Tax Insights: Canada Revenue Agency confirms that fair market value of newly constructed residential complexes includes GST/HST

March 22, 2024

Issue 2024-10

In brief

A recently obtained internal communiqué1 issued by the Canada Revenue Agency (CRA) to its audit and appeals branches provides guidance on the determination of fair market value (FMV) for purposes of calculating the GST/HST on the deemed sale of new residential housing. The communiqué states that the appraised value of a newly constructed residential property includes GST/HST, and that this GST/HST should be subtracted from the appraised value before determining the amount of GST/HST that will be payable by a builder in respect of a deemed sale of a newly constructed rental property.

This is good news for builders of newly constructed rental properties, because it should immediately result in reducing the FMV and the amount of GST/HST owing for these properties by 13% in Ontario (and 5% or 15% in the other provinces or territories), subject to the GST/HST rental rebates.

This Tax Insights provides an overview of the deemed sale rules in the Excise Tax Act (ETA), explains how the GST/HST payable by a builder on a deemed sale is determined and discusses next steps that builders should consider.

In detail


When is there a deemed sale of newly constructed rental properties?

For GST/HST purposes, a builder that:

  • constructs or substantially renovates a residential complex (e.g. home, apartment building, condominium, etc.), and
  • provides possession or use of the residential complex to a person under a lease, license or similar arrangement,

is generally considered to have made a deemed sale of the residential complex for consideration that is equal to the FMV of the residential complex and, as such, the builder is required to pay GST/HST on the FMV of the rental property. The FMV is often a source of dispute between the CRA and the builder, in addition to the amount of GST/HST payable by the builder.

The deemed sale rules in the ETA are intended to treat builders of newly constructed rental properties in the same manner as the purchaser of a newly constructed residential rental complex (i.e. to ensure that the same amount of GST/HST is ultimately paid on the property; if there was no deemed sale, the builder would generally pay less GST/HST, because the profits and various expenses that they incur, including salaries and financing costs, are not subject to GST/HST).

How is the FMV of the property determined?

FMV is generally interpreted to mean “the highest price an asset might reasonably be expected to bring if sold by the owner in the normal method applicable to the asset in question in the ordinary course of business in a market not exposed to any undue stress and composed of willing buyers and sellers dealing at arm’s length and under no compulsion to buy or sell.” FMV can be determined by using:

  • the income method
  • the comparable property method, or
  • the cost method

In most cases, the CRA’s preferred approach is to value multiple unit residential complexes based on the income method, the comparable property method or a combination of the two methods.

How is the GST/HST determined on a deemed sale of a newly constructed rental property?

Before the internal communiqué was issued, the CRA calculated the amount of GST/HST payable by the builder as follows:

FMV of property (as determined by a CRA appraiser)
applicable GST/HST rate (i.e. 5%, 13% or 15%)

Based on the above calculation, most builders had adopted the position that the FMV under the income method and comparable property method was inclusive of GST/HST. This is because:

  • the comparable properties that were used to determine FMV were exempt from GST/HST, and
  • the GST/HST that is payable on the deemed sale is an upfront cost that must be incurred to earn the net rental income  

For example, if a used residential complex can be purchased for $1 million exempt from GST/HST, then a reasonably informed purchaser would not pay $1 million plus GST/HST (of $130,000 in Ontario) for a comparable property; instead, the GST/HST inclusive price of the newly constructed residential complex would equal $1 million.

What has changed?

The CRA now accepts the builders’ position that the FMV (or appraised value) of a newly constructed rental property includes GST/HST, as confirmed in the recently obtained CRA internal communiqué, as follows:

“In conclusion, all approaches to value used will have to state a conclusion of value as ‘Inclusive of GST/HST.’ The auditor will then take the reported FMV ‘Inclusive of GST/HST’ estimate and ‘back out’ the appropriate amount of tax to bring it in accordance with the definition of ‘fair market value’ in subsection 123(1) [of the ETA]. This ensures that the CRA does not assess GST/HST on a FMV that already includes GST/HST. (Essentially the ‘backed out’ tax is then the tax that is assessed on the registrant).” 

As the GST/HST that is included in the appraised value should be “backed out” before determining the amount of GST/HST payable by a builder, this should immediately result in reducing the FMV and the amount of GST/HST owing for newly constructed rental properties, subject to the GST/HST rental rebates.

The takeaway

Builders who have recently paid GST/HST, or will be paying GST/HST, on a deemed sale of a newly constructed rental property should ensure that the FMV is treated as including GST/HST and that reasonable adjustments are made to account for the fact that the residential complex is not 100% complete and fully occupied on the date of the deemed sale. PwC can help builders:

  • ensure that the FMV is adjusted correctly (i.e. to account for the GST/HST that is payable on a deemed sale and the fact that the building is not 100% completed and fully occupied)
  • handle CRA audits, disputes and assessments involving the FMV of newly constructed rental properties, including recovering excess GST/HST that was paid in error
  • calculate eligible input tax credits on property and services that are acquired before a deemed “self-supply” of a newly constructed apartment building
  • claim eligible GST/HST rebates on GST/HST that is owing on a deemed sale, including enhanced rebates2 that may be available if construction started after September 13, 2023


1. CRA internal communiqué dated May 17, 2023 “Updated guidance relating to embedded amount of GST or HST in Fair Market Value (FMV) under the Excise Tax Act (ETA) as it pertains to New Residential Housing”
2. For more information, see our Tax Insights “Enhanced GST rental rebate for rental apartments that begin construction after September 13, 2023.” 

Contact us

Brent Murray

Brent Murray

Partner, PwC Law LLP

Tel: +1 416 947 8960

Wayne Mandel

Director, PwC Canada

Tel: + 1 905 738 2914

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