Real estate flips: watch out for flops! Particularly when you have done major renovations before reselling. The GST and QST may apply.

In general, the sale of a used residential immovable is not taxable, but beware: there are exceptions to this rule that could cost you dearly and substantially reduce your profit.

Anyone who buys a residential property in order to carry out major renovations and then resell it may be required to remit the applicable sales tax (GST and QST) amounts, even if they did not add the sales tax to the sale price when they sold the property to the buyer.

Ultimately, major renovations entail the payment of taxes (GST and QST) on the renovated immovable’s market value, even if the seller is not a GST/QST registrant.

The tax authorities define a major renovation as a “renovation or transformation of an existing building, to the extent that all, or nearly all (90 per cent or more), of it has been removed or replaced, except for the foundation, exterior walls, interior load-bearing walls, floors, roof, and stairs.”

It is, therefore, important to be careful: a seller who has done major renovations on an immovable that they then sell at its fair market value for $300,000, without having added the applicable taxes, will have to remit $44,925 to the tax authorities as GST/QST (the GST/QST on the $300,000 sale price), in addition to the taxes they will have to pay on gains (profit) realized from reselling the immovable.

This can have a significant impact on the profitability of the endeavour.

Don’t consider your renovations “major”? The tax authorities may be of a different opinion. In order to protect yourself, be sure to document the work carried out, namely, with before and after photos, and by keeping the plans and specifications, bids, and invoices.

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