Recent case on GST and houses
September 9, 2001

All Canadians who buy brand new homes are subject to a rather complicated federal government Goods and Services Tax (GST), but a landmark legal case in British Columbia shows that there may be some wriggle room on whether the tax should be counted as part of the home's equity.

New homes in Canada are subject to the 7 per cent GST. New homebuyers can apply for a 2.52 per cent rebate of the 7 per cent GST applicable to the purchase price to a maximum of $8,750 for homes costing less than $350,000 before GST. The GST does not apply to resale houses anywhere in Canada.

For new homes priced between $350,000 and $450,000 before GST, the GST rebate is reduced proportionately. New homes priced at $450,000 or higher are not eligible for a rebate and the full 7 per cent GST sales tax applies.

Many homebuyers and homebuilders have argued that the GST should not apply to land, since land is neither a manufactured good nor a service. The arguments have been futile, however, and the GST continues to be applied to the entire sale price of property and land.

But the federal sales tax should be confused with market value for property assessments, as a landmark legal case has confirmed.

In 2000, West Vancouver residents Bill and Jo Ann Wedley won a five-year legal battle with the Property Assessment Appeal Board ruling that the goods and services tax (GST) is not part of a home's market value.

The Wedley case against the B.C. Assessment Authority began with the purchase of a new two-storey condominium apartment in West Vancouver in 1994. They paid $616,822 for the suite, plus $43,177 in GST. When they received their tax assessment, the Wedley's discovered their property was now valued at $640,000.

The net GST had been included in calculating the market value. The price of their property had magically risen, but the real value had actually fallen. The Wedleys were actually paying a tax on tax.

After their initial appeal to the Assessment Appeal Board was speedily rejected, the Wedleys twice took their case to the B.C. Supreme Court. The Court ruled that the Board must consider whether it is appropriate to include GST in the assessment of the Wedley's property and properties in general. On February 2 of 2000, the Appeal Board reheard the case and reversed its previous stand. As a result of the Board ruling, the Wedleys had their 1996 and 1997 property tax assessments lowered.

As Bill Wedley noted later: " The GST is not part of land or physical property: it's a tax on value and not part of the value and it is never negotiated in the market place."

It seems like a fair comment, but one that has consistently eluded all three levels of government. The rationale for including the GST as an integral part of the purchase price was that it can be recouped when the home is sold. However, the GST is not applied to resale homes so it can never be recovered.

While the Assessment Appeal Board has now determined actual value for the Wedleys' property, it didn't go on to determine equity for other property owners. "It doesn't seem right that we get special treatment when the law is supposed to be equal for everyone," said Wedley.

For other Canadian homebuyers of new homes, it is good advice to carefully check your property assessments and be ready to challenge any increase based on tax, not market value.

Korman & Associates
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