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Real Estate

THE NEW HST: What all Home Buyers are Asking!

Residential Real Estate Properties

Overview

As part of its provincial budget, the Ontario government chartered a bill on March 26, 2009 that will adopt a single sales tax system tagged as the Harmonized Sales Tax (HST). This will take effect on July 1, 2010. Effective this date, Ontario will facilitate a federally administered Harmonized Sales Tax (HST) that will apply to most purchases and transactions, including real estate. The HST will be carried out by the Canada Revenue Agency (CRA).

The Harmonized Sales Tax (HST) is proposed to combine the 8% Ontario Sales Tax (PST) and the 5% Goods and Services Tax (GST) into a single 13% value-added sales tax. Real property builders will see significant changes with the implementation of the HST. Builders and contractors will now be able to claim the full 13% HST they have paid as Input Tax Credits (ITC) against the HST they levy. This ultimately means a savings for builders and contractors since they can get their provincial sales tax payments immediately as long as they are levying the HST.

Because of the nature of the real estate business, where contracts are signed well in advance of construction beginning, builders are faced with many questions about the transitional rules.

For those selling their house as a re-sale of a previously occupied house will  still be exempt under the HST. And those purchasing a re-sale of a previously occupied house will not be charged the HST.

Builders that are registered for GST/HST purposes will be able to claim an ITC (input tax credit) for the 13% HST paid on the lumber and other construction materials purchased after June 2010 that will be used to construct new housing.

HST & New Housing

Since the HST will be effective from July 1, 2010 onwards, it is very important to fully understand the process of transition and the dates crucial for everyone. The general rules indicate that for goods; HST will apply when goods are delivered and ownership transferred after June 30, 2010.  As for taxable services, HST will apply for services performed after June 30, 2010. For residential builders, the sale of a newly constructed or substantially renovated home or rental home, will be subject to HST where both ownership and possession of the home are transferred after June 2010, unless it is a grandfathered under the pre-HST provisions.

For transactions that straddle the July 1, 2010 implementation date, there are also transitional rules that need to be considered.

These key dates to be aware of when considering the transitional rules are:

  • July 1, 2010 – Implementation date for the HST
  • May 1, 2010 – The HST will generally apply to consideration(monies) that becomes due, or is paid without having become due, on or after this date for supplies made (delivery or possession of) on or after July 1, 2010; (Hence you pay for something that will only be provided to you on or after July 1, 2010)
  • October 14, 2009 – The HST will not apply to consideration(monies) that becomes due, or is paid without having become due, on or before October 14, 2009. Certain businesses and public service bodies may be required to self-assess the Ontario component of the HST on consideration that becomes due, or is paid without having become due, after October 14, 2009 and before May 2010 for property and services provided on or after July 1, 2010;
  • October 31, 2010 – Any outstanding RST (Retail Sales Tax) will become payable by this date.

Grandfathered Housing (HST Exempt)

Because builders of grandfathered homes will be eligible for ITCs (input tax credits) for inputs after July 1, 2010, they will be required to pay a transitional tax adjustment.  This is to account for the PST (ie. RST) that would have otherwise been embedded in the new home under the current regime.  This adjustment applies to homes that are less then 90% complete on the implementation date.  Special rules also apply to resellers who do not occupy the home.

Where a written agreement of purchase and sale for a newly constructed or substantially renovated detached house, semi-detached house, attached house, residential condominium unit or condominium complex was entered into on or before June 18, 2009, the sale would generally be grandfathered if both ownership and possession of the home is transferred to the purchaser, under the agreement, after June 2010. In this case, the provincial component of the HST (i.e. 8%) would not be payable on the sale. Only the federal component of the HST would apply (i.e. 5%). In the case of a detached house, semidetached house or attached house, residential condominium unit or condominium complex, the purchaser must be an individual in order for the grandfathering rule to apply.

While the grandfathered sale of housing is not subject to the HST, the builder would be required to remit a transitional tax adjustment if the construction straddles the Implementation Date. This transitional tax adjustment is intended to approximate the amount of the PST (ie. RST) that would have been paid in respect of the construction costs incurred after June 2010, unless the construction of the housing is 90% or more complete on July 1, 2010. The chart below provides a summary of the transitional rules and their applicable time-frames:

Date of Agreement of Purchase and Sale Possession (Occupancy) Transferred to Purchaser Ownership Transferred to Purchaser Applicable Tax
June 18, 2009 or earlier After June 2010 After June 2010 5% GST(Grandfathered Sale, no HST or PST (ie. RST) component)
June 19, 2009 or later After June 2010 After June 2010 13% HST
June 19, 2009 or later Before July 1, 2010 Before July 1, 2010 5% GST
June 19, 2009 or later Before July 1, 2010 After July 1, 2010 5% GST

New Housing Rebates

If the conditions for claiming the federal component of the HST (ie. the GST) new housing rebate are met, the home will also qualify for the provincial component of the HST (ie. the PST) Ontario new housing rebate. The same types of new residential housing for which a rebate is available under the GST, the Ontario government will also provide a new housing rebate (the “NHR”) in respect of the provincial part of the HST. As such, the NHR is available for new homes purchased as primary residences across all price ranges. The NHR is available in respect of the provincial component of the HST paid on the purchase of a newly constructed or substantially renovated house. Such homes will qualify for a rebate of up to $24,000.

The New Housing Rebate gives you a 75% rebate on the provincial portion of the HST. This brings the tax down to 2% from 8% on homes under $400,000. Homes over $400,000 pay the full 8% on the amount over $400,000. You still get the maximum tax rebate on homes over $400,000, but you have to pay the extra portion above $24,000.

Provided all conditions for claiming the rebate are met, the calculation of the new housing rebate in respect of the provincial part of the HST should be as follows:

Purchase of a House, Mobile or Floating Home (“houses”)

For the purchases of newly constructed or substantially renovated houses, the Ontario new housing rebate would be equal to 75% of the provincial part of the HST paid on the purchase, up to a maximum rebate amount of $24,000. There would be no phase out of this rebate, such that homes priced above $400,000 would qualify for the maximum rebate amount of $24,000. This rebate would essentially reduce the provincial part of the HST to a rate of 2% on the first $400,000 of the purchase price of the house.

Purchase of House Together with Lease of Land, or Shares in a Housing Co-Op

For the purchases of newly constructed or substantially renovated houses together with land leased from the builder, or shares in a housing co-op, the Ontario new housing rebate would be equal to 5.31% of the price paid for the building portion of a house on leased land or of the price paid for qualified shares in a housing co-op, up to a maximum rebate amount of $24,000. There would be no phase out of this rebate. If the price paid for the building portion of a newly constructed or substantially renovated house is above $452,000, the house would qualify for the maximum rebate amount of $24,000.

Owner-built Housing

For owner-built or substantially renovated housing of their primary place of residence, the maximum Ontario new housing rebate amount would depend on whether the individual paid the provincial part of the HST on the purchase of the land upon which the individual constructed or substantially renovated the housing.

Where the provincial part of the HST was paid on the land, the Ontario new housing rebate would be equal to 75% of the provincial part of the HST paid, up to a maximum rebate amount of $24,000. There would be no phase out of this rebate, such that owner-built homes with a fair market value above $400,000 would qualify for the maximum rebate amount of $24,000.

Where the provincial part of the HST was not paid on the purchase of the land, the Ontario new housing rebate would be equal to 75% of the provincial part of the HST paid on the building or renovations, up to a maximum rebate amount of $16,080.

The rebate for owner-built housing would be available for purchases of newly constructed or substantially renovated mobile or floating homes and for housing constructed or substantially renovated by an individual or a person hired by the individual to do so, for use as the primary place of residence of the individual or a relation of the individual.

The Ontario new housing rebate in respect of the provincial part of the HST would be administered by the CRA in a manner similar to the GST new housing rebate. Builders would be able to pay or credit the Ontario new housing rebate to the purchaser of a new house, just as they currently may pay or credit the GST new housing rebate. Individuals would also be able to file an application for the Ontario new housing rebate directly with the CRA if the builder does not pay or credit the rebate to the purchaser. A single rebate application for both the Ontario (provincial component) new housing rebate and the GST (federal component) new housing rebate will be available on the CRA Web site by July 1, 2010.

Individuals claiming the Ontario new housing rebate for owner-built housing would file an application directly with the CRA. A single rebate application for both the Ontario new housing rebate and the GST new housing rebate for owner-built housing will be available on the CRA Web site by July 1, 2010.

The time limits for claiming an Ontario new housing rebate are the same as those for claiming a GST new housing rebate (within 18 months).

Retail Sales Tax (RST) Transitional New Housing Rebates

Transitional Rules for Residential Real Property Transitional HST rules for residential real property have also been proposed in order to help home buyers and builders transition to the new tax system. The new HST regime will subject builders’ sales of newly constructed or substantially renovated homes to the HST where both ownership and possession of the home are transferred after June 2010 (i.e. beginning July 1, 2010). Builders of newly constructed or substantially renovated single homes or residential condominiums who rent out such new homes or condominiums and are required to pay GST on self-supply after June 2010 will also be required to pay the provincial portion of the HST on self-supply. Similar rules will apply to new rental homes.

Sales of newly constructed or substantially renovated homes under written agreements of purchase and sale entered into on or before July 18, 2009, will be “grandfathered” such that these sales will not be subject to the provincial portion of the HST even where both ownership and possession of the homes are transferred after June 2010. Purchases of newly constructed or substantially renovated single homes and condominium units for residential rental will be grandfathered if the agreement of purchase and sale was entered into on or before June 18, 2009. Newly constructed or substantially renovated homes built by owners for their personal use, and mobile and modular homes will not be grandfathered.

Builders of grandfathered newly constructed or substantially renovated single detached, semi-detached and attached homes will be required to pay a transitional tax adjustment where the home is completed in full or in part after June 2010. The transitional tax adjustment will be calculated on the total purchase price of the home, as established for GST purposes, based on the extent of construction or substantial renovation completed as of July 1, 2010. Builders of newly constructed or substantially renovated residential condominiums will be required to remit a transitional tax adjustment.

New homes subject to the provincial portion of the HST may be eligible for a RST transitional housing rebate to provide relief in respect of the RST already embedded in the home price. The transitional rebate will be calculated as a proportion of the estimated embedded RST in the home, based on the degree of completion as of July 1, 2010. Eligible applicants will be permitted to calculate the estimated embedded RST by choosing one of two methods. Eligibility for the RST transitional housing rebate will not be affected by a purchaser’s or builder’s ability to claim the new housing or rental housing rebate.

This rebate will be available for non-grandfathered single homes, condominiums and traditional apartment buildings as well as grandfathered condominiums for which the transitional tax adjustment would be payable. For newly constructed or substantially renovated single detached homes, semi-detached homes, attached homes or duplexes, the RST transitional housing rebate will be available to individuals purchasing the home or to builders who first rent the home after June 2010. The rebate is only available where the HST will apply and not to grandfathered homes. But for newly constructed or substantially renovated homes that are resident condominiums or traditional apartment buildings, the transitional rebate will be available to the builder rather than the purchaser.

The RST transitional new housing rebate would be calculated as follows:

Percentage completion as of July 1, 2010                                  % of RST Rebated

Less than 10% complete                                                                                0%

Equal to or greater than 10% and less than 25%                                  25%

Equal to or greater than 25% and less than 50%                                  50%

Equal to or greater than 50% and less than 75%                                  75%

Equal to or greater than 75% and less than 90%                                  90%

Equal to or greater than 90%                                                                     100%

For a free consult and review of your Purchase and Sale Agreement, in order to assess your HST/GST/RST obligations, please contact the lawyers at Levy Zavet PC.

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