By: Jayson Schwarz LLM and Lori Simpson
Effective July 1, 2010, new home buyers became subject to 13% HST on their purchase agreements. The HST, consisting of a 5% federal portion and an 8% Ontario portion, applies to a builder’s sale of newly-constructed or substantially renovated homes where both ownership and possession are transferred after June 30, 2010. There are two exceptions to this rule where the old GST rules will continue to apply: if either ownership or possession was transferred before July 1, 2010 or if the agreement was signed on or before June 18, 2009.
Former GST New Housing Rebate
Under the pre-HST rules, a rebate of any GST paid on the purchase of a new home was available to buyers. For homes priced up to $350,000, 36% of any GST charged by the builder was eligible for a rebate. This rebate was gradually phased-out and eliminated altogether once the purchase price reached $450,000. Under the new HST, these rules continue to apply to the 5% federal portion of the HST for new home purchases.
New Ontario Housing Rebate or the PST Part
Since new home buyers are paying an additional 8% of Ontario HST on new home purchased after July 1, 2010, a new Ontario Housing Rebate was introduced as a relief measure. The rebate applies to all price ranges and is calculated as 6% of the Ontario HST on the first $400,000. In effect, home buyers are paying 2% Ontario HST on the first $400,000 of the purchase price and 8% on the remainder.
For example, a house priced at $300,000 is subject to $39,000 of HST ($300,000 x 13%). Provided that the purchase is eligible for rebates, the purchaser would receive an Ontario New Housing Rebate of $18,000 ($300,000 x 6%) and a GST New Housing Rebate of $5,400 ($300,000 x 5% x 36%). The Purchaser would still pay $15,600 in tax.
Similarly, a house selling for $500,000 would be subject to $65,000 of HST ($500,000 x 13%) and eligible for an Ontario Rebate of $24,000 ($400,000 x 6). The purchaser would not be entitled to claim a GST Rebate since the purchase price exceeds the $450,000 threshold and as a result pays $41,000 in tax.
Both the GST and Ontario New Housing Rebates are available for purchases of newly-constructed and substantially-renovated houses and condominium units, co-operative housing, owner-built housing, mobile homes, floating homes, and housing on leased land.
Pre-HST, builders typically included GST in the price and any rebates available were assigned to the builder. This practice will likely continue as builders will include the full 13% HST in the purchase price and buyers will receive credit for the old GST and new Ontario New Housing Rebates when assigned to the builder on signing of the paperwork. The reality however, is that prices will rise to compensate for these costs. So in the end the consumer pays.
Retail Sales Tax (RST) Transitional Housing Rebate
A new home buyer may also be eligible for an RST Transitional Housing Rebate where construction of a new home was not yet complete at July 1st and HST applies to the purchase. Construction must have been at least 10% complete at July 1st to be eligible. This rebate is calculated based on an estimate of the Ontario RST included in the cost of the home and the extent of construction at July 1st:
|
Extent of Completion of Construction on July 1st |
Applicable Tax Rate |
|
Less than 10% |
Nil |
|
10% to 24% |
25% of the estimated RST |
|
25% to 49% |
50% of the estimated RST |
|
50% to 74% |
75% of the estimated RST |
|
75% to 89% |
90% of the estimated RST |
|
At least 90% |
100% of the estimated RST |
There are two methods to determine the amount of estimated RST: the floor space method ($45.00 per square metre of completed floor space) or the fair market value method (2% of the purchase price).
For example, if your home was purchased on January 1, 2010 for $450,000, is 60% complete at July 1, 2010 and closes on August 31, 2010, a rebate of $6,750 ($450,000 x 2% x 75% completed) would be available under the fair market value method.
Individuals who purchase single detached homes, semi-detached homes, row houses or duplexes are entitled to this rebate. Builders who first rent these types of homes may also claim the rebate. Rebates in respect of residential condominium units or apartment buildings may only be claimed by the builder, rather than the purchaser.
Transitional Tax Adjustment
Given that many homes were partially constructed at July 1st, transitional rules were passed to address transactions that straddled both the June 18, 2009 and July 1, 2010 key dates. Homes bought prior to June 18, 2009 but both ownership and possession did not transfer until after July 1, 2010 are “grandfathered”, meaning that they are not be subject to the 8% Ontario portion of the HST. In order to approximate the amount of Ontario RST that would have been paid on construction materials and costs incurred after July 1, 2010, a Transitional Tax Adjustment will be charged to builders. This Tax Adjustment will be based on the total purchase price and extent of construction as determined by the builder at July 1st:
We hope this helps you understand a complex and unwelcome tax. If you have questions, mail, deliver, email or fax letters to the magazine or to us, use the web site (www.schwarzlaw.ca, email info@schwarzlaw.ca). I will try to deal with them in print or electronic form.
Our thanks to Lori Simpson in co authoring this article. Lori is a tax accountant and associate in the accounting firm MNP LLP., located in the Mississauga office and may be reached by email at Lori.Simpson@mnp.ca.