Tuesday, June 15, 2010

HST and Real Estate

HST? - How It Affects 12 Matters In Ontario


Real Estate

Beginning July 1, 2010, there will be sales tax in Ontario

of 5% + 8% = 13% (12% in British Columbia) replacing

the former 5% GST (Goods and Services Tax) and the

former 8% PST (Provincial Sales Tax).

1) HST and Mortgage Brokerage Fees (to arrange

a mortgage, if one uses a Mortgage Broker)

HST will not apply since mortgage brokerage services are

exempt as part of the financial services industry.



2) HST on Real Estate Commissions

Generally, HST will be payable on commissions for any

real estate sale closed after July 1, 2010. However, the

general transitional rule (for sale contracts entered into

before July 1, 2010), is if at least 90% of the services

were performed prior to July 1, 2010, only 5% GST is

payable (no PST). If an offer to purchase real estate was

accepted prior to July 1, 2010, then the realtor services

were performed prior to July 1, 2010, and only 5% GST

should be payable even though the realtor’s commission

is not due for payment until the sale has closed after July

1, 2010. Warning to sellers: If, prior to July 1, 2010, a

seller is about to accept an offer to purchase (which will

close after July 1, 2010), the seller should clarify

in writing with the realtor that only GST will be payable

on commissions due on a sale closing after July 1, 2010.



3) HST and Rents Paid by Tenants

For residential tenancies, HST will not apply to such rents.

For commercial tenancies (industrial, office or retail), HST

will be charged on rents paid after July 1, 2010 (but most

commercial tenants qualify to recover such HST payments

through input tax credits).



4) HST and Condominium Monthly Maintenance Fees

For residential condominiums, HST will not apply on

monthly common expenses, but HST is payable for

commercial (retail), office, industrial) condo common

expenses paid on or after July 1, 2010 (most commercial

condo owners qualify to recover such HST payments

through input tax credits).



5) HST on HOME RENOVATIONS

For any part of services (labour and materials) provided

after July 1, 2010 (no matter when a contract for

renovations of a residence was signed), the part performed

or provided after July 1, 2010, will be subject to HST.



6) HST and RESALE COTTAGE / VACATION

PROPERTY PURCHASES



HST will not be payable on the price if the property sold

by the seller and bought by the buyer is personal use

property. However, if the seller had been renting out the

property more than 50% of the time during the seller’s

ownership, the price will likely be subject to HST. If the

property being sold was part of a rental pool, HST will

apply. Consult your tax accountant.



7) HST and RESALE RESIDENTIAL PROPERTY

PURCHASES

There will be no HST on the price of resale residential

purchases. Note: Resale residential purchases will

therefore become a much more attractive investment

(rather than buying from a builder) particularly when one

considers that builder prices will result in 13% HST

(whether built into the price or being structured in

addition to the price by some builders in Ontario).

Builder prices also must include higher increased current

costs of labour, materials and land costs as well as

substantial municipal levies and educational levies

plus sizable closing adjustments (often being hidden by

builders in the fine print of many pages in a builder’s

agreement), all of which are not payable by a buyer /

investor who purchases resale residential property.

(Think about it!)



8) HST on a PURCHASE OF A SUBSTANTIALLY

RENOVATED HOME

If a residence being purchased has been “substantially

renovated”, it will be treated in the same manner as

buying new construction from a builder and HST will

generally apply to the price paid. See Canada Revenue

Agency (CRA) Bulletin B-092 which states that a

“substantial renovation”, in effect, refers to a renovation

where at least 90% of the interior of a building

(excluding the foundation, external walls, internal

supporting walls, roof, floors and staircases) has been

removed or replaced.



9) HST and PURCHASE of RESALE APARTMENT

BUILDINGS (Multi-Unit Residential)

No HST will be payable on the price of a resale apartment

building (multi-unit residential). If part of such a building is

commercial, the purchase price must be reasonably

apportioned between the part of the building that is

residential resale (HST exempt) and the other part of the

building that has a commercial component, which part will

be subject to HST.



10) HST on PURCHASE OF COMMERCIAL

PROPERTIES (new or resale commercial properties

closing after July 1, 2010 no matter when an offer

was signed)

HST will apply to the purchase price; however, typically,

buyers who obtain a GST registration prior to closing

(must be registered for GST in the same manner as

ownership will be taken) will not need to pay the HST on

closing provided:



(a) a GST registration is obtained prior to the closing date

and



(b) the buyer signs an appropriate undertaking in the

lawyer’s office to become self-assessed.

Note: Watch out for the purchase of office condominiums,

industrial condominiums, and retail condominiums, the

price for which will be subject to HST (being subject to

only GST on the price for closings prior to July 1, 2010).



11) HST and the PURCHASE OF VACANT LAND

(a) Farmland

HST will typically apply to the price of such land if farm

land is sold alone; however, if the land is sold as part of

a farming business, it can be treated differently. Consult

your tax accountant.

(b) Building Lot

HST will typically apply to the price when the seller is

involved in a commercial real estate activity; however,

some lot sale prices might be exempt from HST if the

seller is not engaged in a real estate commercial activity.

(c) Personal Use Of Vacant Land

No HST is payable if an individual sells personal use

vacant land (which would have been exempt from GST).



12) HST on PURCHASES OF NEWLY

CONSTRUCTED RESIDENTIAL PROPERTY

(a) Builder’s Agreement Prior to June 19, 2009

No HST is payable if an offer to purchase from a builder

was accepted prior to June 19, 2009 (only GST will

apply; however, most builders include GST inside the sale

price). Note: Buying by way of an assignment (where the

builder sale agreement was signed prior to June 19, 2009)

becomes attractive!

(b) Builder’s Agreement Accepted after June 18,

2009

If an offer to purchase from a builder was accepted after

June 18, 2009 and either occupancy closing (for a new

condo purchase) or final closing occurs prior to July 1,

2010, HST is not payable; HST is payable if both

occupancy (in a new condo purchase) and final closing

occur after July 1, 2010.

(c) If Builder’s Agreement Silent about HST

If an offer to purchase from a builder was accepted after

June 18, 2009 and failed to make reference to HST, the

sale price includes Ontario’s 8% PST component of the

HST if it is payable (which means that the builder must

pay the PST and cannot charge it to the buyer).

(d) GST Rebate (calculated on the 5% GST part of

the 13% HST)

Typically, most builders include the GST component of

HST (being 5%) in the sale price based on the government

GST rebate being assigned from the buyer to the builder

(such GST rebate being 36% of the GST payable on the

first $350,000.00 which is reduced to NIL as the price

increases from $350,000.00 to $450,000.00, there being

no GST rebate after $450,000.00).

Note: In order for the GST rebate to be assigned to the

builder by the buyer, the buyer must qualify by the buyer

or an immediate family member living in the unit. If not

qualifying (such as an investor who will be renting out the

unit), the rebate cannot be assigned to the builder and the

builder will charge the cost of such unassignable rebate to

the buyer on closing in addition to the purchase price,

which results in the buyer being forced to make a separate

application to the federal government to recover such

rebate. To qualify for recovery of such rebate, the investor

must own the unit for at least one year and reasonably

expect to rent the unit to the initial tenant for one year.

An investor need not wait the year to apply for and obtain

the rebate but if the government later discovers that

ownership was less than one year, the government might

seek to recover the rebate paid to the investor.

(e) PST Rebate (calculated on the 8% PST

Component of the 13% HST)

Warning: All builder agreements should be reviewed by

a lawyer either before a buyer signs an offer or during

any available cooling off period since some builder

agreements require buyers to pay the 8% PST (or the

Net PST) component of the HST in addition to the

purchase price.

Regarding a PST rebate, only 75% of the 8% PST

component of the HST is refundable to a buyer on

the part of the purchase price that is up to $400,000.00

(being newly constructed from a builder since there is

no HST on resale residential property). There is no

government rebate on the 8% PST for the part of

any price that exceeds $400,000.00! This means that

75% of 8% (being 6%) is refundable by the government

and 25% of 8% (being 2%) is not on the first

$400,000.00 of price.

Example: If the price from a builder is $500,000.00,

the gross 8% PST component of the HST would be

$40,000.00, but since the government offers a rebate

of 75% of the 8% PST on the first $400,000.00, this

will effectively (for a qualifying buyer whose immediate

family member will be living in the unit) reduce the PST

to 2% on the first $400,000.00 to $8,000.00. Since

there is no PST rebate for that part of the price over

$400,000.00, 8% is charged on the next $100,000.00

being a further $8,000.00 which means (for a qualified

buyer who can assign the rebate to the builder) that the

total net PST payable is $16,000.00. If the net PST is

not included in the price of $500,000.00, the price plus

net PST payable becomes $516,000.00. The gross 8%

PST on $500,000.00 is $40.000.00 but (due to the

rebate of $24,000.00 on the first $400,000.00) the net

PST payable is $16,000.00.

Note: If the builder’s agreement requires the Net PST to

be paid by the buyer, the buyer pays $16,000.00 on top

of the price. If the builder’s agreement states that the Net

PST is included in the price (as GST is typically with most

builders), the price remains $500,000.00. Watch out!

Caution: An investor-buyer who will rent out the unit will

not qualify for assignment of PST rebate to the builder

and, therefore, on closing, must pay the purchase price

of $500,000.00 plus the gross PST of $40,000.00

(being a total of $540,000.00) and then, after closing

apply to the government for the rebate of $24,000.00

to be received if the investor qualifies (must be owning

for one year and rent to a tenant who is reasonably

expected to live in the unit for one year, although the

rebate application can be made as soon as the

purchase from the builder is closed).

(f) Qualifying for a Rebate (GST or PST) when

Buying from a Builder

In order to qualify for GST or PST rebates, the property

purchased from a builder must be intended to be a

primary place of residence, which means that if a person

has more than one residence in the world, (in order to

qualify for the rebate) the unit must be the main place

of residence and not a secondary residence.

Also, the residence purchased must be used as a primary

place of residence (as stated above) by the buyer or a

relation of the buyer. Relation of the buyer includes an

individual who is related by blood, marriage, adoption or

common law (including a former spouse or a former

common law partner). Blood relation is limited to parents,

siblings, children, grandchildren but does not include

cousins, uncles or aunts.

(g) Additional Transitional PST rebate for

NON-CONDOMINIUM Builder Purchase (where

part of construction was done as of July 1, 2010)

If HST is payable on a newly constructed home (not a

condominium) and if construction of the residence was

at least 10% complete as of July 1, 2010, a transitional

PST rebate of up to 2% of the sale price can be claimed

on the PST component of the HST as follows:



% Completed As Of July 1, 2010

Portion Of 2% Of Price To Be Refunded



10% - 24%

25%



25% - 49%

50%



50% - 74%

75%



75% - 89%

90%



90% - 100%

100%





Example: If buying a freehold townhouse, a semi-detached

or a detached from a builder for $500,000.00 where

construction was 95% complete on July 1, 2010 and

closing occurs on July 15, 2010, PST rebate for qualified

buyer will be:

(i) 75% of 8% on the first $400,000.00 = $24,000.00

(ii) 100% of 2% on $500,000.00 = $10,000.00

Total rebates $34,000.00

Instead of paying a gross PST of 8% on $500,000.00

being $40,000.00, the rebates of $34,000.00 would

reduce the net PST payable to $6,000.00. The question

is whether such Net PST is included or not included in the

purchase price from the builder according to the terms

of the builder’s agreement!

Note: The PST transitional rebate of up to 2% of the

purchase price can only be obtained if:



(i) HST is payable on the price where the builder’s

agreement was accepted after June 18, 2009 and

closes after July 1, 2010;

(ii) the purchase is for new residential construction which

is not a condominium;



(iii) construction is at least 10% complete as of July 1, 2010;



(iv) a certificate is obtained on closing from the builder

stating the percentage of completion of construction as

of July 1, 2010. Note: the builder is not required to provide

this to a buyer unless the terms of the purchase agreement

with the builder requires such a certificate to be provided;



and



(v) an application for a transitional PST rebate is filed with

the government by July 1, 2014.

(h) CONTACT TELEPHONE NUMBERS FOR HST

TRANSITIONAL RULES

Ontario has proposed transitional rules that assist businesses

in the transition to a Harmonized Sales Tax (HST). For

more information on the transitional rules for the HST, please

call Canada Revenue Agency (CRA):



Provided by:

Stephen H. Shub Professional Corporation

Barrister, Solicitor, Notary

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