and is headquartered in Austin, Texas. For more information about Rabbet for Real Estate Developers, visit rabbet.com.