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Transitioning to 5% GST on Real Estate Transactions

By Richard Weiland [Clark Wilson LLP Tax Group]         October 31, 2007 

The federal government’s mini-budget announcement on October 30 included a further cut in the GST rate from 6% to 5%, effective on January 1, 2008. As with the reduction from 7% to 6% in 2006, the announcement includes special transitional rules for real estate sales. Navigating the transitional rules is likely to give real estate professionals a sense of déjà vu, as the rules and procedures are largely recycled from the last cut. This article briefly summarizes how the transitional rules work this time around for real estate transactions.

Sales of New Housing

Once again, a transitional rebate applies to sales of residential complexes that straddle the effective date of the rate cut. The following chart summarizes how the transitional rebates for the 2006 and 2008 rate cuts interact:

Purchase agreement was entered into: Ownership or possession is first transferred:
Before
January 1, 2008
On or after
January 1, 2008
before May 3, 2006 7% GST
- 1% transitional rebate
7% GST
- 2% transitional rebate
between May 3, 2006 and October 30, 2007 6% GST 6% GST
- 1% transitional rebate
after October 30, 2007 6% GST 5% GST

The foregoing rates are effectively reduced where the GST New Housing Rebate applies. The New Housing Rebate reduces the GST by 36% for new homes valued at less than $450,000 purchased for use as a principal residence. The builder is able to pay or credit the New Housing Rebate against tax owing by the purchaser. However, the transitional rebate requires the purchaser to file a claim directly with Canada Revenue Agency.

The form for the 2008 transitional rebate has not yet been released, but will likely be an update to the GST193 form that applied for the 2006 transition.

Other Real Property Sales

Once again, the transitional rules for sales of real estate other than new residential housing are relatively straightforward, and can be summarized as follows:

If ownership or possession under the agreement is transferred before January 1, 2008 GST is charged at 6%
If ownership and possession under the agreement are transferred on or after January 1, 2008 GST is charged at 5%

Once again, the legislation will include anti-avoidance rules to prevent parties from rearranging their affairs to take advantage of the lower rate. Developers and other vendors should consult with their legal and tax advisors if they are considering amending existing sale contracts to push the completion date into 2008, as the anti-avoidance provisions may nullify the 1% GST reduction in these situations.

Rent Payments and Other Taxable Transactions

The general transitional rules apply to taxable transactions other than the sale of real property. In the real estate context, this category includes rents under commercial leases and sales of furniture or other personal property in the course of a real estate sale.

For these transactions, the rate of GST is determined based on the earlier of when the GST is paid or becomes payable:

GST is payable or is paid before January 1, 2008 6% GST applies
GST first becomes payable or is paid on after January 1, 2008 5% GST applies

In general, GST is payable on the payment date specified in a contract or when the supplier issues an invoice.

For example, GST on a taxable rent payment due on December 31, 2007 will be calculated at 6%, but a rent payment due on January 1, 2008 will be subject to GST at 5%, unless the lease payment and the GST on it are paid before the due date.

- Richard Weiland

 

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