HST Rebates & Condo Investing with Tax Expert Mark Purdy

Mark Purdy Interview Transcript

Hello and welcome back to The True Condos Podcast. Once again, I'm your host Andrew la Fleur. Thanks for listening in today. When it comes to condo investing, one of the most confusing and the most misunderstood subjects that I've encountered is probably the HST and HST rebates. The worst part of it all is that if you talk to 5 different people about the HST, you're going to get 5 different answers. I'm just talking about the experts; lawyers, accountants, developers. Everybody seems to have a different thought process or opinion on how it actually works.

The HST's actually been around for over 4 years now and yet no one seems to be able to tell you how it works and how the rebate process actually is looked after by the CRA. Well, the good news is that I have found a great guy recently that I want to introduce you to, all my condo investor clients, all the listeners of this podcast. His name is Mark Purdy. He's a tax consultant. Mark has personally filed hundreds of successful HST rebate applications for his clients and has recovered millions of dollars for them. He's the best person that I found yet to talk to about HST because he's actually living and breathing it every day. It's not just theoretical. He's actually doing it.

If you're completely unfamiliar with the HST and how it affects condo investors, I've written a couple articles about this subject and have a link to those in the show notes for this episode which you can find over at TrueCondos.com/rebate. Okay, so here it is, my interview with Mark Purdy. Hey Mark, thanks very much for being here on the podcast today, appreciate your time.

Mark Purdy: You're welcome. Thank you.

Andrew la Fleur: Why don't we start just by telling everybody a little bit about yourself, your company, what's your story, how did you get in to this business of HST rebates.

Mark Purdy: Okay. We've been around for about 15 years in tax consulting. We actually got into this business more as a mistake than anything else. We bought our first condo 3, 3 1/2 years ago. On closing, we found out that we had to pay HST.

Andrew la Fleur: Like a lot of people who are listening, a lot of people who've been through the HST experience, this whole HST thing in terms of condo investing was news to you as well.

Mark Purdy: It was a big shock.

Andrew la Fleur: Even though your business was as a tax consultant.

Mark Purdy: Yeah. It was a big shock. About 3 days before closing. In fact, I kind of hear rumors about it, so I'd asked a couple of people and never got an honest answer. About 3 days before closing, we got a call from our lawyer saying that we had to come up with $17,000 in HST. We were like, "What the heck?" We stepped back. We had the cash flow, so that was great. We paid the HST. We met with our lawyer and asked the lawyer a little bit about it and he said he thought we could get it back if we were going to live there, which of course we weren't. He gave me one form and he said, "Have a look into it."

I left his office and got on the internet because it's a wonderful thing. Started looking around trying to find out about HST and the HST rebates, and how can I possibly get this money back? I came across a couple of companies that do claim to do it. When I called them and told them about my situation, they said because I was going to be renting out the property, I wasn't eligible to get the money back. These were the experts in the field at that time. I talked to another company and they said, "No. No. You can get it back and we're going to charge you 20% of your refund."

Andrew la Fleur: Wow.

Mark Purdy: Which was pretty shocking. I listed a little bit ...

Andrew la Fleur: This was, you had a $17,000 HST but how much was the condo? The purchase price of it?

Mark Purdy: Two hundred twenty thousand.

Andrew la Fleur: Two hundred twenty thousand, seventeen thousand dollar HST bill and you're thinking, how am I going to get this money back, you're hearing mixed messages, so then what happened?

Mark Purdy: Actually, my first reaction was, "Let's sell this puppy and get out of this. This is crazy." Which of course we didn't do. We looked into it a little bit further, called CRA, got copies of all the guides and the documents and the forms that need to be filled in which wasn't the easiest thing, pulled down the 176-page guide to fill in this form that needed to be done and then we went through the process of applying. A lot of uncertainties with it. One of the challenges is Revenue Canada said we had to be an individual, well, we bought it through our holding company. It turns out you can buy it as a holding company, you can buy it as an American citizen, any country in the world, you can buy property in Ontario and you're going to get that HST rebate back. Nobody seemed to know that. We went through, we filled in the application. It took us several hours. We sent it off to Revenue Canada and about 3 weeks later, we got our money back. That's great.

Andrew la Fleur: Then what? A light bulb went off and you said ...

Mark Purdy: A light bulb went off and I called up my lawyer, and I said, "How come you didn't tell me about this?" He said, "Well, I've never heard of this before." Then I called up my Realtor and I said, "Why didn't you tell me about this?" They said, "Well, we weren't sure how the program worked." Then I did a little more research and I called a bunch of real estate lawyers and a bunch of accountants, and a bunch of Realtors and lo and behold, nobody seemed to understand the program. That's when the light went off and I went, "Geez, I bet you there's an opportunity for this." Since then, we've never looked back.

Andrew la Fleur: You have this tax consulting business, how much of your business is the HST rebate side now? Is it just a side piece for you? Is it becoming a big thing?

Mark Purdy: From a volume perspective, most of our tax consulting is in the scientific research and experimental development. That represents probably 85% of our income. From a volume of actual clients, the HST has picked up significantly. One of the reasons for that is people just don't understand the program. The other problem that's happened is, recently, Revenue Canada has gone through and has decided to start reviewing all applications for the new home rebate. That's where you buy the property and you say you're going to be the primary resident of that property.

Andrew la Fleur: Right.

Mark Purdy: Most investors as you can imagine had said, "Yes, I'll be the primary resident," because they don't have to pay HST on closing, but Revenue Canada is now doing a hundred percent review.

Andrew la Fleur: Whereas before, they were not.

Mark Purdy: Before, they weren't doing anything.

Andrew la Fleur: They were sort of turning a blind eye. People were saying, "Yeah, I'm going to move in," and the developers didn't care, nobody cared so HST rebates were just flowing right through.

Mark Purdy: Yeah and you get the benefit of it right away. The unfortunate thing is Revenue Canada can go back 2 years. They can go back to somebody who purchased a property in May 2012 and say, "Prove to me that its primary residence."

Andrew la Fleur: Right.

Mark Purdy: Proving that you're a primary resident is very difficult. In fact, even people who actually live in the property can't prove based on Revenue Canada standards that they're a primary resident.

Andrew la Fleur: Okay.

Mark Purdy: Of course what we're seeing is that 70, 75%  of these cases, Revenue Canada is sending them a letter saying, "You owe us this money back. You're not eligible."

Andrew la Fleur: Right. Right.

Mark Purdy: Not only do they owe the money but they also owe penalties and interest, and they're not going to get those penalties and interest back.

Andrew la Fleur: Okay. Let's take a step back and just talk to us, just for somebody who's totally new to HST rebates, maybe they're a condo investor, they're facing an HST on closing, an HST bill on closing or somebody who's thinking about getting in to condo investing for the first time and they've heard about this HST thing. Just give us an overview of what is the HST rebate process exactly, how does it work and what is it all about?

Mark Purdy: Okay. It's actually fairly simple. There's 2 programs. There's a program for someone who's going to live there, but that's not what we're talking about. There's a program for someone who's going to invest in the product. If they're going to invest and they close on this property, they need to get somebody in for a 1-year lease. They rent the property out for 1 year. Once they've got that 1 year lease in place, they're going to get their rebate. Now, it's a matter of filling in forms. There's 3 forms that need to be filled in. They also need to send in a copy of their purchase or sale agreement or statement of adjustments and a copy of their lease.

Once those things are sent in, they're going to get their check back in about 40 days, including interest. It is really quite simple. Think of it as almost like a coupon at the grocery store. As long as you buy the right thing, you're going to get your money back. This is how that works. You're going to get a hundred percent of your money very much like you would if you apply through the new home rebate. They're exactly the same benefit which is one's for a primary liver, someone who's going to live there, and one's going to be someone who's going to use it as investment property.

Andrew la Fleur: Right. Okay. Now I'm going to take you through ... These are a number of questions that people have asked me about the HST rebate program. If you don't mind Mark ...

Mark Purdy: No problem.

Andrew la Fleur: ... I'm going to just pepper you now with various questions. Some of these points you might have already answered in the things you're saying. We're going to go through this list of frequently asked questions about the HST.

Mark Purdy: Right.

Andrew la Fleur: Here's the first one. The price list and the marketing materials I got from the builder said that all prices include HST, so why do I have to pay extra?

Mark Purdy: Very good question. It's really, for lack of a better word, it's a lack of understanding at the sales process. Everyone who buys a property, the assumption from the builder is that you're going to use it as your primary residence. They can't distinguish who's an investor and who's not. If you're using it as your primary residence, you're not going to pay any extra HST in closing. If you're using it as an investment property, you're going to pay HST in closing but you're going to get it back. The only reason you don't get it back is you don't pay attention to the rules. It's easy to get it back.

Andrew la Fleur: Right. Next question, do I have to pay an extra 13% on final closing if I'm an investor of a new condo?

Mark Purdy: No. What happens is, the first 5.2% of the HST is built in to the price and the builder's paying that.

Andrew la Fleur: Okay.

Mark Purdy: On closing, you're going to pay 7.8% of the purchase price. If you buy a property for 200,000 you're going to pay $15,600 in HST on closing, which you can get back.

Andrew la Fleur: Great. If the government is just going to give me my money back, why do I have to pay it in the first place.

Mark Purdy: Good question. The biggest reason is it's administration of the program and it's to try and dissuade people from buying properties and flipping them because you do have to lease the property. You can't just buy the property and flip it the next day. If you do, you're going to forgo that HST rebate. It's also a cash flow thing. How many people are buying these properties time and time again and flipping them? They're entitled to get that money. It's part of the HST program. I hope I answered that.

Andrew la Fleur: You touched on this, but how much do I have to pay? Let's say if I'm buying something for, I don't know, $300,000 how much HST will I have to pay on the final closing?

Mark Purdy: Seven point eight percent, so let's call it 8% to make the math nice and easy. In that case, you're going to pay $24,000.

Andrew la Fleur: Is it always 7.8% on the ...

Mark Purdy: Always 7.8%.

Andrew la Fleur: That's an easy way to do the calculation.

Mark Purdy: That's the easiest way to calculate.

Andrew la Fleur: Okay. How much will I get back?

Mark Purdy: Good question. You're going to get back all the HST that you paid. I'm going to answer this one in a roundabout ways, well, a lot of people seem to get the impression that if their property is worth more than 450, they get nothing back. That's not the case. You can buy a brand new property for $3 million, $6 million, $10 million, you're still entitled to a rebate in Ontario. In Ontario, the minimum you're going to get back on a million dollar property is $24,000. Typically, you're going to get back every dime you pay in HST, except of course the stuff that you pay for your lawyer.

Andrew la Fleur: Okay.

Mark Purdy: If you buy a property for $400,000 and you pay $27,000 in HST you're going to get $27,000 in HST back.

Andrew la Fleur: Okay.

Mark Purdy: Does that make sense?

Andrew la Fleur: Under what circumstances would you not get all of the HST back and how much would you not get back?

Mark Purdy: The only time really you're not going to get anything back if you ...

Andrew la Fleur: Not anything, but if you don't get all of them. Let's say you pay $30,000 and you only get $24,000. Under what circumstance would that happen?

Mark Purdy: The only reason you're not going to get it all back is ... There's 2 reasons, 1) you filed for the new home rebate and you got charged penalties and interest, and then you finally filed for the right program 6 months, 8 months down the road, so you're not going to get it back because you're going to pay penalties and interest. Standardly, you shouldn't pay any more than what the rebate is eligible for. If I buy a property from a builder for $400,000 the only HST I should pay is what I'd be eligible to get back.

Andrew la Fleur: Right. Okay.

Mark Purdy: Right? Some builders or some lawyers in the process haven't figured that out. I shouldn't be liable for any HST beyond what I'm eligible to claim back because it says HST is included. If you're charged $32,000 HST on closing, someone's done something wrong.

Andrew la Fleur: That's very interesting.

Mark Purdy: You're eligible because it says HST is included. The only thing you should have to pay on closing is anything you're not entitled to because you're not using it as a primary resident.

Andrew la Fleur: Right.

Mark Purdy: Once you use it as an investment property, you're entitled to it all back. You should get everything you pay back.

Andrew la Fleur: Have you been through circumstances with your clients where they have paid too much?

Mark Purdy: Yes.

Andrew la Fleur: Have you been able to help them rectify that problem and get the money back?

Mark Purdy: It's a difficult situation because now you're dealing with lawyers and builders and who did what wrong?

Andrew la Fleur: Right.

Mark Purdy: Has it been resolved? Not usually. Oftentimes, what ends up happening is the consumer pays more HST than they should. There's no real way for them to get it back unless they go after the lawyer or they go after the builder.

Andrew la Fleur: What should people do if they're coming up on final closing and they want to make sure they're not paying too much?

Mark Purdy: It's a good idea to actually do the math. If I'm closing out a property that's $300,000 multiply that by 7.8, that's what I should pay in actual HST in closing.

Andrew la Fleur: Okay.

Mark Purdy: If I'm being asked for more, ask the question why? It's just education, right?

Andrew la Fleur: Right.

Mark Purdy: If you're closing out a property and it's a million dollars, and they're asking you for %50,000 in HST, if HST was included, the rebate's $24,000 so all I should be paying is $24,000.

Andrew la Fleur: Okay.

Mark Purdy: If anything else is being charged, you need to ask why.

Andrew la Fleur: Interesting. Okay. You touched on this again, but what ... If you could go over it again, what are the criteria that I have to meet as an investor in order to get the money back?

Mark Purdy: Basically, you need to do one thing. You need to do it at the beginning. You need to put a 12-month or 1 year lease in place. There's criteria around that. It could be rent-to-own property. You could put in a lease that says, "I'm going to buy the property 6 months after," but it's still a 1 year lease. Once you've got that 1 year lease in place, you're guaranteed to get your money back. Can you do other things? For sure.

Andrew la Fleur: Such as?

Mark Purdy: You can have a 3-month lease. You can have 6 3-month leases.

Andrew la Fleur: Okay.

Mark Purdy: You can have short-term rentals. All of those things though are going to require Revenue Canada to do a review.

Andrew la Fleur: Okay.

Mark Purdy: You've got 2 processes. One, I get a 1-year lease. It gets rubber stamps and your check goes out in 45 days.

Andrew la Fleur: Okay.

Mark Purdy: The other way, I put in a whole variety of leases, a 3-month, a 6-month, a 9-month or whatever short term rental contract. Now Revenue Canada has got to review it and do a physical audit.

Andrew la Fleur: Okay. What does a physical audit mean? What does that ... Let's say I have a 3-month lease instead of a 12-month lease, that's all I could find or for some reason that's what I wanted to do. I rented it out for 3 months after I got the keys and I did the final closing, I paid the HST, I send in my application with the 3-month lease, what will happen then?

Mark Purdy: First thing they're going to do is deny it.

Andrew la Fleur: Okay.

Mark Purdy: They're going to look for a history. If I have a 1-year lease in place, I've done my job. If I had a 3-month lease in place, I haven't. Now, they're going to wait until a year, year and a half gone by and now they're going to look back and say, "Has Andrew shown that he is using this as a rental property?" Now they can make an assessment. First of all, you're waiting a year or a year and a half out before you can apply for your rebate and you're allowing Revenue Canada do a physical audit. First approach, get your money back in 45 days. Second approach, you wait a year and then they're going to take 6 to 8 months to review it.

Andrew la Fleur: Your advice to anyone is?

Mark Purdy: Get a 1 year lease.

Andrew la Fleur: Okay. Make it simple. What if I originally bought a pre-construction condo for myself to live in, but it took so long to get built that my life circumstances have changed and I bought another property, and I moved in to that one. Now, I want to rent this one, this condo out. I don't plan on living in it anymore. Do I still have to pay the HST or does that government take into account my intent when I originally bought the property?

Mark Purdy: That's a good question actually. The intent one is a complicated one. You actually have to prove through this program what your intent was. In a situation like you described, how do you prove that? How do you prove what was in your brain a year, 2, 3, 4 years ago? What Revenue Canada is now looking at is they're looking at life altering circumstances. If Andrew bought a property 3 years ago and at that time he was married, and now 3 years in the future and it's a 1-bedroom condo but he's got 3 kids, they can see that as a life altering experience.

Andrew la Fleur: Okay.

Mark Purdy: Maybe it doesn't make sense for him to go ahead and use this as a primary residence. You take a little bit of a risk there. What I would recommend to most people on a situation like that is, a year from now, 2 years from now, you take possession of that property, rent it out, pay the HST on closing, and get it back through the rental rebate program. It's simple.

Andrew la Fleur: Right.

Mark Purdy: In fact, in many cases, we're seeing that people who were actually physically living in the property are still getting denied because they're not doing the right things. What Revenue Canada is looking for are things that the average consumer probably wouldn't consider. If you're to buy a property tomorrow and you were going to live in it, what would you do? Change your address?

Andrew la Fleur: Change my address, yeah.

Mark Purdy: Hook up your utilities, right? All of those things you would do as a landlord. Those don't qualify you as a primary resident, right?

Andrew la Fleur: Right.

Mark Purdy: Would you automatically go out and change your tax filing information?

Andrew la Fleur: I might not do it right away, it might take some time.

Mark Purdy: They want to see it right away. Would you change your passport? Would you update your license? Would you change your address with your doctor and your pharmacist? Your optometrist? All of those things need to be done immediately because those things designate you actually living in that property.

Andrew la Fleur: Those are the things that CRA is looking for.

Mark Purdy: That's what they're looking for. They're looking for things like you setting up a landline. Today, most of us don't have landlines, we have cellphones.

Andrew la Fleur: Right.

Mark Purdy: You don't have a landline, you don't qualify.

Andrew la Fleur: Wow.

Mark Purdy: They're looking for you to get a subscription to a magazine subscription sent to that property.

Andrew la Fleur: Wow.

Mark Purdy: How many people do that?

Andrew la Fleur: Wow.

Mark Purdy: All of those things they're looking for. We've dealt with probably 5 families this month alone who have been denied the primary resident rebate who've been living there, who've got affidavits from their neighbors that they've been there for 2 years.

Andrew la Fleur: Really?

Mark Purdy: We're having to fight those.

Andrew la Fleur: You're having to fight that based on all these things you're just listing up.

Mark Purdy: Because they aren't doing the right things.

Andrew la Fleur: They're checking out all sorts of things.

Mark Purdy: Yeah and some of thing are simple. You get insurance. There's 2 types of insurance. There's resident insurance, there's renter insurance.

Andrew la Fleur: You have to get the right one.

Mark Purdy: Right.

Andrew la Fleur: What's the main thing, though? Is it changing your changing your driver's license and setting up the utility bills? What's the main thing in your experience that Revenue Canada is looking for?

Mark Purdy: They're looking for all the public information changes. They're looking for if you've got kids, you've registered them at the local school and you've registered them with your current address. They're looking for things like prescriptions and magazine subscriptions. Landlines.

Andrew la Fleur: How do they get that information? Like magazine subscription.

Mark Purdy: You have to prove it to them.

Andrew la Fleur: You have to prove it to them?

Mark Purdy: When they ask the question, are you living there? You've got to give them evidence to support it.

Andrew la Fleur: You have to support it. Okay.

Mark Purdy: It's not, you're automatically innocent.

Andrew la Fleur: Guilty until proven innocent.

Mark Purdy: That's what they're looking for. In some cases, I almost suggest that if you're going to use it as our primary residence, it's easier to rent it to yourself and get your HST rebate.

Andrew la Fleur: Wow. That's interesting. You touched on this, I think, but can I get the HST rebate back if I buy the condo under a company name?

Mark Purdy: Yes. You can do it 1 of 2 ways. If you buy-in in an operating company, you're going to create an input tax credit. You're not going to apply for the rebate, you're just going to get your HST back on your next HST installment payment. That's simple. If you're buying-in in a non-operating company, a holding company, you're treated just like an individual. As long as you've got that 1 year lease in place, you apply, the check comes back to the holding company. If you're a non-Canadian citizen, same thing. As long as you have that 1 year lease in place, you apply, you get the check sent back to you.

Andrew la Fleur: Great. After I get the HST money back, can I just turn around and sell the condo and keep the rebate?

Mark Purdy: No. There are 3 reasons why Revenue Canada can demand you pay that HST back. The first reason is you sell that property within a year of taking occupancy. For condos, it's different than non-condo environment. If I buy a free hold property, occupancy is the day I take possession of the property. In a condo, often times, occupancy is way before the property's registered.

Andrew la Fleur: Yes.

Mark Purdy: The first thing you have to think about is you want to wait 1 year from occupancy.

Andrew la Fleur: One year from occupancy before ...

Mark Purdy: Then you can sell that property.

Andrew la Fleur: ... selling. Okay.

Mark Purdy: There is a caveat. If I were to buy a property, I take occupancy in May, I apply and get my HST rebate back. In July, I decide to sell the property. I'm okay to sell it as long as I sell it to someone who promises to live in it as a primary resident.

Andrew la Fleur: Okay.

Mark Purdy: In a situation like that, I would strongly suggest that that individual signs an affidavit guaranteeing that they're going to live there as a primary resident. If there live there as a primary resident, you don't have to pay back the HST.

Andrew la Fleur: Okay. That's a great tip. If somebody's in that situation, get that affidavit from the purchaser, just in case the CRA ...

Mark Purdy: Just in case they ...

Andrew la Fleur: ... comes in knocking down the road and says, "Hey, what's going on?"

Mark Purdy: The other thing you want to consider is, what does sell mean? From Revenue Canada's perspective, the sold date is the date that the actual financial transaction with the bank, the mortgage happened.

Andrew la Fleur: The closing date.

Mark Purdy: The closing date.

Andrew la Fleur: Not the date that have ...

Mark Purdy: Not the enlisted date.

Andrew la Fleur: You have an agreement, right.

Mark Purdy: If I buy a property and let's say I take occupancy at that property in January 2013, I can put in on the market in June, July, August. All I want to do is make sure my closing is a year and a date beyond that occupancy time, and I'm covered. I don't have to pay that to HST. Please apply for the HST first because it's a lot easier to get it ...

Andrew la Fleur: Yes, than to ...

Mark Purdy: ... when you have possession of the property.

Andrew la Fleur: Right. How many applications have you done?

Mark Purdy: This month?

Andrew la Fleur: Roughly in total.

Mark Purdy: We're doing about 20 to 30 applications a month.

Andrew la Fleur: Twenty to thirty applications a month. Okay, so these are hundreds.

Mark Purdy: I would say 2-250 times so far this year.

Andrew la Fleur: This year? Wow.

Mark Purdy: Yeah.

Andrew la Fleur: How complicated is it for somebody to fill out the application and do it all themselves would you say?

Mark Purdy: Without shooting myself in the foot, it's really not that bad. It's really a matter of terminology, understanding the terms. The problem for a layman is, you're presented with these 3 documents, 3 forms and all these other forms that you've got to complete and add in, and these mathematical calculations that you've got to make, which aren't really that bad. In order to do it, you've got to go through the guides. You really do. The first time I saw it, I went ...

Andrew la Fleur: You can't just wing it.

Mark Purdy: ... "Geez, what is this?" You've got to read that guide. The initial guide for the new residential rental program, it's about 72 pages long. That's daunting because you know what? It's written in government language which means you probably needed another guide to understand the language.

Andrew la Fleur: Right. Let's face it, you talk to ... Like you said, when you started this whole thing, you talked to 4 different lawyers, you talked to 4 different accountants, you're going to get 4 different answers.

Mark Purdy: Yeah. The first thing that happens is as you start reading through the guide, there's a "Are you eligible?" section and one of the first categories in there is it says, "Did you pay more than $450,000 for your product or does your fair market value exceed $450,000?" If it does, it says you're not eligible. At that point, most people stop and go, "Oh. I thought I was getting this money back but I'm not."

Andrew la Fleur: Right.

Mark Purdy: What that means is you're not eligible for the federal rebate but there's a provincial rebate. You just have to continue reading. The other problem is you're going to easily find the federal form, but finding the provincial form isn't as easy. The provincial form is about 3 times the value of the federal form. Can you do it? Sure you can. If you want to sit down and go through the guides and take the time to do it, you can do it. I would say the average person is going to spend 8 to 10 hours filling in the form or they can hire us to do it, we can get it done in a couple of hours, we can process, we can guarantee that they're going to get their rebate.

Andrew la Fleur: Great. I guess it's a good time to ask, in terms of your service, how do you get paid? What do you charge?

Mark Purdy: We charge a flat fee. We will charge a percentage if we like, but the percentage never makes sense. We charge on average $575. Once we receive that rebate or once the client receives their rebate that become due. Many clients end up paying us beforehand, but the way we process it is if I did your application today, it's almost the end of May, I'd probably send you out an invoice at the end of June. Chances are, you're going to have the check by the end of June. That's when it's due.

Andrew la Fleur: Right.

Mark Purdy: If you don't the check then wait till you receive the check and pay us, that's fine.

Andrew la Fleur: Great. Okay. One of the things on the big question I get asked a lot and there's a lot of misinformation, on the forms you have to put the fair market value of your property, FMV, fair market value. What is the fair market value? How was it determined because it seems like a subjective sort of a thing. What number are you supposed to put in there for fair market value? What do you do?

Mark Purdy: Let me ask you what is fair market value? You're a Realtor, you should know these things.

Andrew la Fleur: Well, if you ask me from a Realtor's perspective what is fair market value, that's basically what a property would sell for if put on the ... if exposed on the market today.

Mark Purdy: Today, that's correct. That's what it is from Revenue Canada's perspective. If I buy a property and I agree to buy a property 2 years in advance and I agree to buy it for $210,000. When I close on the property today and I pay $210,000 what's its fair market value? $210,000.

Andrew la Fleur: Okay.

Mark Purdy: That's what someone was willing to pay. I was willing to pay $210,000. That's its fair market value from Revenue Canada's perspective is what is someone prepared to pay for that today, which is what I paid. Your fair market value in 99% of time is what did you pay for the property? Take out your HST though because HST isn't part of it.

Andrew la Fleur: Okay.

Mark Purdy: If I bought it for 210 and there was $13,000 in HST or $5,000 in HST, the fair market value then is 205.

Andrew la Fleur: Interesting. Okay.

Mark Purdy: Where it becomes the questionable one is let's say I apply for a new home rebate. I pretend that I'm going to live there. I knew I was going to rent it from the beginning but I didn't want to pay the cash flow upfront, so I decided to apply as a new home rebate. Six months, a year from now, Revenue Canada calls me up and says, "You're not eligible, but we noticed you rented the property, you might be eligible for the new residential rental rebate program." What's the fair market value now? Now, the fair market value is what is someone willing to pay today, a year, year and a half down the road.

Andrew la Fleur: Now that number is different.

Mark Purdy: Now that fair market value is increased if you've done your job right. You bought the place for 210 back in 2012, but in 2014 when Revenue Canada sent you that letter, the whole place is done, the landscaping's done, the neighborhood's gone up in value, people have been selling these properties. Now all of a sudden this property is not worth 210 anymore, it's worth 400,000. That's going to impact the amount of rebate you're eligible for.

Andrew la Fleur: Wow. Again, it goes back to do it right away.

Mark Purdy: Do it right away.

Andrew la Fleur: Do it the right way.

Mark Purdy: It's fast. It's easy.

Andrew la Fleur: Here's a question that is becoming more common with especially in Toronto condos is developer giving these guaranteed lease-back programs or the developer will lease the property back from you. If you purchase a condo, they guarantee to lease it back for 1 or 2 or 3 years.

Mark Purdy: Yup. Great programs.

Andrew la Fleur: Yeah, great. Very attractive for investors.

Mark Purdy: Guaranteeing your return on investment. It's a wonderful idea. It really becomes a question of semantics. Okay? If the developer is truly going to lease the property back from you. If the developer is truly going to lease the property back from you, so you're going to get a letter from ABC Developer saying, "We are leasing this property from you for a year, 2 years, 3 years at a guaranteed rate," you're not eligible.

Andrew la Fleur: Okay.

Mark Purdy: If what they're doing is providing a property management type function which means they're going to take your property, they're guaranteeing it will be leased at a certain rate. They're going to go out and find a tenant then you're eligible. It really is a semantics thing. If I'm as the builder going to lease it from you and then sub-lease it to someone else, now it becomes, you don't have a residential lease, you have a lease for the commercial entity.

Andrew la Fleur: Okay.

Mark Purdy: A commercial lease doesn't qualify.

Andrew la Fleur: Okay.

Mark Purdy: If they just become the 3rd party that helps you find a lease, then guarantees you a rate, then you're fine. You're going to get a hundred percent of your rebate back. It really is a semantics question. Most builders, they hire a property management company and that's how they're working that.

Andrew la Fleur: Okay. In your experience with doing the rebate applications under a rental guarantee, what paperwork or how does it need to be set up to be successful to get that HST back. Can you give us an example of the successful one?

Mark Purdy: Everyone we've done so far has been successful. It's just an extra step. When we call the client or when we're talking to the client and they send us over a copy of the lease, what they send to us is a copy of the agreement between them and the builder or between them and the property management company. We then have to call the property management company and say, "Okay, can you send me a copy of the lease with the tenant." It doesn't matter that that lease with the tenant is between the tenant and the property management company. We've closed the loop by saying, "As the owner, I'm allowing you to lease this on my behalf." Right?

Andrew la Fleur: Okay.

Mark Purdy: We've closed the loop so it's easy for Revenue Canada.

Andrew la Fleur: The property manager becomes not the tenant but the agent really who is finding that tenant.

Mark Purdy: That's all they are. That's all they are.

Andrew la Fleur: Okay.

Mark Purdy: In that case, they're going to get a hundred percent of their rebate.

Andrew la Fleur: That's ...

Mark Purdy: It's easy.

Andrew la Fleur: Yeah. That's good news for people who are ... investors who are buying these units with lease-backs.

Mark Purdy: Yeah. It's a great concept. It's a wonderful idea that the developers have come up with because from a return on investment perspective, it's great. From an HST perspective, it means that if you're buying one of these properties, you're guaranteed you're going to get your rebate. Of course one of the challenges that we've seen is probably 50% of the claims that we get in this situation, they apply originally as a new home rebate saying that they're going to live there.

Andrew la Fleur: Right.

Mark Purdy: Obviously, you aren't.

Andrew la Fleur: Right.

Mark Purdy: You bought it with the idea that they were going to rent it.

Andrew la Fleur: Again, it keeps going back to doing your homework, doing it right the first time.

Mark Purdy: Correct.

Andrew la Fleur: You do shoot yourself on the foot in a lot of cases if you don't do this properly.

Mark Purdy: You're causing yourself needless cash flow and stress, right?

Andrew la Fleur: Yeah.

Mark Purdy: Revenue Canada calls, nobody wants to talk to Revenue Canada.

Andrew la Fleur: No.

Mark Purdy: That's the reason why you hire an accountant or you hire someone to be that person in the middle. What you're doing is, if you'll apply to save yourself some cash flow at the beginning, "I don't have to pay that $20,000 in HST on closing." A month, 2 or 3 months down the road, Revenue Canada calls you, they're charging you penalties and they're charging you interest of 5%. All of a sudden, you just paid up $2,000. You could have borrowed the money at the bank at 2.5%, applied right away and got your money back in 45 days. Now, it might cause you $125 for that money. Whereas the other way, with interest and penalties, you could be up a thousand dollars.

Andrew la Fleur: Right, so don't do that.

Mark Purdy: You don't have to go through the stress of having your own [inaudible 00:35:33].

Andrew la Fleur: The stress, yeah.

Mark Purdy: Hello?

Andrew la Fleur: It sort of comes down to where most people say ... People, you want to avoid stress, right?

Mark Purdy: Yeah.

Andrew la Fleur: That's great. We've covered so much here today. I think there's probably going to be a lot of follow up questions from people listening. Feel free to email me, andrew@truecondos.com and we will definitely think have to have you on again for another interview in the future.

Mark Purdy: Sure. That'd be great.

Andrew la Fleur: Just in closing, tell us a little bit about yourself in terms of condo investment. Are you a condo investor yourself? What do you own and what's your strategy with investing in condos?

Mark Purdy: We are. We actually quite like it. We bought our first condo 3 1/2 years ago. We now have 4 condos, 2 are just being finalized as far as development goes. I think we take possession of those end of the summer. We've had no problems renting them which is wonderful. Little rocky in the beginning with the HST, but now that we understand that, that's easy. It's a bit of a cash flow crunch at the beginning but you're going to get it all back, so that's great and you get some interest on it, too. We've had no problems getting renters. We're getting rent well beyond what we expected. The big change for us is we're seeing that we're buying these condos like, so one of the condos we bought for 210,000, now that they finished the property, the landscaping's done, it's all completed and we're a year away from taking occupancy, we can actually look at selling it. The property's worth 280.

Andrew la Fleur: Wow.

Mark Purdy: All of a sudden we've made $70,000 plus we've had a little bit of pay down on over the year. What we also not like is that because they're condos and because they're new, there's not a lot of work to do. We can use the condo rules to help us out tremendously. Our first tenant calls us up and says, "Hey, we'd like to put a satellite dish on the outside," "Sorry, the condo rules won't allow that," or "We'd like to get a big dog," "Sorry, it's not me. I like big dogs, but the condo rules don't allow it." All of a sudden, we get to use the condo board as our reason to manage our clients which is nice.

Andrew la Fleur: Right. Have you owned other investment properties or ...

Mark Purdy: Yup. We'd had a couple ...

Andrew la Fleur: Compared to other types of investment properties, do you see a lot of advantages to get a condo?

Mark Purdy: A couple big advantages. We've had a couple residential products where we bought, resell products. We've built them up and we flip them, did okay. We bought a couple of residential products where we built them up and we've had tenants in there. Lots of concerns because they're older properties. There's always a thing going wrong. The biggest gain for us has been in the new condos because we're buying them at [inaudible 00:38:08]. By the time we take possession, they're already worth 20, 30 thousand dollars more than we purchased them for. We wait that year, they're worth 50, 60 thousand dollars worth more than we paid them for and we have no problems renting them because they're brand new and no one's lived in.

Andrew la Fleur: Right.

Mark Purdy: There's been no work.

Andrew la Fleur: No work, yeah.

Mark Purdy: I would say in those 2 that we have, I've probably done 1 visit on a client that had a concern. That's pretty nice. Whereas I can think back 2, 3 year ago, we were getting calls. Between the 3 units that we have, we were probably getting calls once a month, plus somebody had to go mow the lawn. It'd be nice to ask your client to do that, but they're not going to do that. Whereas here, we don't have to do anything. There's no work for us. Like I said, we might go out once every 6 months just to say hi and 9 times out of 10, they love it. It's not a big deal. It's been a great experience for us.

Andrew la Fleur: That's great.

Mark Purdy: We're making good money at it.

Andrew la Fleur: That's what it's all about.

Mark Purdy: Yeah.

Andrew la Fleur: Great. Thanks Mark. If anybody wants to get a hold of Mark, just send me an email, andrew@truecondos.com or go to my website TrueCondos.com search for Mark Purdy in the search bar, Mark Purdy, and you'll pull up the blog post with this interview, and you can fill out the contact form there to get a hold of Mark. Thank you very much Mark for your time.

Mark Purdy: You're welcome.

Andrew la Fleur: Hopefully, we can have you on again.

Mark Purdy: Sounds great. Thanks.

Andrew la Fleur: Okay. There you go. That was Mark Purdy, tax consultant and HST rebate expert. There's tons of valuable information that was just dropped in you in this episode. This one might be one you want to bookmark or come back to, listen to it again. Let it all sink in. Think about how it might affect you in your situation with your investments. The HST is somewhat complex issue, obviously, and we're going to have to have Mark on again in the future episode to talk more about this subject, but I know that I learned a ton from this episode and from talking to Mark. I hope you did, too. If you have any questions, which I'm sure you do, or if you'd like to talk to Mark directly about your HST rebate situation, just send me a quick email, andrew@truecondos.com or give me a call, 416-371-2333 and we'll get you connected there. Once again, for all the show notes on this episode, just head on over to TrueCondos.com/rebate. Thanks for listening and we'll catch you on the next episode. Bye.

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