The answer is, overwhelmingly, YES. The Ontario Government announced in its March 26, 2009 budget its intention to combine Ontario’s existing retail sales tax (PST) with the federal Goods and Services Tax regime to create a federally administered harmonized sales tax of 13%. Ontario will be joining Nova Scotia, New Brunswick and Newfoundland & Labrador which harmonized their sales tax regimes in 1997. Under the new tax system, commercial supplies in Ontario of real property, new home purchases, new construction of residential single family homes and condominium units, real estate commissions, property maintenance and management costs, landscaping, engineering and architectural services, and trade contracts, to name just a few, will be subject to the new harmonized sales tax (HST).
While this new regime will not take effect until July 1, 2010, and we have not yet been provided with implementation and transition details, it is important to understand how the HST will affect your future and potentially your pre-July 1, 2010 arrangements. The real estate sector will be particularly affected by the HST - accounting changes, amendments to existing agreements of purchase and sale, condominium budgets, construction contracts and various other development related documentation will be required.
New Housing Rebate Applicability
Although we do not yet have the technical details of the announced new housing rebate program, it is anticipated that the application of the HST to new homes will be at least partially offset by application of a new housing rebate, provided that the purchase price fits within the proposed limits and otherwise qualifies under the new rebate system.
For qualifying purchases, a rebate of 75% of the provincial component of the HST is anticipated to be available for new homes or condominium units purchased at a price of $400,000 or less, resulting in an effective Ontario tax of 2%. The rebate is reduced as the price of the new home increases for homes above $400,000 resulting in a $0 rebate for a sale price of a new home for a $100,000 increase in price to $500,000, resulting in an effective Ontario tax rate leap at that price point to 8%.
Construction/Renovation Contracts and Budgets
The new regime will have an important impact on construction and renovation contracts and budgeting, which could result in a significant increase in construction costs that is not anticipated at the time of budgeting, and in particular for those projects that straddle the effective date or have been tendered prior to the effective date of the HST without taking into consideration the impact of the HST in the tender and contract administration process.
Condominium Budgets and Operating Expenses
Of particular importance to condominium developers, condominium boards and their property managers, is the impact of the HST on developer’s pre-registration disclosure budgets contained in the Disclosure Statements as well as potential budget overruns due to the added provincial component in first year operations post-registration. Developers should consider addressing this issue prior to implementation of the new regime. Similarly, condominium boards and their property management will want to ensure these costs are covered in any proposed budgets that straddle the HST implementation date. The transition rules may provide further guidance in this respect.
Transitional Rules
Although Ontario has yet to set out the specific details for implementation of the new HST regime, including, and of great importance for projects currently underway, any transition rules for pre-existing contracts and sales, the transition rules may follow the Atlantic Provinces transition model.
In that event, the provincial component of the HST may not apply to an agreement of purchase and sale of a new home or condominium unit that was signed prior to the "announcement date". The "announcement date" is typically the date on which the government announces how the new regime will be implemented in Ontario. This date is expected to be in late summer 2009, and we will be paying particular attention to these transition rules for new home sales, construction projects and contracts that pre-date the effective date of the new program.
We anticipate further details to come once the Province has concluded a comprehensive HST agreement with the federal government which is expected by September 10, 2009. Further policy and administrative details are expected by March 31, 2010.
