On July 23, 2009, British Columbia announced that it will harmonize its provincial sales tax (PST) with the federal goods and services tax (GST) effective July 1, 2010. This follows the earlier announcement by Ontario in March that it will do so on the same date.
The BC harmonized sales tax (HST) will apply at the rate of 12 per cent compared with 13 per cent for Ontario and the other GST-harmonized provinces (Nova Scotia, New Brunswick, and Newfoundland & Labrador). The federal government will provide BC with $1.6 billion in transitional funding and will assume the administration of the HST.
Application of the HST
The HST will apply to the same tax base as the GST, with some limited point-of-sale rebates on the provincial portion for a few products, including children’s items, gasoline and diesel fuel for motor vehicles. BC will also introduce temporary restrictions on input tax credits in respect of the provincial portion of the HST, for certain items acquired by large businesses with annual taxable sales over $10,000,000 and financial institutions. The input tax credit restrictions will apply for the first five years and will be phased out over the following three years. The restrictions will apply to the following:
- energy (except where purchased by farmers or used to produce goods for sale)
- telecommunications services other than Internet access and toll-free numbers
- road vehicles weighing less than 3000 kg (and parts and certain services)
- meals, beverages and entertainment
Implications for New Housing
BC, like Ontario, will provide a rebate of the provincial portion of the HST for new residential housing. The rebate will apply at all price levels and will be equal to five per cent of the purchase price up to a maximum rebate of $20,000. The current GST rebate of 36 per cent of the five per cent tax on the first $350,000 of the purchase price for new residential housing (which is phased out where the price is between $350,000 and $450,000, and eliminated thereafter) will remain unchanged.
According to the HST materials released by the BC government, the provincial rebate will ensure there is no tax increase for new housing valued up to $400,000, since the amount of PST currently embedded in the cost of new housing is approximately two per cent. Like the GST new housing rebate, the provincial rebate will be available for all purchases of new owner occupied and rental housing. For new housing priced above $400,000, the effect of the rebate is that the provincial portion of the HST will apply at a rate of two per cent on the first $400,000 of the purchase price and seven per cent on the balance. Accordingly, there will be a significant tax increase for new housing priced above $400,000.
Transitional Rules for New Housing
Transitional rules will be required in order to implement the HST for new housing. These rules have not yet been released, but will be required to deal with transactions that straddle the July 1, 2010 implementation date. The transitional rules will address "grandfathered" sales and self-supply transactions, transitional PST payments by builders for grandfathered sales, and transitional PST rebates for properties completed before June 30, 2010 and sold after that date. Based on the transitional rules in provinces that have previously implemented or announced an HST regime, and on the system used when the GST rate was reduced from seven per cent to six per cent and then again to five per cent, the following is the likely scenario for the application of the provincial portion of the HST on sales of new housing:
- the provincial portion of the HST will not apply if ownership or possession transfers before July 1, 2010
- the provincial portion of the HST will not apply if a purchase and sale contract is executed prior to the date of the announcement of transitional rules
- the provincial portion of the HST will apply if a purchase and sale contract is executed after the date of the announcement of transitional rules and both ownership and possession transfers after July 1, 2010
Implications for Commercial Transactions
The rules governing the application of the HST and the availability of input tax credits in respect of the purchase of commercial real estate will be the same as the rules governing the GST. In particular, a purchaser who is registered for GST purposes on the completion date of the transaction will be entitled to self-assess the HST and the vendor will not be required to collect it. The purchaser will then be entitled to claim an input tax credit for the amount of the HST payable, effectively offsetting 100 per cent of the tax.
Implications for Residential Landlords
The harmonization of PST and GST in BC will have significant cost implications for landlords of residential properties as they are not entitled to claim input tax credits. An additional seven per cent tax will be payable on expenses that were previously not subject to PST, such as property management and maintenance services and the labour component of repair services. In addition, new units put into residential use will be subject to an additional tax burden to the extent that the unit value exceeds $400,000.