Federal Court of Appeal Confirms Permissible Valuation Approaches
The Federal Court of Appeal (“FCA”) recently confirmed in Carvest Properties Limited v. Canada, 2022 FCA 124 that apartment buildings registered as condominiums must be valued on a unit-by-unit basis. Importantly, the FCA did not disturb the Tax Court of Canada’s acceptance of a “volume discount” for the hypothetical sale of all of the units in the building and the effect of their introduction to the condominium market. These two elements of the FCA’s decision are useful for resolving tax disputes respecting the valuation of newly constructed residential real property for GST/HST purposes.
Section 191 of the Excise Tax Act (the “ETA”) requires the builder of a newly constructed residential real property to remit GST/HST on the fair market value of the property. The ETA deems the builder to have sold and received (a “self-supply”) the property at the later of the time of substantial completion and the occupancy of the property under a lease. The Canada Revenue Agency (the “CRA”) is very active in auditing these “self-supplies” and many developers have come to expect that the CRA will disagree with and propose an uplift to their self-declared valuation.
The ETA does not require the developer to retain a professional third-party appraiser when determining the fair market value of the property, but many developers choose to retain one for a variety of reasons, including to help insulate against the risk of the CRA assessing beyond the limitation period. An appraiser needs to be instructed on what asset to value, and which methods are legally permitted that might not be automatically considered in other contexts. Given the FCA’s decision in Carvest Properties Limited, whoever is conducting the valuation of the property should recognize that (a) the valuation should be conducted for each legal unit in the condominium building, and (b) a “volume discount” or “absorption discount” may be available in appropriate circumstances.
Canada Revenue Agency Federal Court of Appeal Excise Tax Act