Carvest Properties – Tax Court of Canada finds that condo registration of a rental apartment building meant that the rental units were HST self-supplied based on comparable condo sales
In order to reduce its municipal tax bill, a company in the business of renting self-constructed apartment buildings, registered each of the 137 units in a 12-storey apartment building in London, Ontario (that was ready for occupancy at the end of 2008) as condominium units, even though it rented the units out, rather than making condo unit sales. St-Hilaire J found that this meant that the applicable HST self-assessment rule was that under ETA s. 191(1), i.e., the company was required to self-assess HST on the FMV of each “condo” unit as each unit was occupied by its tenant, rather than self-assessing under s. 191(3) on the FMV of the whole building when the first tenant moved in (or on substantial completion, if later). Furthermore, she accepted that the best method for valuing condo units is comparable sales of condo units, and rejected a variant of the cost method of valuation proposed by the company. (She accepted that any cost-based method - which should be based on replacement cost rather than historical costs incurred - would be inappropriate given difficulties in allocating common-area costs to the individual units.)
However, the resulting per-unit value was to be reduced by a 6% “absorption discount” to reflect the effect on the market of absorbing the sale of 137 condo units over a 16-month period.
It is understood that in recent years, sales in the condo market have generally reflected higher per-square-foot valuations than sales of rental apartment buildings. If so, registration of the units as condo units in this case was costly from an HST perspective.