HST and Real Estate: How It Works

By Darren Donnelly

While the BC government is getting out of the sales tax business, the province's residential real estate developers will have more taxes to cope with than ever before.

Chronology

On July 23, 2009, the BC government announced that it had reached an agreement with the federal government to combine the 7% BC Provincial Sales Tax with the 5% federal Goods and Services Tax to create a single Harmonized Sales Tax. The new tax will come into effect on July 1, 2010.

Following the announcement, several industry associations, including the Urban Development Institute, held discussions with relevant tax administrators within both the provincial and federal governments. Generally, industry was told to expect transitional provisions similar to those in Ontario, and industry suggested various departures from the Ontario rules.

On October 14, 2009, the BC government announced general transitional rules for the implementation of HST; however, the general rules contained little information regarding real estate. On November 19, 2009, the government announced transitional rules for new housing and proposed to increase the previously announced limit for the BC HST new housing rebate from $400,000 (the Ontario figure) to $525,000.

With the transitional provisions now in place, we can examine with some certainty the effect of the HST on the real estate industry.

General

New Housing

Currently under the GST, new housing is taxed while used housing is not. No housing sales are directly taxed under the PST, although the BC Ministry of Finance states that there is currently an average of 2% PST embedded in the cost of new homes from PST charges on construction materials. Under the HST, there would be no embedded tax but the full 12% HST would apply to new housing.

An HST partial rebate on new housing will be provided to purchasers in an amount equal to 5% of the purchase price up to a maximum rebate of $26,250. The Ministry's rationale is that because purchasers currently pay 2% embedded PST, the rebate would eliminate any tax increase on new housing sold for a purchase price of up to $525,000. The embedded PST aside, homes under $525,000 will be subject to a tax 2% higher than under the current system. Homes over $525,000 will be taxed at a rate 7% higher than under the current system, less a flat $26,250 rebate (in addition to the currently available GST new housing rebate currently available for prices up to $450,000).

Price of Eligible New Home (not including GST or HST) GST Portion – New Housing Rebate1 British Columbia Portion – New Housing Rebate2 Total Rebates
$350,000 $6,300 $17,500 $23,800
$400,000 $3,150 $20,000 $23,150
$450,000 $0 $22,500 $22,500
$525,000 and above $0 $26,250 $26,250

1. New home buyers may be eligible for the federal GST new housing rebate, which generally equals 36% of the tax paid on the first $350,000 of the purchase price. The amount of the GST rebate is phased out on a straight-line basis for homes priced between $350,000 and less than $450,000.

2. British Columbia proposed rebate for new housing is equal to 5% of the purchase price up to a maximum rebate of $26,250 (71.34% of the provincial component of the HST).

In order to avoid the increased tax burden on homes priced over $525,000, vendors and purchasers may consider, wherever possible, completing the sales of new homes prior to July 1, 2010 when the new HST comes into effect. See transitional rules below for more details.

Buyers in the market for a home may be considering purchasing resale properties in order to avoid the increased tax burden on new homes. While the tax on resale properties is not directly affected by the new HST, the cost to the purchaser of these homes may still increase slightly because services associated with the purchase may be subject to increased tax. For example, home inspection charges would be subject to HST.

Transitional Rules for Pre-Sales

On July 1, 2010, many homes in BC will be partially constructed or the subject of incomplete transactions. Transitional rules for new housing were announced by the BC government on November 19, 2009 as follows:

What To Do Now: Important Provisions for Strata Presale Agreements

For purchase and sale agreements entered into after November 18, 2009 the developer is required to disclose in its purchase and sale agreement whether the provincial portion of the HST applies to the sale or whether the developer pays, and, if so, whether the stated price in the agreement includes the applicable provincial portion of HST. This requirement must be stated in the purchase and sale agreement and not just in the disclosure statement and, to be safe, should be stated expressly and not, for example "if the HST applies, then…". If the developer does not meet these requirements, the stated price in the purchase and sale agreement would be deemed to include the provincial portion of the HST and the purchaser would not be required to pay the provincial portion of the HST in addition to the stated price in the purchase and sale agreement.

For developers wishing to credit purchasers with a rebate, as they may have traditionally done with the GST new housing rebate, the process is virtually identical, but with different percentages and limits. The GST new housing rebate will continue to be available while the new HST housing rebate will be available in addition.

It is important to note that the HST new housing rebate only applies, and is only assignable to the developer, where purchaser is purchasing it as the purchaser's principal residence.

There is a new rental housing rebate available where the first use of the housing would be for occupancy or use by an individual under a rental arrangement or for occupancy by the developer as a primary place of residence for a period of at least one year. However, this new rental housing rebate is not assignable to the developer. Landlords would be able to apply for the rebate by filing a rebate application with the Canada Revenue Agency.

Rental Apartment Buildings

Residential landlords will face increased costs under the HST, since some goods and (especially) services not currently subject to the PST and necessary in the operation of apartment buildings will be taxed under the HST. As is currently the case with GST, landlords will not be able to claim input tax credits for HST paid and will not collect HST from tenants. Expenses such as maintenance, electricity and other services required by landlords will be taxed at 12% starting July 1, 2010.

Building Lots

Builders of new homes will be entitled to claim input tax credits for most HST paid on their inputs, such as raw land, just as they currently do with the GST. However, new homes in BC that are currently subject to the GST will become subject to HST as described above under the New Housing heading.

Commercial Sales and Leasing

Commercial sales and leases will not be materially impacted by the new system. The 12% HST will apply on commercial sales and leases just as the 5% GST does under the current system and input tax credits will be available to tenants and purchasers for the full amount paid.

Real Estate Commissions

Commissions will be subject to HST in the same manner as they currently attract GST. Commercial vendors will be able to claim input tax credits on HST paid to agents, while individuals selling personal use property will not.

For Commissions payable after June 30, 2010, in respect of services rendered at least partly before July 1, the transitional rules with respect to services apply. If at least 90% of the services were provided before July 2010, then only 5% GST will apply. Otherwise, GST applies to the commission in proportion to the portion of the service performed before July, while HST applies to the remaining portion. Examples can be found at pages 60 and 61 of this CRA Presentation.

More Information

The links below offer more information on the new BC HST:

Government Sites

CRA Excise and GST/HST News – No. 76; Spring 2010 (published June 22, 2010)

CRA New Housing Info Sheet for BC Builders GI-084 (published June 21, 2010)

CRA New Housing Info Sheet GI-078 (published June 11, 2010)

Canada Revenue Agency's HST Site for BC

Provincial Government's HST Site

Legislation & Inter-government Agreement

Consumption Tax Rebate and Transition Act

Provincial Choice Tax Framework Act

BC Comprehensive Integrated Tax Coordination Agreement

Government News Releases

Ministry of Finance Press Release: It's Official: PST Eliminated in B.C.

Ministry of Finance Press Release – "Province Increases New Housing Rebate Threshold"

Ministry of Finance Press Release – "Harmonized Sales Tax to Boost Investment, Job Creation"

HST legislation introduced in B.C.

June 3, 2010 CRA presentation to Urban Development Institute

Commentary & Analysis

KPMG Tax News Flash – B.C. Releases HST Transitional Rules for New Home Builders

Urban Futures: Evolution or Extinction: Harmonization in a British Columbia that Works

BDO commentary

BC Real Estate Association HST FAQs

Grant Thornton: New filing requirements for GST/HST returns

Altus: The HST Transitional rules – What is the cost to the developer?

Previous GST Transition

Transitioning to 5% GST on real estate transactions

Darren Donnelly