On July 1, 2010, British Columbia plans to harmonize its 7% Provincial Sales Tax (PST) with the 5% federal Goods and Services Tax (GST). British Columbians will then pay a single, value-added Harmonized Sales Tax (HST) of 12% on their purchases.
Premier Gordon Campbell and Finance Minister Colin Hansen claim that the HST will boost new business investment, improve productivity, enhance economic growth and create jobs, thereby making BC "one of the most competitive jurisdictions in the industrialized world for new investments," but the proposed HST has triggered a fierce political and economical debate in BC. Certain industry sectors, such as the real estate sector, have serious questions and concerns about the introduction of the HST in BC.
How will the HST affect the real estate sector?
Under the proposed legislation, the 12% HST will apply to all new housing and substantially renovated housing, effective July 1, 2010.
Under the new HST system the provincial tax on new homes would increase from 2% to 7%. The current 2% provincial tax is an embedded tax in the cost of new homes (under the HST system builders will be able to claim input tax credits and in theory consumers will see a 2% reduction in the purchase price of new homes).
Considering that in the Vancouver area in July 2009 the average price of a new house was approximately $1,100,000, and the average price of a new condo was $460,000, this is certain to have an impact on the new housing market. Even purchasers of resale homes will be forced to pay increased costs on associated services such as real estate commission and home inspections because of the application of HST.
To assist homebuyers and builders transition from the current regime to the proposed single value-added tax, the province will likely adopt enhanced new housing rebates, new rental housing rebates and transitional rules to deal with purchases straddling July 1, 2009. The province has not yet announced the rebates or rules, but has proposed to use the rebates and transitional rules being introduced by the province of Ontario as a starting point. A complete copy of the proposed Ontario transitional rules can be found at (http://www.rev.gov.on.ca/en/notices/hst/pdf/02.pdf). Certain associations within the real estate industry are recommending that some aspects of the rebates and transitional rules be adapted to more accurately reflect the real estate market in the Lower Mainland.
New Housing Rebate
The proposed new housing rebate would be available to purchasers of new homes purchased as a primary residence (either for the individual purchaser or a "relation"). The new housing rebate will be a partial rebate of 71.43% (5/7ths) of the HST paid on the purchase price, up to a maximum rebate of $20,000. Purchasers of new homes above $400,000 will receive a flat rebate of approximately $20,000.
Effectively, the new housing rebate would result in the application of the provincial portion of the HST at a rate of 2% on the first $400,000 of the purchase price and at a rate of 8% on any amount above $400,000.
New Rental Housing Rebate
The proposed rebate for new rental housing will likely be available for the same types of new residential rental properties for which a GST rebate is currently available. The rebate would be available for new rental housing, including investment properties, for use as places of primary residence. The rental housing rebate will be 71.43% (5/7ths) of the HST paid on the purchase price for rental housing purchased for up to $400,000. The maximum rebate for rental housing purchased for over $400,000 would be $20,000.
The rental housing rebate would be available to purchaser-landlords and to builder-landlords who would be subject to the single sales tax under self-supply rules.
The transitional rules introduced by the province will address the purchase and sale of new homes straddling the July 1, 2010 introduction of HST. Some of the proposed transitional rules are as follows:
- Purchases of new homes completing prior to July 1, 2010 will be governed by the current GST/PST regime.
- Purchases where both the ownership and possession of a new home are transferred on or after July 1, 2010 will be subject to the HST unless "grandfathered."
- Purchases where both the ownership and possession of a new home are transferred on or after July 1, 2010 will not be subject to HST if the written contract of purchase and sale is entered into on or before the announcement date of the transitional rules (the Announcement Date).
- Builders would generally be able to recover the provincial portion of the HST on the majority of purchases through input tax credits; however, large businesses (those with annual taxable sales in excess of $10 million) will, on a temporary basis, be unable to claim inputs tax credits in respect of the provincial portion of the single sales tax on certain inputs used in their taxable activities.
- Transactions falling under the grandfathered provisions would require the builders of grandfathered condominiums to remit a transitional tax adjustment (2% of the purchase price as established for GST purposes). The transitional tax adjustment would be calculated based on the extent of construction as of July 1, 2010.
- Builders of newly constructed condominiums and grandfathered condominiums (completed in full or in part prior to the introduction of the HST) would have PST embedded in the cost. As a result, the builder may be able to claim a transitional housing rebate as a proportion of the estimated embedded PST, based on the extent of completion of the new home as of July 1, 2010. The rebate would work together with the transitional tax adjustment to approximate the tax that would have been embedded under the current tax regime.
Disclosure Requirements For Developers
The proposed transitional rules require developers (vendors) to make certain disclosures. In particular, contracts of purchase and sale for new homes entered into after the Announcement Date, and prior to July 1, 2010, must disclose whether the provincial portion of the HST applies to the sale, and whether the provincial portion of the HST (net of the provincial housing rebate) is included in the purchase price. The provincial portion of the HST will be deemed to be included in the purchase price if such disclosure is not made by the developer. In other words, the vendor would be required to pay the provincial portion of the HST.
What Can Developers Do?
Real estate developers should:
- be cognizant of when the transitional rules are introduced (i.e. the Announcement Date) and be ready to operate under the HST regime, and
- review and revise disclosure statements and contracts of purchase and sale to clarify the obligations of HST, and to meet the reporting and disclosure requirements.