As you are no doubt aware, the HST regime in Ontario will take effect at midnight on June 30, 2010. One of the industries most affected will be house building and there are complexities involved in how HST applies to sales.
I have provided, in chart form attached as Schedule “A”, some details of how the HST impacts on freehold and condominium housing sales. The date of the Agreement of Purchase and Sale becomes very relevant as does the date of possession and title transfer in determining the tax rate. In addition, there is the transitional tax adjustment and the RST Transitional New Housing Rebate which applies to housing under construction on the effective date. To comply with the new regime, builders must take a snapshot of each unit at the close of business on June 30, 2010 to determine the percentage of completion and the fair market valuation.
Attached as Schedule “B” are examples of how the rebates are calculated under different scenarios.
Attached as Schedule “C” is a table produced by PRICEWATERHOUSE COOPERS showing the effect of HST on New Housing Prices.
Unfortunately, even though the implementation date is fast approaching, the regulations and the forms have yet to be published so there is a certain amount of ambiguity.
I would refer readers to the main publications released to date on the CRA and Provincial government websites, which should be reviewed in depth:
GST/HST Notices – Notice 244 – December 2009 – Harmonized Sales Tax for Ontario – Questions and Answers on Housing Rebates and Transitional Rules for Housing and Other Real Property Situated in Ontario
Helping Homebuyers and the Housing Industry with an Enhanced New Housing Rebate, a New Rental Housing Rebate and Transitional Rules Single Sales Tax (Harmonized Sales Tax) Information Notice 2 – June 18, 2009 http://www.rev.gov.on.ca/en/notices/hst/02.html
Additional Information for Homebuyers and the Housing Industry under…Information Notice No 4 – November 2009
General Transitional Rules for Ontario HST Harmonized Sales Tax Information Notice 3 October 2009
HST SUMMARY OF TRANSITIONAL ISSUES
FREEHOLD AND CONDOMINIUM HOUSING SALES
|Type of Housing||Either Title or Possession Transferred before July 1, 2010||APS signed BEFORE June 19, 2009 – closing after June 30, 2010 (grandfathered)||APS signed AFTER June 19, 2009 – both closing and occupancy occur after
June 30, 2010 (not grandfathered)
|Freehold||– 5% GST on closing payable by buyer
– No transitional issues
– Builder would be entitled to input tax credits for HST/GST paid by it after June 30, 2010
|– 5% GST on closing payable by buyer
– Builder to pay transitional tax adjustment based on percentage completion (see Note 2. below for calculation)
|– 13% HST payable on closing
– Unless the APS stipulates that the 8% tax increase is payable by the buyer, the vendor is to bear the 8% tax increase
– If buyer is individual, buyer is entitled to RST Transitional New Housing Rebate based on either sales price or floor space method times percentage of completion as of June 30, 2010. (See Note 3. below for calculation)
– Buyer can apply directly to CRA or rebate can be applied against HST paid to the builder on closing
– Payable regardless of use of house as principal residence, etc.
– Applies only if at least 10% built on July 1, 2010
|Condominium||– 5% GST on title transfer payable by the buyer after June 30, 2010 as long as possession is given prior to June 30, 2010
– Builder would be entitled to input tax credit for HST/GST paid by it after June 30, 2010
|– 5% GST on closing payable by the buyer
– Builder to pay transitional tax adjustment of 2% of the total consideration payable to it for the grandfathered sales in the complex less GST payable and any rebates (i.e. not related to percentage completion)
– Builder is entitled to claim an RST transitional new housing rebate if the builder is required to pay the transitional tax adjustment in respect of the unit or complex, or the sale is subject to HST. (See Note 3. below for calculation)
– If claim based on floor area, rebate may be claimed any time after July 1, 2010. If the claim is based on consideration payable, it is claimed after closing
|– 13% HST payable on title transfer
– Unless the APS stipulates that the 8% tax is payable by the buyer, the vendor is to bear the 8% tax increase
– No transitional tax adjustment
– Builder is entitled to RST transitional new housing rebate if construction of complex is more than 10% complete on June 30, 2010. See previous column for details
1. Provincial certificate – As a condition of obtaining an RST transitional new housing rebate, a builder would be required to attach a valid provincial certificate – a letter of good standing – to their first rebate application and file the application with the CRA. The letter of good standing would be obtained from the Ontario Ministry of Revenue, would be issued where the builder has no outstanding provincial debts and would generally be valid for one year from the date of issuance unless revoked by the province. The letter of good standing would be used by the CRA to process subsequent RST transitional new housing rebate applications filed by the builder provided that the letter of good standing remains valid and has not been revoked. The province would notify the CRA and the builder if it revokes a letter of good standing. Where a letter of good standing is no longer valid, a builder would be required to attach a new letter of good standing to any subsequent rebate application filed with the CRA.
2. Transitional tax adjustment for a house (other than a condominium complex or a residential condominium unit)
|Degree of completion of construction or substantial renovation as of July 1, 2010||Transitional tax adjustment rate as a percentage of consideration|
|Less than 10%||2.0 %|
|Equal to or greater than 10% and less than 25%||1.5 %|
|Equal to or greater than 25% and less than 50%||1.0 %|
|Equal to or greater than 50% and less than 75%||0.5 %|
|Equal to or greater than 75% and less than 90%||0.2 %|
|Equal to or greater than 90%||0.0 %|
The transitional tax adjustment would be calculated on the consideration payable for the grandparented sale of the housing, which would exclude the GST payable and any new housing rebates. For purposes of calculating the transitional tax adjustment, the consideration would be deemed to be equal to the fair market value where the consideration payable for the housing is less than the fair market value of the housing on July 1, 2010, as if the housing had been substantially completed on that date.
The adjustment is payable in the next reporting period and must be reasonably calculated. Can be based on progress billings. The cost is for construction and excludes land cost and soft costs.
3. The RST transitional new housing rebate would be calculated as follows:
|Degree of completion of the housing as of July 1, 2010||% of estimated RST that would be rebated|
|Less than 10%||0%|
|Equal to or greater than 10% and less than 25%||25%|
|Equal to or greater than 25% and less than 50%||50%|
|Equal to or greater than 50% and less than 75%||75%|
|Equal to or greater than 75% and less than 90%||90%|
|Equal to or greater than 90%||100%|
The estimated RST embedded in the housing would be calculated by choosing one of the following two methods:
- the floor space method – the total square metres of floor space completed in the housing multiplied by a prescribed amount (not released yet); or
- the consideration or fair market value method – 2% of the total consideration paid for the housing or, in certain situations, 2% of the fair market value of the housing if consideration paid is less than the fair market value.
For the purchaser to be eligible to claim this rebate, the construction or substantial renovation of the house must be at least 10% complete as of July 1, 2010 and the builder must certify the degree of completion of the construction or substantial renovation as of July 1, 2010.
The rebate application for the RST transitional new housing rebate will be available on the CRA Web site by July 1, 2010.
For further information, please contact John Singer by phone at (416) 364-4400 or by email at firstname.lastname@example.org.
© Morrison Brown Sosnovitch LLP, 2010. All rights reserved.