HST and Real Estate: How It Works

By Clark Wilson LLP’s Commercial Real Estate Group
November 24, 2009

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

• The HST rate will be 12% (5% federal component + 7% provincial component).
• The PST will be eliminated completely.
• There will be a partial rebate of the provincial portion of the HST of up to $26,250 on new housing.
• Input tax credits will be available for HST in the same manner as under the current GST.

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).

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:

• 5% GST will apply to sales where title and possession of new housing is transferred prior to July 2010.
• 12% HST will apply to sales where title and possession of new housing is transferred after June 2010 unless grandfathered. After June 2010, the HST would generally be payable on the earlier of the day on which ownership or possession of the property is transferred to the purchaser. The transitional provisions further provide that where the property is a residential unit in a residential condominium building and possession of the unit is transferred after June 2010 and before the condominium has been registered under the Strata Property Act, the HST would become payable when ownership of the unit is transferred, or 60 days following the date of the registration of the condominium, whichever is earlier. This latter provision was taken verbatim from the Ontario provisions and makes little sense in the context of BC closing procedures (where “registration of the condominium” is not a term of art). As it is likely to lead to confusion we would expect further amendment.
• Sale agreements entered into on or before November 18, 2009 where title and possession of new housing is transferred after June 2010 will be grandfathered, meaning that the provincial portion of the HST will not apply at closing.
• Where a sale is grandfathered and the building is wholly or partially completed after June 2010, the builder will be liable to pay a transitional tax intended to ensure the building has a tax content equal to what it would have had if constructed wholly prior to July 2010 (i.e. PST paid on all materials) and may also be eligible for a PST transitional new housing rebate. In the case of residential condominiums, the transitional tax adjustment would be calculated at 2% of the value of consideration for the condominium unit or building as established for GST purposes. In cases where the value of consideration for the sale of the grandparented home is less what the fair market value of the home would have been if the home had been substantially completed on July 1, 2010, the consideration for purposes of calculating the transitional tax adjustment will be deemed to be equal to the fair market value of the home as if the construction was substantially completed on July 1, 2010.
• BC has adopted an approach to dealing with condominiums whereby the builder must pay 2% of the selling price of the unit (the government’s estimate of the PST content) and then claim a PST transitional new housing credit for the estimated PST paid on materials prior to July 2010 to provide relief in respect of the PST embedded in the price of the home. For newly constructed residential condominiums, the PST transitional new housing rebate would be available to the builder rather than the purchaser. Eligible applicants would be permitted to calculate the estimated embedded PST by choosing one of the following methods: (1) estimated PST content calculated at a prescribed amount of $60.00 per square metre of floor space or (2) estimated PST content calculated based on selling price or fair market value of the home, calculated at 2% of the total value of consideration or fair market value established for GST purposes.
• Where a sale is subject to HST and construction commenced prior to July 2010, the builder will be entitled to a formula based PST transitional credit for the estimated PST paid on materials prior to July 2010.
• Detailed information on the British Columbia transitional rules for new housing is available here.

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.