General Discussion
On July 23, 2009, British Columbia announced its plans to implement a Harmonized Sales Tax (“H.S.T.”) for B.C. effective July 1, 2010. The H.S.T. is a combination of the 7% Provincial Sales Tax (“P.S.T.”) with the 5% federal Goods and Services Tax (“G.S.T.”) for a single sales tax rate of 12%.
For consumers, goods and services (with some exceptions) will be subject to the H.S.T. in the same manner as they are currently subject to GST. This applies to real estate as well.
For both used and new homes, there are some extra costs for buyers or sellers but these are for the services required to buy or sell, not on the price of the home.
Buyers of used residential real estate can expect to pay H.S.T. on items such as home inspectors, appraisals and other such services. Lawyer fees will not change as they have been forced to charge P.S.T. for years.
Sellers of used residential real estate can expect to pay H.S.T. on realtor commissions, and any other services they may use (we can’t think of any).
H.S.T. has different implications for used residential real estate and new residential real estate. There are also different rules for commercial properties, mobile homes and other types of real estate. Below is an explanation of each situation.
Used Residential Real Estate
There is no H.S.T. on the price of used residential real estate, much like the current rules regarding G.S.T. There are no extra closing costs on the purchase or sale of a used residential house, subject to the comments above.
New Housing
Here is where the costs will increase.
H.S.T. will be payable on the sale of new or substantially renovated homes, where the Contract of Purchase and Sale was entered into after November 18, 2009 and both ownership and possession of the home is transferred after June, 2010. H.S.T. will not be payable on sales of newly constructed or substantially renovated homes where ownership or possession of the home is transferred before July 2010, or where the Contract of Purchase and Sale is dated prior to November 18, 2009.
New Housing Rebate
The Provincial Government is proposing a New Housing Rebate (“the Rebate”) to ensure that purchasers of homes priced up to $525,000 would pay no more tax, on average, than under the current P.S.T.
The Rebate is 71.43% of the provincial component of the H.S.T. paid, up to a maximum of $26,250.00.
To illustrate this, let’s assume a purchaser is purchasing a new home for $500,000.00.
|
|
Current Tax Payable |
Proposed Tax Payable |
|
Purchase Price |
$ 500,000.00 |
$ 500,000.00 |
|
G.S.T. |
$ 25,000.00 |
$ 25,000.00 |
|
H.S.T. additional tax |
- |
$ 35,000.00 |
|
Rebate of H.S.T. (71.43% of H.S.T. additional tax) |
- |
$ 25,000.50 |
|
|
|
|
|
Total Purchase Price |
$ 525,000.00 |
$ 534,999.50 |
Note that in the above example the purchaser is paying about $10,000 more with the H.S.T. This is approximately 2% more than under the current G.S.T.
The government states that while sales of new homes in B.C. are not directly subject to the P.S.T., building materials used in the construction of homes are subject to the 7% P.S.T. The total amount of P.S.T., on average, embedded in the selling price of a new home is estimated to be equal to two percent. As a result, the government claims that purchasers of homes priced up to $525,000 would pay no more tax, on average, than under the current P.S.T. This of course assumes that the price of homes drop 2% due to the elimination of P.S.T. on building supplies.
Note also that the maximum rebate is $26,250.00. This means that the extra tax will increase dramatically for homes over $525,000.00. Consider the following example for a home priced at $900,000.00.
|
|
Current Tax Payable |
Proposed Tax Payable |
|
Purchase Price |
$ 900,000.00 |
$ 900,000.00 |
|
G.S.T. |
$ 45,000.00 |
$ 45,000.00 |
|
H.S.T. additional tax |
- |
$ 63,000.00 |
|
Rebate of H.S.T. (maximum of $26,250.00) |
- |
$ 26,250.00 |
|
|
|
|
|
Total Purchase Price |
$ 945,000.00 |
$ 981,750.00 |
Using the above example, the purchaser of a new home priced at $900,000 will pay an additional $36,750.00 with the imposition of the H.S.T.
The new housing rebates would be federally administered in a manner similar to the G.S.T. rebates for new housing. Individuals would be able to file an application for the rebate directly with the Canada Revenue Agency. However, in the case of homes sold by the builder, similar to the G.S.T. new housing rebates, the builder would have the option of paying or crediting the new housing rebate to the purchaser at the time of purchase.
Other Rebates
New housing rebates would be available for the provincial component of the H.S.T. paid for all types of housing eligible for G.S.T. new housing rebates. This includes rebates for the following:
New housing rebate – for purchasers of new houses together with leased land
New housing rebate – for purchasers of new mobile homes and floating homes
New housing rebate – for houses acquired through the purchase of qualifying shares in a housing co-op
New housing rebate – for owner-built homes
New rental housing rebates
Rather than retyping the government announcement on these rebates, please visit http://www.rev.gov.bc.ca/documents_library/shared_documents/HST/new-housing-rebates.pdf. This has complete details on all of the above rebates. It also has information on rentals of new homes by builder-landlords and purchaser-landlords, as well as transitional rebates for partially constructed homes.
|
|
B.C. Releases HST Transitional Rules for Builders and buyers of new homes in British Columbia will be affected by the province’s proposal to harmonize its provincial sales tax with the federal goods and services tax. Today B.C. released amendments to the new housing rebate together with the transitional rules for new housing transactions that will straddle July 1, 2010, the effective date of the harmonized tax. Background — B.C. HST On July 23, 2009, B.C. announced its intention to harmonize its 7% provincial sales tax (PST) with the 5% federal goods and services tax (GST) to create a single, harmonized sales tax (HST) at a 12% rate, effective July 1, 2010.
The B.C. HST will generally use the same rules and tax base as the GST. As a result, new homes in B.C. that are subject to GST will become subject to the HST. This TaxNewsFlash-Canada summarizes the B.C. HST new housing rebate and the transitional rules proposed in a B.C. Ministry of Finance News Release dated November 19, 2009 and an accompanying HST Notice #3 dated November 18, 2009 (the Notice). References to “new homes” in this TaxNewsFlash-Canada include both newly constructed and substantially renovated housing. New housing rebate In response to industry concerns regarding the impact of the HST on new housing in B.C. markets with relatively high new home prices, B.C. today announced that the threshold will be increased to $525,000. New homes purchased for $525,000 or more will be eligible for a flat rebate of $26,250. New home buyers may also be eligible for the federal GST new housing rebate, which generally equals 36% of the tax paid on the first $350,000 of the purchase price. The amount of the GST rebate is phased out on a straight-line basis for homes priced between $350,000 and less than $450,000.
KPMG observation Similar to the GST system, B.C. proposes to limit the new housing rebate to homes for use as primary places of residences. As such, recreational properties such as cottages and ski chalets not used as primary residences would generally not qualify for the new housing rebate. New rental housing rebate The proposed rebate will apply for new rental housing to be rented out for use by the tenants as primary residences. This rebate will apply across all price ranges up to a maximum of $26,250. Landlords who purchase new rental property will be eligible for the rebate, calculated as 5% of the purchase price of a new rental property, up to a maximum rebate of $26,250. Landlords who build rental housing and will be subject to HST under the “self-supply” rules will also be eligible for the rebate. This rebate will be provided for the same types of new residential real properties for which a GST rebate is available. Qualifying housing will include substantially renovated rental housing, co-operative rental housing, additions to traditional apartment buildings, long-term residential care facilities, rental mobile homes and rental floating homes for use as primary residences. A rebate will also be available for leased land where the land is used for residential purposes. This rebate will be 5% of the lease amount up to a maximum of $8,663. B.C.’s transitional rules for residential real property New home sales The provincial portion of the HST will not apply to builders’ sales of new homes that are taxable under the GST when, under a written agreement of purchase and sale, ownership or possession of the home is transferred before July 2010. New rental homes — Builder-landlords These builders will be required to pay the provincial portion of the HST on the self-supply if they rent out the new homes or condos (or the first unit of a new traditional apartment building) after June 2010. If these builders rent out the homes before July 2010, they will not be required to pay the provincial portion of the HST on the self-supply. Grandfathering rules Grandfathered purchase and sale agreements that are assigned to third parties will generally retain their grandfathered status providing that:
The Notice also sets out situations in which taxable re-sales of new homes may be grandfathered where the original purchase and sale agreement was entered into on or before November 18, 2009. Grandfathering will not apply to traditional apartment buildings, duplexes, mobile homes, floating homes and homes built by owners for their individual use. However, these homes may qualify for one or more of the PST transitional new housing rebates described below and the B.C. new housing rebates described above. Transitional tax adjustment for grandfathered homes However, for grandfathered homes, builders in B.C. will generally be required to pay a “transitional tax adjustment” based on the completion of the home on July 1, 2010 to account for PST that would have otherwise been embedded in the grandfathered homes under the current PST system. The transitional tax adjustment for grandfathered sales of new single homes and condominiums will have different calculations for each category. Grandfathered single unit homes
For example, where a builder entered into an agreement to sell a new home to an individual purchaser for $500,000 on or before November 18, 2009 for completion in October 2010 and the home was 55% completed on July 1, 2010, the builder will be required to pay a transitional tax adjustment of $2,500 ($500,000 × .5% = $2,500). Grandfathered condominiums KPMG observation Generally the transitional rules announced by B.C. are the same as announced by Ontario on July 18, 2009. However, the requirement to calculate the transitional tax adjustment on the greater of the sale price and the fair market value of the new home at July 1, 2010 was not part of the original Ontario announcement. On November 19, 2009, Ontario also released additional information on the transitional rules for new housing which includes the same modification to the transitional tax adjustment calculation. This proposal seems to increase both the compliance burden and potential cost to builders of new housing in a rising market. PST transitional housing rebate The rebate will generally be available for non-grandfathered single homes, condominiums and traditional apartment buildings. The rebate will also be available for grandfathered condominiums in respect of which the transitional tax adjustment would be payable by the builder (see above). For eligible HST-taxable single homes (including detached, semi-detached and attached homes and duplexes), the PST transitional housing rebate would be available to individuals purchasing the home (or builders who first rent the home) after June 2010. Individuals will have the option to apply for the rebate directly with the CRA or through the builder. Individuals will be required to obtain from the builder a certification of the percentage of completion of the home as of July 1, 2010 to make a claim with the CRA. The rebate will not apply to grandfathered homes. For eligible condominiums or traditional apartment buildings, the PST transitional housing rebate would be available to the builder (rather than the purchaser). The rebate would be available for these homes where the transitional tax adjustment or the HST would apply. Transitional rebate calculations B.C. proposes two methods for eligible applicants to estimate the embedded PST content: either an amount based on a prescribed amount of $60 per square metre of floor space in the home or an amount calculated as 2% of the total value of consideration or fair market value, as the case may be. The rebate will be calculated based on the extent of construction or substantial renovation completed as of July 1, 2010, as follows:
For example, an individual purchases an eligible new home for $500,000 plus $60,000 HST in October 2010. If the home was 55% complete on July 1, 2010, the individual may be entitled to a transitional rebate of $7,500 under the “selling price method” ($500,000 × 2% = $10,000 estimated PST content × 75% = $7,500). The PST transitional new housing rebate will be administered by the CRA. As a condition of obtaining the rebate, a builder will be required to obtain a “clearance certificate” from the province and attach it to the first PST transitional new housing rebate application submitted to the CRA. Generally, a clearance certificate will be provided where a builder has no outstanding provincial tax debts. Disclosure requirements for agreements signed after November 18, 2009 If the builder does not make the disclosure as noted above, the stated price in the written agreement would be deemed to include the provincial portion of the HST and the purchaser would not be required to pay the provincial portion of the HST in addition to the stated price in the agreement.
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
|
Information is current to November 19, 2009. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity.
|
||||||||||||||||||||||||||||||||||||||||||||||||