GST and Fair Market Value #167

Mar 01, 1991

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By Gerry Neely
B.A., LL.B.

Appraisers tell me that the property purchase tax was small enough not to affect appraisals of fair market value, but that the GST is too large to be ignored as one of the factors in calculating fair market value. While the implementation of GST has given builders a variable bottom line, what, if anything, has it done to the calculation of fair market value (FMV) and the price upon which a licensee's commission may be calculated?

Assume the sale of a new unoccupied single family dwelling house completed in 1990 and sold in 1991 by the builder for $200,000 (GST included):

1) Under the GST legislation, FMV - GST = FMV or: $200,000 x 100/107 = $186,915.89

(This is the builder's worst position, if the purchaser doesn't qualify for the new housing rebate and possession is given after June, 1991.)

2) If the purchaser qualifies for the new housing rebate of ($13,084.11 x 36% = $4,710.28) and assigns it to the builder, the builder's net is increased to $191,626.17.

3) If possession is given before April, 199 1, and the purchaser assigns to the builder the FST rebate

($186,915.89 x 4.25 % x 2/3 = $5,295.96) the builder's net is further increased to $196,922.12.

4) If possession is given after March 31, 1991 but before July, 1991 the two-thirds in the above equation becomes one-third, the FST is reduced to $2,648, and the builder's net falls to $194,274.17.

There are, of course, different variables if the sale is a condominium or if GST is added to the price of $200,000. So, how many fair market values can there be when there should only be one?

1) $186,915.89, under the GST legislation definition. 2) $200,000 for the calculation of property purchase tax, based upon the Ministry of Finance's opinion that this price meets their definition of FMV; which is the price to be paid by a willing purchaser to a willing vendor. (This, despite the fact that the willing purchaser paid $200,000 to a willing builder who accepted something less.)

3) $200,000 according to a purchaser thinking of an immediate resale at his cost, or $186,915.89 if the purchaser is alking to the B.C, Assessment Authority.

4) $186,915.89, up to wherever the builder's bottom line reaches.

According to CMHC, GST is to be included in determining the lending value of property. Lending value is the lesser of the purchase price or market value as determined by appraisal. If the purchase price includes GST or no reference is made to GST, that will be the purchase price which is compared to market value. if the purchase price specifically excludes GST, then for the purpose of obtaining lending value, the net GST must be added to the purchase price.

As for commissions, is the purchase price the $200,000 paid by the purchaser or $200,000 less GST; is it the builder's bottom line; or if GST is added, is it $214,000 or $200,000? What should the listing contract provide?

Since a builder is unlikely to agree to pay commission on GST added to the purchase price, the builder may logically argue that he should not pay commission on GST included in the purchase price. On the other hand, in pre-GST times no one deducted FST from the sale price to calculate the value for commission purposes. So, can a builder logically object to paying commission on the purchase price less the net GST payable after crediting all rebates?

Presumably, appraisers looking at comparable sales reported on MLS will need to know whether GST was included or excluded from the purchase price. But will they need to know the extent to which rebates influenced a builder's decision to sell at the price reported? Different appraisers have suggested different approaches to the calculation of fair market value. This column raises questions without attempting to provide answers and a future column will be tumed over to an appraiser who has the answers.

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