27 February 2020 CBA Roundtable, Q.15

The definition of “fair market value” in s. 123(1) excludes those taxes that are excluded by s. 154 from the value of consideration paid for a supply, so that GST/HST is not to be included in the fair market value of a MURC under s. 191(3).CRA’s auditors are reluctant to accept that a valuation that is derived under the “direct comparison method” and the “discounted cash flow” method (income method) are inclusive of GST/HST. Does CRA agree that where the “income method” is used to determine the FMV of a MURC, that the FMV thereby derived should be considered to be inclusive of GST/HST, so that such GST/HST should then be backed out for purposes of coming to a reduced corrected FMV for purposes of s. 191(3)?

CRA responded:

It is the CRA’s position that the fair market value (FMV) derived from the income approach is net of GST/HST assuming the market comparables used in deriving the overall capitalization rate (OCR) are exempt sales.

It is important to distinguish between GST/HST imposed under Part IX in respect of a taxable supply and an amount in respect of GST/HST that may be imbedded in the consideration for a supply as a result of the GST/HST having been imposed at an earlier time.

Section 154 refers to the GST/HST imposed under Part IX in respect of a taxable supply, not to any amount imbedded on account of HST that may be attributable to a prior supply. Therefore, when arriving at FMV, section 154 does not provide a legislative basis to discount the consideration of an exempt supply in an attempt to remove an amount imbedded in the consideration of that supply.

For example, where the consideration of a taxable supply of a residential complex is used as a comparable in a valuation methodology, the GST/HST imposed on that supply, even where the supply was “GST/HST included”, is excluded from the consideration. However, if a comparable used in the valuation method is an exempt sale of a residential complex, section 154 does not permit the consideration of that exempt sale to be discounted to remove an amount imbedded on account of HST as a result of a prior taxable supply.

In the context of an inquiry on determining the fair market value of a new apartment building (or other ”MURC”) when there is a self-supply at the time of substantial completion and first occupancy, CRA noted that where the cap rate used in applying the income approach to valuing the MURC was derived from comparable sales of occupied MURCs, such comparables may reflect “GST/HST that may be imbedded in the consideration for a supply as a result of the GST/HST having been imposed at an earlier time.” On the other hand, “where the consideration of a taxable supply of a residential complex is used as a comparable in a valuation methodology, the GST/HST imposed on that supply, even where the supply was ‘GST/HST included’, is excluded from the consideration.”