Read the full version of this article to learn how GST/HST is incorporated into the purchase price of a new property and what impact it will have on your property purchase transaction. [Read more...]

This following summarizes some of the key benefits and costs of forming a PREC.

A. BENEFITS OF FORMING A PREC

1. Limited Liability For Licensees

A PREC is a corporation and as such, it is treated as a separate legal person from its owners. This separation of business and personal identities is the main reason that corporations are the preferred business organization for most business owners. Generally, owners of corporations are not personally liable for the Corporation’s business dealings. However, there is an important exception to this general rule as it applies to PREC’s. Pursuant to the Real Estate Services Act, the fact that a realtor is carrying on business as a PREC does not affect the realtor’s individual liability with respect to the provision of real estate services or his or her duties to clients. That is, a realtor is personally liable for his or her negligent performance of real estate services despite the fact that the realtor is carrying on business as a PREC.

Despite this important exception, a properly incorporated PREC can be a highly effective tool for protecting a realtor’s personal assets from liabilities that the business may incur that are not in connection with the provision of real estate services. This is particularly significant having regard to the fact that a realtor’s errors and omissions insurance does not cover these types of risks.

For example, a PREC would serve as a barrier to personal liability for the following business liabilities: business loans, some employee obligations, some workers compensation obligations, some business tax obligations and supplier or other creditor obligations.

2. Income Splitting

A PREC offers a flexible means of shared ownership. The Real Estate Services Act permits realtors, their spouses and children to own shares in the PREC. At the time a PREC is incorporated, family members may be issued shares in the PREC for nominal value. As shareholders of the PREC, these family members are entitled to profits from the PREC, even if they do not actively participate in the business. This ability to allocate profits from the PREC to family members in lower marginal tax brackets can produce significant tax advantages for a realtor and his or her family.

The following represents a simplistic analysis of the tax savings that may be achieved through income splitting assuming $80,000 in net business income in a given year.

The above analysis assumes that neither spouse has income from other sources and may be affected by many variables in each person’s individual tax position and financial planning objectives.

3. Tax Deferral

The income generated by the PREC is taxed in the hands of the PREC, not the owners. Owners of a PREC do not pay any income tax until the profits of the PREC are actually distributed in the form of dividends. Although the PREC must pay tax on its income in the year it is earned, the owners may generally determine the timing of distributions of profits from the PREC, allowing owners to defer the payment of tax until such a time as it suits them.

B. COSTS OF FORMING A PERSONAL REAL ESTATE CORPORATION

1. Incorporation Costs – $900

Although the costs of incorporating a PREC may vary between lawyers, Business Law Group charges a fixed fee of $900 to incorporate a PREC. This fixed fee includes all of the registration fees and administrative costs associated with the incorporation.

2. Name Change Fee – $25

The Real Estate Council charges a fee of $25 to change the name of your license from your personal name to the name of your PREC.

3. Annual Maintenance and Corporate Returns – $250/year

PREC’s are required to maintain corporate records and file an annual return with the corporate registry. Although the costs may vary between lawyers, Business Law Group charges a fixed annual fee of $250 to maintain the PREC records book and file its annual corporate returns. This fixed fee includes all of the registration fees and administrative costs. Alternatively, you may also elect to maintain your own record book and complete the annual returns for the PREC yourself, in which case the expected costs would be $50/year.

4. Corporate Income Tax Return – $500/year

As a separate legal entity, your PREC will be required to file its own tax return. A reasonable expectation of costs for an accountant or bookkeeper to prepare a corporate tax return is $500. Alternatively, you may elect to prepare the corporate tax return yourself, in which case there would be no additional costs. It is important to recognize that this additional cost may be offset by a reduced cost of preparing your individual tax return, which would be much less complicated if your business was carried on by the PREC.

5. Real Estate Fees – $1,175/2 years

Your PREC will be required to pay the single fee payable to the Real Estate Council on account of licensing fees, errors & omissions insurance and special compensation fund assessments every two years. This is in addition to the fee of $1,175 that is paid by you as the controlling individual of the PREC.

Please contact Business Law Group for a free consultation regarding the incorporation of a PREC.

In the case of Joint Tenants, a surviving owner will acquire the interests of the deceased owner thereby increasing the surviving owner’s interest in the property. In this case, the surviving owner is said to have the Right of Survivorship.

In the case of Tenants in Common, a surviving owner does not, by virtue of the Tenancy in Common, acquire the interests of the deceased owner. In this case, the surviving owner does not have a Right of Survivorship. The deceased owner’s interest in the property will be considered part of the deceased owner’s estate upon death.

By way of example:

If Jane and Pat own a house as Joint Tenants, then Jane’s interest in the property will automatically pass to Pat upon Jane’s death thereby increasing Pat’s interest in the property.

If Jane and Pat own a house as Tenants in Common, then Jane’s interest in the property will pass to Jane’s estate upon her death. As such, Pat’s interest in the property will not increase upon Jane’s death.

Property Transfer Tax is a one-time tax payable by the purchaser at closing should not be confused with Property Tax, which is paid annually by property owners to local governments.

What is the Property Transfer Tax Rate?

The tax rate is 1% on the first $200,000 of the fair market value of the property, plus 2% on the fair market value over $200,000.

For example, if the fair market value of the property is $500,000, then the tax is 1% of $200,000 ($2,000) plus 2% of the remaining $300,000 ($6,000) for a total tax of $8,000.

When is Property Transfer Tax Payable?

Property Transfer Tax is paid on the closing date of a residential transaction. In most cases your lawyer will complete the Property Transfer Tax return and remit the required amount on your behalf.

Is My Transaction Subject to Property Transfer Tax?

Generally speaking, all residential property transactions are subject to Property Transfer Tax unless the purchaser qualifies for an exemption. See a list of common exemptions under the heading “Other Common Exemptions” below.

First Time Home Buyer’s Exemption from Property Transfer Tax

The First Time Home Buyers’ Program exempts qualified home buyers from paying Property Transfer Tax. Under the program, eligible purchasers can claim an exemption from Property Transfer Tax if the fair market value of the home is less than $425,000. A proportional exemption is provided for eligible residences with a fair market value of up to $25,000 above the threshold (i.e. up to $450,000).

To qualify for the First Time Home Buyers’ exemption, you must meet all of the initial eligibility criteria. To retain the exemption, there are also requirements which must be met in the year following the transfer.

Contact us to assist you in determining your qualification for the First Time Home Buyer’s Program

Other Common Exemptions

Some other commonly claimed exemptions for residential real estate transactions are as follows:
- transfers of principal residences amoung certain family members
- transfers involving Joint Tenants & Tenants in Common
- transfers involving an agreement for sale
- transfers resulting from marriage breakdowns

Contact us to assist you in determining your qualification for an exemption from Property Transfer Tax

Resources

Property Transfer Tax (British Columbia) – First Time Homebuyers Guide

Property Transfer Tax (British Columbia) – Instruction Guide

Property Transfer Tax (British Columbia) – First Time Homebuyers Sample Return

GST/HST New Housing Rebate

Effective July 1, 2010, purchasers of new residential property for the purpose of principal residency may be eligible for a rebate of 71.43 per cent of the provincial component of the HST paid, up to a maximum of $26,250.

For example, a purchaser of new residential property with a purchase price of $500,000 will pay 7% or $35,000 for the provincial component of the HST. The purchaser may be eligible to a rebate equal to 71.43% of 35,000, or $25,000.

The GST/HST New Housing Rebate will often be credited by the builder of your new home at closing, in which case you will only be required to pay the builder the net amount of HST payable on the transaction. Alternatively you may have to pay the full HST to the builder at closing and apply for the GST/HST New Housing Rebate yourself.

Contact us to determine your eligibility for the GST/HST Rebate on the purchase of your new residential property or to assist with claiming the rebate yourself.

GST/HST New Residential Rental Property Rebate

Effective July 1, 2010, purchasers of new residential property for the purpose of renting to a tenant may be eligible for a rebate of 71.43 per cent of the provincial component of the HST paid, up to a maximum of $26,250.

For example, a purchaser of new residential property with a purchase price of $500,000 will pay 7% or $35,000 for the provincial component of the HST. The purchaser may be eligible to a rebate equal to 71.43% of 35,000, or $25,000.

Your eligibility for this rebate will depend on a number of factors including the type of property, your intent to rent the property at the time of purchase and the first use of the property as a rental property. The eligibility criteria for the GST/HST New Residential Rental Property Rebate are technical and should be explained to you by a lawyer when making your application.

Unlike the GST/HST New Residential Rental Property Rebate, which is often assigned to the builder at closing and credited to the purchaser, the GST/HST New Residential Rental Property Rebate must be applied for after the closing of the sale and the occupancy of the property by a tenant.

Contact us to determine your eligibility for the GST/HST New Residential Rental Property Rebate on the purchase of your new residential property or to assist with completing the application package.

PST Transitional New Housing Rebate

Purchasers of new residential property whom are subject to the provincial component of the HST after June 2010, may be eligible for a PST Transitional New Housing Rebate to provide relief in respect of the PST embedded in the price of the home.

Generally, the PST Transitional New Housing Rebate is calculated as a proportion of the estimated embedded PST in the residential property, based on the degree of completion of the construction of the home as of July 1, 2010.

Eligible applicants would be permitted to calculate the estimated embedded PST by choosing one of the following two methods:

1. $60.00 per square metre of floor space; or
2. 2% of the total value established for GST purposes.

The PST Transitional New Housing Rebate is administered by CRA. Purchasers have the option of obtaining the PST Transitional New Housing Rebate through the builder or by filing an application directly with the CRA. Where the purchaser files the application they are required to obtain from the builder of the home a certification of the percentage of completion of the newly constructed or substantially renovated home as of July 1, 2010. As a condition for obtaining the rebate, your builder will be required to obtain a clearance certificate from the province and attach it to the first PST Transitional New Housing Rebate application submitted to the CRA. Generally, the application for the PST Transitional New Housing Rebate needs to be filed before July 1, 2014.

Your eligibility for the PST Transitional New Housing Rebate will not affect your ability to claim the GST/HST New Housing Rebate or GST/HST New Residential Rental Property Rebate.

Contact us to determine your eligibility for the PST Transitional New Housing Rebate on the purchase of your new residential property or to assist you with completing the application package.

Resources

GST/HST New Housing Rebate – Application

GST/HST New Housing Rebate – Instruction Guide

GST/HST New Residential Rental Property Rebate – Application

GST/HST New Residential Rental Property Rebate – Instruction Guide

GST/HST Transitional Rebate – Application

The following represents a summary of the implications of the HST to builders and developers:

Rebates to Purchasers

Generally speaking, purchasers of new housing will be eligible for rebates on the provincial component of the HST paid for all types of housing previously eligible for GST new housing rebates. The new housing rebate is 71.43% of the provincial component of the HST paid for qualifying housing, up to a maximum amount of $26,250. Assuming the amount of PST, on average, embedded in the selling price of a new home is 2%, purchasers of homes priced up to $525,000 pay no more tax, on average, than the former GST/PST regime.

Builder’s Self Supply of Residential Rental Property

Builders who rent out new homes are required to pay GST under the self-supply rules if the rental occurred before July 2010, and will be required to self-assess and pay the HST under the self supply rules where the self-supply occurs after June 2010. However, under the new HST regime, builders of certain types of residential rental properties who are required to self-asses for HST may be eligible for the enhanced GST/HST New Rental Housing Rebate. The GST/HST New Rental Housing Rebate is 71.43% of the provincial component of the HST paid for qualifying housing, up to a maximum amount of $26,250.

The GST/HST New Rental Housing Rebate is federally administered in a manner similar to the GST rebate for new residential rental properties. Builder landlords will be able to apply for the rebate by filing a rebate application with the Canada Revenue Agency (CRA).

Builders required to self-assess and pay GST under the self-supply rules before July 2010 are not required to pay the provincial component of the HST.

Grandparenting Rules

Generally, sales of newly constructed or substantially renovated homes are grandparented where the written agreements are entered before November 18, 2009. Sales of these grandparented homes are not eligible for the GST/HST New Housing Rebate or GST/HST New Rental Housing Rebate.

Builders who are registrants for GST/HST purposes may recover the provincial component of the HST paid on most purchases through input tax credits (ITCs) on materials paid for after July 1, 2010. Where the construction of a grandparented home straddles the July 1 commencement date, builders must pay a transitional tax adjustment in order to compensate for the fact that sales of grandparented homes will not be subject to HST. The amount of transitional tax payable by builders of single-unit housing varies, but is intended to approximate the amount of PST embedded in the price of the home before July 1, 2010. The amount of transitional tax payable by builders of condominium units is 2% of the value of consideration for the condominium unit as established for GST purposes. In both cases, this amount is reduced depending on the level of completion at July 1, 2010.

Transitional Rules

New homes completed in full or in part before July 2010 will have PST embedded in the price of the homes since building materials used in the construction of homes are subject to PST. In this case, a PST Transitional New Housing Rebate may be available to provide relief in respect of the PST embedded in the price of the home. In the case of most single-unit forms of housing, the PST Transitional New Housing Rebate is available to the purchaser through the builder or by the purchaser filing an application directly with the CRA. In the case of residential condominiums, the PST Transitional New Housing Rebate is available to the builder rather than the purchaser.

Eligible applicants may calculate the estimated embedded PST by choosing one of the following two methods:

1. $60.00 per square metre of floor space; or
2. 2% of the total value established for GST purposes.

Eligibility for the PST Transitional New Housing Rebate does not affect the purchaser’s or builder’s ability to claim the GST/HST New Housing Rebate or GST/HST New Rental Housing Rebate.

As a condition for obtaining the PST Transitional New Housing Rebate, builders must obtain a clearance certificate from the province and attach it to the first PST Transitional New Housing Rebate application submitted to the CRA. Subsequent PST Transitional New Housing Rebate applications submitted to the CRA by the builder will be processed based on the clearance certificate submitted with the first rebate application.

Generally, the application for the rebate needs to be filed before July 1, 2014. Where the builder is unable to file their rebate application within this timeframe due to extenuating circumstances (such as a delay in completing the sale of a home), the builder may make a request in writing for an extension of the timeframe to file the rebate, provided the request for extension is received by the CRA before July 1, 2014.

Builder Disclosure Requirements for Transitional Period

If a written agreement is entered into after November 18, 2009 and before July 1, 2010, the builder is required to disclose in the written agreement whether HST applies to the sale and, if so, whether the price in the agreement includes the applicable provincial component of the HST, net of the GST/HST New Housing Rebate and the PST Transitional New Housing Rebate, if applicable.

If the transaction is subject to the provincial component of the HST and the builder did not make a disclosure as outlined above, the stated price in the written agreement would be deemed to include the provincial component of the HST. In such a case, the purchaser would not be required to pay the provincial component of the HST in addition to the stated price in the agreement.

Limited Liability for Owners

A corporation is treated as a separate legal person from its owners. In many respects, a corporation has the same legal status a natural person. For example, a corporation can sue and be sued, borrow and lend money, enter into contracts in its own name, and become accountable for taxes. Unlike sole proprietorships and partnerships, the owners of a company are not generally personally liable for the actions of the business. A properly incorporated business can be a highly effective tool for protecting a business owner’s personal assets from the liabilities of the business.

Flexible Ownership Structure

A corporation is treated as a separate legal person from its owners. In many respects, a corporation has the same legal status a natural person. For example, a corporation can sue and be sued, borrow and lend money, enter into contracts in its own name, and become accountable for taxes. Unlike sole proprietorships and partnerships, the owners of a company are not generally personally liable for the actions of the business. A properly incorporated business can be a highly effective tool for protecting a business owner’s personal assets from the liabilities of the business.

Tax Advantages

Carrying on business as a corporation can offer business owners a variety of tax advantages over simpler forms of business organization. Among these advantages are the ability split income with family members, defer income and take advantage of the Lifetime Capital Gains Exemption if the business is sold for a profit.
Income Splitting

At the time a corporation is incorporated, family members may be issued shares in the corporation for nominal value. As shareholders of the corporation, these family members are entitled to profits from the corporation, even if they do not actively participate in the business. This ability to allocate profits from the corporation to family members in lower marginal tax brackets can produce significant tax advantages for the business owner and his or family.

Tax Deferral

Unlike other forms of business organizations, income from a corporation is taxed in the hands of the corporation, not the owners. Owners of a corporation do not pay any income tax until the profits of the corporation are actually distributed in the form of dividends. Although the corporation must pay tax on its income in the year it is earned, the owners may generally determine the timing of distributions of profits from the corporation, allowing owners to defer the payment of tax until such a time as it suits them.

Lifetime Capital Gains Exemption

Generally owners of shares in a small business corporation will be entitled to a capital gains deduction, which may be used by the owner to claim against any capital gain arising from the sale of the business. The deduction limit is currently $375,000 for an individual’s lifetime, which effectively provides for a tax free capital gain of $750,000. Other forms of business organizations do not qualify for this type of deduction when the business is sold.

Costs of Incorporating

While corporations are face higher start-up and annual maintenance costs than other forms of business organization, the long term benefits to business owners will quickly make up for these costs.

Contact Us for a free consultation regarding the most appropriate business organization for your business.

Sole Proprietorship

If a person carries on business alone, the business is called a sole proprietorship. A sole proprietorship is a simple and cost effective way for an individual to start a business in British Columbia in that it requires no formal organization. The only legal requirement for a sole proprietorship is to file a declaration of the business name with the BC Business Registry in circumstances where the sole proprietor does not conduct business in his/her own name.

A sole proprietorship is suitable only for someone who intends to carry on a business alone, perhaps with the help of employees. It is not suitable if other people are expected to participate in the ownership of the business.

Potential advantages of a sole proprietorship include the relatively low start-up costs, the complete discretion of the sole proprietor in the control and management of the business and the ability of the sole proprietor to write off business losses directly against personal income. The main disadvantage of a sole proprietorship is that the sole proprietor is personally liable for all of business’s activities, including ownership of any business assets that are acquired and any obligations of the business that are incurred, such as debts. In this respect a sole proprietorship is not recommended for businesses that may be subject to third party liabilities. A sole proprietor also limits the ability of the business to share its pre-tax income with other stakeholders.

General Partnership

In many respects, a general partnership has similar attributes of a sole proprietorship with the obvious exception that there is more than one owner. Like the sole proprietorship, there are few legal requirements in organizing a general partnership apart from the registration of a trade name and the filing of a brief description of the partnership. In the absence of a partnership agreement, all partners are able to share in the management of the business. In some cases, a partnership may provide tax advantages because business losses can be deducted against other personal income. For example, if the owners of the business expect there will be losses in the first years of operation of the business, they may want to use a partnership so that they can apply these losses as individuals against other sources of income.

Like the sole proprietorship, the major disadvantage of a general partnership is the liability it imposes upon the partners. Each partner is personally liable for the losses of the business, and may also be liable for the wrongful acts other business owners. In this respect, the general partnership is only suitable for a relatively small number of owners whose business is not frequently exposed to third party liabilities.

Although not legally required a partnership agreement is integral to the proper function of a general partnership. The Partnership Act imposes certain rights and duties upon partners, which may not suit the business owners. For example, under the Partnership Act, all of the partners are entitled to share equally in the profits of the business. This may not be the arrangement that the partners want and they are free to change this by private agreement. Furthermore, a partnership agreement may be needed for many other reasons, such as to define management responsibilities, and to ensure the partnership’s continued existence after a partner departs.

Limited Partnership

Unlike a sole proprietorship and general partnership, llimited partnerships require formal organization under law. In British Columbia, these requirements are found in the Partnership Act. Limited Partnerships consist of general” and “limited” partners. General partners have much the same liabilities, rights and duties as ordinary partners whereas limited partners are principally investors. This structure allows general partners to maintain full control of the business while bringing on additional partners who do not share in the same level of control and typically cannot interfere in the day-to-day operations of the business (i.e. limited partners). This option may be advantageous in circumstances where you wish to take on partners for investment purposes without necessarily giving up control of your business or exposing your investors to personal liability from your business. Limited Partnerships provide investors limited liability while allowing them the income tax advantages of a partnership form of organization (that is, they can deduct losses against personal income).

Corporation

A corporation is a more sophisticated form of business organization but may offer substantial advantages to business owners. Unlike a sole proprietorship or general partnership, a corporation is treated as a separate legal person from the business owners. As such, a business owner is not exposed to the same personal responsibility for the obligations of the company, such as debts or lawsuits associated with the business. A properly incorporated business can provide much needed protection to the business owners.

Please refer to the article titled “Why Incorporate” for a more detailed analysis of the costs and benefits of incorporating your business.

Contact us for advice on the proper business organization for your business.

Generally, HST will be payable by the purchaser of new residential property where possession and ownership of the property is transferred after July 1, 2010. The result is a higher tax rate for purchasers of new homes. For example, the purchaser of a new home in the amount of $500,000 would be subject to 5% Goods and Services Tax (GST) prior to the effective date and 12% HST thereafter, which is an increase of $35,000 in tax payable on the purchase.

Fortunately, there are a number of ways that a purchaser can minimize the net increase in tax payable. The following represents a summary of the common rebates and transitional rules that may apply to the purchase of your new home.

Your purchase of a new residential property may be “grandparented” in which case the provincial 7% component of the tax may not be applicable. Generally, purchases of new residential homes will be grandparented where the written agreements of purchase and sale are entered into before November 18, 2009 and ownership is transferred under the agreement after June 2010.

Sales of these grandparented homes would not be eligible for the GST/HST New Housing Rebate or the GST/HST New Rental Housing Rebate.

Grandparenting does not apply equally to all forms of residential property. Contact Us to assist you in determining if your purchase of residential property may be grandfathered.

Effective July 1, 2010, purchasers of new residential property for the purpose of principal residency may be eligible for a rebate of 71.43% of the provincial component of the HST paid, up to a maximum of $26,250.

For example, a purchaser of new residential property with a purchase price of $500,000 will pay 7% or $35,000 for the provincial component of the HST. The purchaser may be eligible to a rebate equal to 71.43% of $35,000, or $25,000.

The GST/HST New Housing Rebate will often be credited by the builder of your new home at closing, in which case you will only be required to pay the builder the net amount of HST payable on the transaction. Alternatively you may have to pay the full HST to the builder at closing and apply for the GST/HST New Housing Rebate yourself.
Contact us to determine your eligibility for the GST/HST Rebate on the purchase of your new residential property or to assist with claiming the rebate yourself.

Effective July 1, 2010, purchasers of new residential property for the purpose of renting to a tenant may be eligible for a rebate of 71.43 per cent of the provincial component of the HST paid, up to a maximum of $26,250.

For example, a purchaser of new residential property with a purchase price of $500,000 will pay 7% or $35,000 for the provincial component of the HST. The purchaser may be eligible to a rebate equal to 71.43% of $35,000, or $25,000.

Your eligibility for this rebate will depend on a number of factors including the type of property, your intent to rent the property at the time of purchase and the first use of the property as a rental property. The eligibility criteria for the GST/HST New Residential Rental Property Rebate are technical and should be explained to you by a lawyer when making your application.

Unlike the GST/HST New Residential Rental Property Rebate, which is often assigned to the builder at closing and credited to the purchaser, the GST/HST New Residential Rental Property Rebate must be applied for after the closing of the sale and the occupancy of the property by a tenant.

Contact us to determine your eligibility for the GST/HST New Residential Rental Property Rebate on the purchase of your new residential property or to assist with completing the application package.

Purchasers of new residential property who are subject to the provincial component of the HST after June 2010, may be eligible for a PST Transitional New Housing Rebate to provide relief in respect of the PST embedded in the price of the home.

Generally, the PST Transitional New Housing Rebate is calculated as a proportion of the estimated embedded PST in the residential property, based on the degree of completion of construction of the home as of July 1, 2010.

Eligible applicants would be permitted to calculate the estimated embedded PST by choosing one of the following two methods:

1. $60.00 per square metre of floor space; or
2. 2% of the total value established for GST purposes.

The PST Transitional New Housing Rebate is administered by the CRA. Purchasers have the option of obtaining the PST Transitional New Housing Rebate through the builder or by filing an application directly with the CRA. Where the purchaser files the application, they are required to obtain from the builder of the home a certification of the percentage of completion of the newly constructed or substantially renovated home as of July 1, 2010. As a condition for obtaining the rebate, your builder will be required to obtain a clearance certificate from the province and attach it to the first PST Transitional New Housing Rebate application submitted to the CRA. Generally, the application for the PST Transitional New Housing Rebate needs to be filed before July 1, 2014.

Your eligibility for the PST Transitional New Housing Rebate will not affect your ability to claim the GST/HST New Housing Rebate or GST/HST New Residential Rental Property Rebate.

Contact us to determine your eligibility for the PST Transitional New Housing Rebate on the purchase of your new residential property or to assist you with completing the application package.

Summary Table – Transitional Rules