Introduction

On January 1, 2008, the federal goods and services tax (GST) rate will drop from 6% to 5%. As the deadline approaches for yet another 1% GST rate reduction, many buyers, sellers and lessors of property have questions about the timing and application of the new 5% rate. If you are a developer, a new home seller or buyer, or a commercial landlord you will need to understand the following rules and take careful note of the dates that any payments are made or become due as that will influence the rate of GST that must be applied.

General rule

The general rule is:

  • If GST becomes payable, or is paid without having become payable, before January 1, 2008, the 6% rate will apply. 
  • If GST becomes payable on or after January 1, 2008, without having been paid before that day, the 5% rate will apply. 
  • If GST is paid on or after January 1, 2008, without having become payable before that day, the 5% rate will apply.

Commercial Lease Payments

GST becomes payable on a supply of real property made by way of lease, licence or similar arrangement on the earlier of when the payment is made and when the payment becomes due under the agreement for the supply. So, where lease payments are due on the first of each month, 5% GST will apply to a lease payment due on or after January 1, 2008, unless the payment was made before January 1, 2008. The 6% GST rate will apply to lease payments that become due before January 1, 2008, or that are paid before January 1, 2008 without having become due.

Progress Payments

The tax rate depends on when the payment becomes due or is made rather than when the services are performed. For progress payments made under a construction contract, the GST is payable on the value of each payment on the earlier of the day on which the payment is made and the day on which the payment becomes due. All progress payments that become due on or after January 1, 2008, and that are not paid before January 1, 2008, are subject to 5% GST. Progress payments that are made or that become due before January 1, 2008 are subject to 6% GST.

Sales of Real Property other than New Housing

Under the proposed measures, the following specific transitional rules will apply to sales of real property to determine whether the 6% rate or the 5% rate will apply.

Ownership or Possession Transferred before January 1, 2008: Generally, the 6% rate will apply to the total sale price of real property if ownership of the property, or possession of it under the agreement of purchase and sale, is transferred to the buyer before January 1, 2008.

Ownership and Possession Transferred on or after January 1, 2008: The 5% rate will apply to the total sale price of real property if both ownership of the property and possession of it under the agreement are transferred to the buyer on or after January 1, 2008.

Sales of New Houses, Apartment Buildings and Other Residential Complexes

Where both ownership and possession are transferred on or after January 1, 2008, the following rules apply:

  • the 6% rate will apply to the total sale price where a written agreement is entered into on or before October 30, 2007 but after May 2, 2006.
  • the 7% rate will apply to the total sale price where a written agreement is entered into on or before May 2, 2006,

In both of these circumstances, the purchaser will be entitled to file a claim directly with the Canada Revenue Agency (“CRA”) to be paid a “Transitional Rebate” that reflects the GST rate reduction to 5%, net of any corresponding “New Housing Rebate” adjustment. Unlike the regular GST New Housing Rebates, the GST Transitional Rebate is not subject to any maximum purchase or fair market value limitation; and there is no provision for a new housing purchaser to assign, to a builder or to any other person, the GST Transitional Rebate. The purchaser must complete a separate application for the GST Transitional Rebate and submit it to the Summerside Tax Centre.

The GST Transitional Rebate is not only available to individuals: any person purchasing a new or substantially renovated residential complex may be eligible to claim a GST Transitional Tebate unless the person was entitled to claim an “input tax credit” concerning the purchase. The amount of the GST Transitional Rebate takes into account any rebate that the person may be entitled to claim (e.g., a GST New Housing Rebate or public service bodies rebate).

Replacement of a previous purchaser in the agreement of purchase and sale

You must determine whether your agreement of purchase and sale has been modified, varied or otherwise materially altered to the extent that a new agreement is entered into. If you have entered into a new agreement, the application of the transitional rule for sales of new housing will be based on the date you enter into the new agreement, as well as the dates that possession and ownership are transferred under that new agreement. If your agreement has not been materially altered, the application of the transitional rule will be based on the date you entered into the original agreement as well as the dates that ownership and possession are transferred under that agreement. Generally, however, a change in the purchaser (i.e., the person liable to pay for the supply under the agreement) would result in a new agreement.

Conclusion

To navigate through the next phase of the GST rate reduction, it is important to understand the transitional rules and take careful note of when payments are made or become due.