GST/QST Self-Supply on a New Residential Rental Property

Building or substantially renovating residential rental property in Québec can trigger a GST/QST obligation even though you have not sold the building. Under the self-supply rules, a builder may have to calculate and remit tax on the property’s fair market value (FMV).

Getting the timing and valuation right helps you avoid interest and penalties and identify any rebates available for your project.

What is a GST/QST self-supply?

A self-supply is a deemed sale: for tax purposes, the builder is treated as having sold the residential complex to itself and purchased it back. GST and QST are calculated on the property’s FMV at the time of that deemed sale.

The rules can apply when a builder constructs or substantially renovates a residential complex for rental use. An individual building a home outside a business or commercial activity is not necessarily considered a builder under these rules, so the facts of each project matter.

When does the self-supply occur?

For a builder leasing a new or substantially renovated residential complex, the relevant date is generally the later of:

• the date the construction or substantial renovation is substantially completed; and

• the date possession is transferred to the first tenant for residential use.

Substantial completion is generally associated with a building being approximately 90% complete. Signing a lease alone does not trigger the self-supply, and the rule does not simply apply at whichever of the two events happens first. Different circumstances, including additions to existing buildings, may require a separate analysis.

How do you calculate GST and QST?

1. Establish the property’s fair market value

The tax base is the residential complex’s FMV when the self-supply occurs. This is a market valuation at a specific date, rather than automatically the construction budget, the municipal assessment or a lender’s projected value for a fully leased building.

Keep the appraisal and supporting assumptions on file. In particular, confirm that the valuation reflects the property’s condition and market circumstances on the self-supply date. Revenu Québec also provides a fair market value and rebate estimator.

2. Choose an appropriate valuation approach

An appraiser may consider comparable sales, construction costs and, where appropriate, income evidence. The best approach depends on the property and the available market data. Construction cost is not automatically equal to FMV, and an income approach is not automatically inappropriate for a new rental building.

A valuation prepared for financing may use assumptions about future occupancy or stabilized income. Review those assumptions before relying on it for a GST/QST self-supply.

3. Apply the tax rates

At the current Québec rates, GST is 5% and QST is 9.975%. For illustration, if the applicable FMV is $1,000,000:

This is the tax calculation before any applicable rebates. The amount ultimately payable depends on the project’s circumstances.

How do you report the self-supply?

If you are registered for GST and QST

Report the deemed tax in your regular return for the reporting period in which the self-supply occurs.

If you are not registered

The obligation may still apply. Revenu Québec directs non-registrants to use form FP-505.2-V, GST/HST and QST Return for the Self-Supply of a Residential Complex. Filing and payment deadlines depend on the circumstances, so establish the self-supply date early in the project.

Can you recover some of the tax?

Potentially. An owner who supplies qualifying new or substantially renovated housing for long-term residential rental may be eligible for a new residential rental property rebate.

Under the regular rebate, the refund can reach 36% of the GST and QST attributable to an eligible unit, subject to maximum amounts and a phase-out. For GST, the rebate is reduced above an FMV of $350,000 per unit and ends at $450,000. For QST, it is reduced above $200,000 per unit and ends at $225,000. Special valuation rules can apply to a duplex. These are generally unit-level thresholds, not a $450,000 or $225,000 limit on the entire apartment building.

A separate measure may provide a full GST rebate for qualifying purpose-built, multi-unit rental housing. Its conditions include project timing, the number and type of units, and long-term rental use. This federal GST measure should be assessed separately from the regular QST rebate.

For a business claiming the regular rebate, the relevant forms may include:

• FP-524-V for the GST rebate;

• FP-525-V as a supplement where the complex has more than two units;

• VD-370.67-V for the QST rebate.

A rebate application generally must be filed within two years after the end of the month in which the tax was deemed paid. Check the applicable form and conditions for your particular project.

Plan the tax treatment before the first tenant moves in

For a new rental development, the self-supply date, the property’s FMV and rebate eligibility can materially affect cash flow. Reviewing these items before occupancy gives you time to document the valuation, prepare the return and assess the available rebates.

Mallette’s tax professionals can help builders and developers assess their GST/QST obligations and prepare rebate claims suited to their projects.