June 19 - Harmonized Sales Tax Enhancements Announced

June 23, 2009

HARMONIZED SALES TAX ENHANCEMENTS ANNOUNCED

This morning, the Provincial government announced significant improvements to the harmonized sales tax structure as it relates to new homes and rental housing, as well as the transition rules affecting residential real estate.

 

To refresh your memory, in the March 26th budget, the Province protected new homebuyers of under $400,000 product by instituting a 75% (6 points) rebate, which, after input tax credits of 2% were factored in, ensured revenue neutrality – homebuyers would pay no more or less than before.

 

The problem with the budget approach was that the rebate was quickly phased out between $400,000 and $500,000, resulting in a “wall of tax.” To combat the wall of tax, the Province is adopting a progressive tax structure (see BILD proposal May 4) under which the 8 per cent HST will only be payable on the price increment over $400,000, not the full sales price. The result is dramatic reductions in the tax payable. For example, the net tax payable on a $500,000 home will drop from $30,000 down to $6,000 as per the example below.

 

Rental apartments/Investor condos

In another move that is likely to be welcomed by the high-rise condo segment of the membership, the Province is extending the HST rebate to rental housing as well as investor condos.

 

Renovation

So far, the only change with respect to renovation is the inclusion of substantial renovations (as per the GST definition), in terms of eligibility for the HST rebate. BILD has already discussed with the Province the shortcomings of the federal definition and work will begin immediately towards amending it.

 

Transition

With respect to transition, the one thing we can say with certainty is that all sales up to and including June 18, 2009, are grand-parented even if they close after June, 2010. There is consideration for projects that straddle the line and while the rules are complicated (four pages) they seem at first glance to be favourable. We are working as quickly as possible to boil those rules down into simplified terms. Meanwhile, members can review all details of the provincial announcement, including the transition rules, by visiting http://www.rev.gov.on.ca/english/notices/str/02.html.

 

Summary

In conclusion, BILD, working hand in hand with the Ontario Home Builders’ Association, has been relentlessly advocating for changes to the HST since March 26 and we will continue to do so, particularly with respect to renovations, as we also turn our attention to all the other taxes, fees and levies impacting the new housing and renovation industries.

 

Example: The PST on a $500,000, net of input tax credits, would have been $30,000 ($500,000 x 8% = $40,000 minus input tax credits of $10,000 [representing 2 per cent embedded PST] =$30,000). Under the graduated tax approach, the PST, net of input tax credits, drops down to $6,000 ($400,000 at 8%  = $32,000 minus 75% rebate [$24,000] =$8,000 plus $100,000 at 8% [$8,000] =$16,000 tax minus input tax credits of $10,000 =$6,000 net tax).