Tax warning for real estate investors

Real estate investors should be prepared for the tax authorities, as the Canada Revenue Agency and Revenue Quebec may be scrutinizing GST/HST and QST compliance areas relating to the real estate sector in 2015.

KPMG issued a tax warning last week advising companies in the real estate industry that the tax authorities are expected to focus their audit reviews on the following types of entities:

  1. Nominee corporations or bare trusts in joint-venture arrangements, including those that took advantage of a temporary administrative tolerance period.

The policy, which some participants in joint ventures were able to benefit from on a temporary basis, was available for the reporting period ending on or before December 31, 2014. With its expiry, KPMG expects auditors to focus on this area in 2015.

“Organizations that complied with the policy by implementing changes to their joint-venture arrangements and GST/HST and QST reporting obligations may want to review any underlying documentation and test the new processes,” said KPMG.

  1. Certain other nominee corporations or bare trusts that account for GST/HST and QST.

The temporary policy did not apply to GST/HST and QST accounting in other structures involving nominee corporations or bare trusts. For example, where a single beneficial owner of a commercial property registers the title in the name of a nominee corporation or bare trust, the administrative policy is that the owner should register for purposes of the commercial activities relating to the property and account for the GST/HST and QST.

  1. Partnerships, real estate investment trusts (REITs) and entities with agency agreements where the wrong entity may be accounting for tax or there is a lack of supporting documentation.

Different GST/HST and QST rules apply to various types of entities, structures and legal relationships. KPMG added: “To help protect yourself against indirect tax challenges, partnership, REITs and agencies should ensure that the proper entity is accounting for tax and that all supporting documentation is in place.

  1. Real estate companies that must meet documentation requirements to support relationships, valuations, input tax credits, and transfers of rebates.

There are numerous circumstances where the CRA and Revenue Quebec will deny a real estate company’s ITCs and ITRs based on a failure to meet the documentary requirements. Because this is a significant compliance issue in the real estate industry, where purchase invoices may be in the name of an agent or buying representative, it is an area often targeted by auditors.

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