New Residential Rental Property Rebate
If you have purchased a newly built home or condo as an investment property, you are
eligible for the new residential rental property rebate (NRRPR) provided you have a tenant who has signed a lease for at
least one year. When you purchase a new residential property to rent out, the home builder or
condo developer is not permitted to apply for the new home HST rebate on your behalf like they
would if the property was going to be your primary residence. Consequently, the buyer
will be required to pay the HST for the rental property upfront, and then will
have to wait to receive a refund from the Canada Revenue Agency. This can put a temporary
financial strain on the person buying the investment property since they are out
a significant amount of money for upwards of half a year and must eat the interest costs in the meantime. In order to minimize
the amount of money you spend servicing this additional debt, it is strongly recommended that you file your HST rental rebate application as soon
as you close on the property and find a tenant.
Bought a new condo or home to rent out? Contact us now to learn how large an Ontario NRRP rebate you are eligible to receive!
HST Rebate for Rental Properties vs. Primary Residences
If you are buying a home to live in, or as a primary residence for a close relative to live in, the vendor will normally lower the final purchase
price including HST by the amount of the new housing rebate in exchange for the full rights to your rebate when it is issued by the CRA. Not only
does this allow the buyer to afford the property more easily since the purchase price is significantly lower, it also saves them from the
complicated process of applying for the new home rebate themselves as the vendor takes care of this. This also allows condo developers and home builders
in the province to advertise a lower "sticker price." When shopping for new real estate, many of the prices you will see promoted already include the new housing HST rebate to
make them lower. Vendors are only permitted to do this for buyers who are purchasing a primary residence, however, so all
other types of buyers including those purchasing a rental property must pay all the HST upfront which makes the purchase price higher than what is typically advertised.
The good news is that there is a special HST rebate in Ontario designed to ensure that investors do not pay more for a new house
than they would if the property was going to be owner occupied.
The HST rebate for rental properties offered by the Canada Revenue Agency is
called the HST new residential rental property rebate (NRRP Rebate), and any landlord that buys a new home or condo in which the first occupant
is a tenant is eligible for the rebate. The primary difference between the rental property rebate and the standard HST new house rebate is
that the buyer must pay all the HST upfront and then apply for it on their own, instead of the vendor "fronting" the refund to lower the purchase
price and then handling the application for you. Since most property investors interested in applying for the NRRPR are not tax lawyers or accountants, they
typically retain the services of a tax professional instead of attempting the complex process on their own to ensure the timeliness
and accuracy of the HST rental rebate application.
HST Rebate Rental Property Strategies
Real estate investors typically look at what is called the capitalization rate
or "cap rate" of a property to determine if it is a good investment. In a
nutshell, the cap rate of an investment property is calculated by subtracting
the property expenses such as taxes, insurance, and maintenance, from its
rental income, and then dividing this amount by the total value of the house.
The idea is to generate the most net operating income (total rent subtract
expenses) compared to the total value of the property, and cap rates are
typically measured as a percentage. When you buy a brand new condo or house in
Ontario to rent out, your purchase price will include HST. This will lower the
investment condo or house's cap rate on paper, but a wise investor will factor
in the size of their new rental housing rebate when comparing the property to other
non-new property investments where HST will not be charged.
It is very easy to use the HST rebate for rental property to lower the
principal amount of the mortgage. A common strategy is to take out a mortgage
with a 20/20, 15/15, or 10/10 prepayment option. This allows you to prepay up
to 20% of the original mortgage principal amount at the end of the
calendar year without incurring any additional charges or penalties. Buyers who use our HST rebate
service typically only wait two months to receive their rebate money, which means
they will not pay very much additional interest before they can apply the full
rebate directly to their mortgage principal. Once the rental rebate is put
towards the mortgage, the property's cap rate will improve and the only
disadvantage compared to buying a non-new house is that you had to originally
qualify for a larger mortgage.
Using Credit Cards as a Down Payment
Another strategy used by seasoned investors in the province to avoid the need for a larger mortgage to cover the full HST amount is to simply use
credit cards to fund a larger down payment on the rental property. Let us say you want to purchase
a brand new condo in downtown Toronto for $300,000 plus HST ($339k total), and you have a down payment of $70k. Once you close on the property and have a tenant sign a lease, you
would be eligible for a $18,000 new residential rental property rebate. Instead of taking a mortgage out for $269,000 and then figuring out how to use your rebate money to pay down the mortgage principal,
you could instead borrow $18,000 via credit card or line of credit (LOC), make a downpayment of $88,000 and only take out a $251,000 mortgage. Then once you receive your NRRPR you can
easily pay off the credit card debt and you are good to go. Although credit cards and unsecured lines of credit have a much higher interest rate than mortgages, and consequently it would cost you more to carry the additional debt
this way, this strategy allows you to qualify more easily to finance the property purchase since you would have a larger down payment and would not require as big a mortgage.
Some shrewd investors using credit cards as a short-term bridge loan in this situation will
even transfer the entire amount from credit card to credit card to avoid
accruing any interest until they receive their NRRP Rebate cheque from the Federal Government and can pay
off the balance.
HST Rebate for Rental Property Flippers
If a purchaser receives a new residential rental property rebate, they have to
repay the provincial HST rebate if they sell the property within one year. This means that anyone who buys a brand new investment property, rents it out immediately, but then
sells it quickly, is not eligible for the N.R.R.P.R.
Building or Renovating an Investment Property
Anyone who builds or substantially renovates rental housing, making a supply
by way of lease or license arrangement of the property, is considered to have
collected and paid tax under the rental housing self-supply rules. When
calculating the HST for the property, one must determine its fair market value
including both the building as well as the land. Purchasers who rent out the
property immediately after buying it are entitled to the Ontario New
Residential Rental Property Rebate provided the first occupant is a
tenant. You are not permitted to obtain the NRRPR from the builder, however,
and people who buy a home or condo and then rent it out are responsible for the
new rental property HST rebate themselves after they have closed on the
house or condo. Anyone who performs a substantial renovation on a rental property can also apply
for the N.R.R.P. rebate once they have completed doing the work and a tenant is living in the property.
Purchased a new rental property? Contact our Ontario tax consultants now to learn how large a NRRP Rebate you are
entitled to receive!