On March 26, 2009, Ontario Finance Minister, Dwight Duncan announced that, starting July 1, 2010, Ontario would harmonize its provincial retail sales tax with the federal goods and services tax (“GST”). On July 23, 2009 Premier Gordon Campbell announced that B.C. would also be harmonizing its provincial sales tax on July 1, 2010. In Ontario, the Harmonized Sales Tax (“HST”) rate will be 13%, the current 5% federal GST, plus the new 8% provincial tax (“OVAT”). In B.C. the HST rate will be 12%, the GST at 5% plus the new 7% B.C. tax. In both provinces the new provincial portion of the HST is the same as the current rate of provincial sale tax (“PST”).
Neither province offered details with respect to the implementation of the HST at the time of the initial announcement. Ontario, however, released more detailed transitional rules for the housing industry on June 18, 2009. Builders in B.C. can look to Ontario for some indications of what may be expected in their province.
In both Ontario and B.C. the HST will apply to sales of new homes. In both provinces at present the cost of a home includes PST which the builder has paid on construction materials. In both provinces the provincial portion of the HST paid by a home purchaser will exceed the PST previously embedded in the purchase price.
New Housing Rebate
Both Ontario and B.C. will offer a rebate to new home purchasers intended to offset the increased tax on new homes. For homes purchased for less than $400,000 the rebate in Ontario will be ¾ of the OVAT, reducing the rate from 8% to 2%. Purchasers of new homes priced at more than $400,000 will receive a rebate of $24,000.
B.C. stated that purchasers of homes above $400,000 will receive a flat rebate of about $20,000 of the BC portion of the HST but has not yet announced specific calculations. It can be expected that purchasers of homes in B.C. costing less than $400,000 will be able to recover 70-75% of the BC portion of the HST.
We expect that eligible new homebuyers in both provinces 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, as no document released to date in either province provide explicitly for this, builders should use caution when entering into agreements that contemplate such an assignment prior to the release of further information.
Where a rebate has been assigned, the amount so assigned will be considered part of the value of the consideration payable for the home, so the complex circular calculation presently used to determine the relevant amounts will now become more complicated. We expect the release of a GST/HST Memorandum providing detailed formulae and charts that will assist in this determination.
Ontario has announced that it will provide an equivalent rebate for new rental housing. B.C.’s announcement referred to a rebate for “new housing” which we expect will include rental as well as owner-occupied homes as both are eligible for the GST new housing rebate.
The provincial portion of the HST will not apply to transactions when either ownership or possession of the home is transferred to the purchaser prior to July 1, 2010. The full HST will apply where ownership and possession of a home are transferred to the purchaser on or after July 1, 2010 even if the written agreement of purchase and sale was entered into prior to that date. However, in Ontario, no OVAT will apply to sales of homes where the written agreement was entered into prior to June 19, 2009, the day following the announcement of the transitional rules.
We expect that B.C. will announce similar transitional rules, with agreements entered into prior to either the date of the announcement of harmonization or the date on which the transitional rules are announced. Until this is clarified, builders in B.C. should be extremely cautious when entering into agreements expected to close in the spring or summer of 2010.
The following is an outline of Ontario’s transitional rules including a chart for ease of reference:
Agreement entered into before June 19, 2009
- OVAT does not apply even if ownership and possession is transferred after June 30, 2010
- the builder will be able to recover OVAT paid on construction costs by way of input tax credit (“ITC”)
- the builder will be required to pay a transitional tax adjustment (intended to replace the PST not paid on construction costs incurred after June 30, 2010). The amount of the transitional adjustment for single homes is dependent upon the degree of completion of the home on July 1, 2010 and calculated as follows:
- 2% of the purchase price if the home is less than 10% completed
- 1.5% of the purchase price if the home is 10% or more and less than 25% completed
- 1% of the purchase price if the home is 25% or more and less than 50% completed
- .5% of the purchase price if the home is 50% or more and less than 75% completed
- .2% of the purchase price if the home is 75% or more and less than 90% completed
- zero if the home is 90% or more completed
The transitional tax adjustment for residential condominiums is 2% of the purchase price regardless of the degree of completion. The builder will be entitled to claim a transitional rebate to offset a portion of this amount (see information below).
Agreement entered into on or after June 19, 2009
- OVAT applies if ownership and possession transferred on or after July 1, 2010
- A transitional rebate (intended to refund the PST paid on construction materials) may be claimed by the purchaser of a single family home or by the builder of a residential condominium. Purchasers may assign this rebate to the builder. The amount of the transitional rebate is equal to a portion of the estimated PST embedded in the home. The PST content for the purpose of the rebate is either (i) 2% of the purchase price; or (ii) a prescribed amount per square metre of floor space (the prescribed amounts have not yet been announced). The amount of the rebate is dependent upon the degree of completion on July 1, 2010 and is determined as follows:
- zero if the home is less than 10% completed
- 25% of the estimated PST content if the home is 10% or more and less than 25% completed
- 50% of the estimated PST content if the home is 25% or more and less than 50% completed
- 75% of the estimated PST content if the home is 50% or more and less than 75% completed
- 90% of the estimated PST content if the home is 75% or more and less than 90% completed
- 100% of the estimated PST content if the home is 90% or more completed
Builders of traditional apartment buildings will also be eligible to claim the transitional rebate.
Click here to view sales of newly constructed or substantially renovated homes.
Click here to view sales of newly constructed or substantially renovated condominium units.
A Final Note
At the present time, it is difficult to predict exactly what costs and benefits can be expected for builders of new homes where ownership and possession of those homes is expected to occur in the spring and summer of 2010. Builders in B.C. do not know what transitional provisions will apply, particularly with respect to what agreements, if any, will be grandfathered. In fact, neither B.C. nor Ontario has irrevocably agreed with the government of Canada to harmonize their taxes. Although it seems very likely that both provinces will proceed, it is not certain until the appropriate legislation has been passed. Builders should approach any agreement where completion is not expected to occur until spring of 2010 or later with caution.