Ontario Minister of Finance, Dwight Duncan, recently announced that effective July 1, 2010 Ontario will harmonize its provincial sales tax (“RST”) with the federal goods and services tax (“GST”). The combined HST rate will be 13%, equal to the sum of the current RST rate of 8% and GST rate of 5%, but the combined tax will be levied on a broader range of goods and services than the current RST. Although no implementing legislation has yet been released, the rules that were followed when the Maritime Provinces harmonized may provide a helpful indication as to how the new tax may apply to residential housing in Ontario. Based on these rules, we have set out our views below.
Sales of new homes, residential condominium units and condominium complexes
- HST of 8% will apply on the sale price where ownership and possession are transferred on or after July 1, 2010.
- Only GST will apply where ownership or possession is transferred prior to July 1, 2010.
- Special rules may apply so that no HST is collectable where a written agreement was entered into on or before March 26, 2009 or other date specified in the implementing legislation.
Claiming an HST input tax credit (“ITC”)
The builder will be entitled to an ITC for the GST and HST paid on property and services acquired to complete the construction only where the sale is subject to GST and HST. Builders with annual sales over $10 million may not be able to fully recover the HST paid on energy, certain telecommunications services, road vehicles weighing less than 3,000 kilograms and food, beverages and entertainment.
Construction Costs – Labour and Materials
Builders will pay RST on purchases of construction materials and other goods where they take ownership and possession before July 1, 2010. HST will apply on or after July 1, 2010. A special rule may also be announced so that HST will not apply where an invoice is received or a payment is made prior to a specified date even where delivery occurs after July 1, 2010.
Builders will pay HST on services such as subcontracted trades and other labour, where the payment for the service becomes due on or after July 1, 2010. There is likely to be a grace period so that HST will not apply if 90% or more of the work is performed prior to July 1, 2010 and the invoice is rendered prior to the end of that grace period. Payments becoming due after the grace period will be subject to HST regardless of when the work was completed.
RST rebate for builders
It is likely that a transitional rebate for new homes will be announced that will allow builders to claim back a percentage of the RST embedded in the cost of the new home. The rebate would only apply to new homes sold to an individual that are partially constructed on July 1, 2010 based on the degree of completion of the new home. The previous transitional rebate for new homes was based on $50/square meter in Nova Scotia and New Brunswick and $55/square meter in Newfoundland.
Rebate to new home purchasers
Ontario will offer a rebate to new home purchasers intended to offset the increased tax on new homes. For homes under $400,000 the rebate will be 75% of the HST, reducing the rate of tax from 8 to 2%. The amount of the rebate will be reduced for homes between $400,000 and $500,000 and completely eliminated for homes in excess of $500,000. We expect that eligible new homebuyers will be able to assign the rebate to the builder. Builders will then be able to offer a stated price net of rebate, as is presently done under the GST. However, builders should use caution when entering into agreements that contemplate the assignment of the rebate to the builder before more information is available.
Potential Problem Areas
- Until the transitional rules are announced, it is unclear whether HST will apply to agreements entered into prior to some specified date.
- If transitional rules apply to eliminate HST on homes transferred after July 1, 2010 and a substantial amount of the work is done after July 1, 2010, the builder will not get back the HST paid after that date on its inputs so this potential cost needs to be factored into the selling price.
- Where there is a sale of a new home, tax-included net of rebate, that is anticipated to close prior to July 1, 2010, but delays cause the closing to occur afterward, HST as well as GST will apply and the net amount the builder receives will change.
- If transitional rules apply to exempt the transaction from HST but the deal is altered significantly, the HST may apply.
A Final Note
It is difficult to predict exactly what can be expected with the implementation of the HST. Until more details are available, builders should approach any agreement where completion is not expected to occur until spring of 2010 with caution.
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