Effects of HST on the Real Estate Industry

Effects of HST on the Real Estate Industry

Real Estate Institute of British Columbia

January 13, 2010

Presented by Matthew Ely Clark Wilson LLP

Commercial Real Estate Group

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Outline

• HST Generally • HST Exemptions• New Housing and Rebates• Impacts of HST• HST Transitional Rules• Transitional Tax Adjustment (TTA)• PST Transitional New Housing Credit

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HST

• On July 23, 2009, B.C. announced its plans to implement a Harmonized Sales Tax for B.C. (HST) which, subject to legislative approval, would come into effect on July 1, 2010

• The HST rate will be 12% (5% federal component + 7% provincial component)

• The PST will be eliminated completely

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HST Exemptions Generally

• Gasoline, ethanol, diesel and biodiesel when used in motor vehicles as well as locomotive fuel used for trains, marine diesel used for boats, and aviation fuel and jet fuel used for aircraft.

• Books • Children's-sized clothing and footwear • Children’s car seats and car booster seats • Diapers • Feminine hygiene products• All items currently exempt from the GST, including

basic groceries, prescription drugs and residential rent.

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Current Exemptions from PSTProposed Exemptions fromHSTGoods Services

Residential fuels and heat Basic cable television Residential telephoneAll food productsNon-prescription medicationsVitamins and dietary supplementsBicyclesSchool suppliesMagazines and newspapersWork-related safety equipmentSafety helmetsLife jacketsFirst aid kitsSmoke detectors Fire extinguishersEnergy conservation equipment

Personal services Dry-cleaning servicesRepair and maintenance services to household appliancesHousehold repair and maintenanceReal estate feesMembership fees Admission Tourism services Funeral servicesProfessional services Airline fares within Canada

Marine diesel and aviation fuel including biofuels components for motor vehicles, boats and aircraftsBooksChildren-sized clothing and footwear Children’s car seats and car booster seatsDiapersFeminine hygiene productsNew homes up to $525,000All other items on which GST is currently not payable such as basic groceries, prescription drugs and medical devices

New Housing

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New Housing

• Currently estimated 2% PST embedded in the cost of new homes under the GST

• Under the HST, there would be no embedded tax• B.C. announced July 23, 2009 an enhancement new

housing rebate• Partial rebate of the provincial portion of the HST of

up to $26,250 on new housing

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Price of Eligible New Home (not includingGST or HST)

GST Portion – New Housing Rebate

British ColumbiaPortion New

Housing RebateTotal 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

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New Housing Rebate

• GST new housing rebate will continue to be available while the new HST housing rebate will be available in addition

• HST new housing rebate only applies, and is only assignable to the developer, where purchaser is purchasing the property as the purchaser's principal residence

Impacts of HST

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Impacts of HST

• Realtor Commission• Lawyer Fees• Moving Costs• Home Inspection Fees• Mortgage Insurance Premiums• Title Insurance• Home Appraisals• Survey Certificates

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Impacts of HST

• Apartment Buildings• Building Lots • Commercial Sales and Leasing • Property Management• Property Transfer Tax

Transitional Rules

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HST Transitional Rules

• 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.

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Grandfathering Rules

• Sales of new homes under written agreements of purchase and sale entered into on or before November 18, 2009 will not be subject to the provincial portion of the HST where both ownership and possession of the homes are transferred after June 2010.

• Grandfathered purchase and sale agreements that are assigned to third parties will generally retain their grandfathered status

• Exceptions to grandfathering rules

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Application of Grandfathering Rules

• A builder and a purchaser enter into a written agreement of purchase and sale in December 2009 for a newly constructed house. The agreement provides that ownership and possession of the house will transfer to the purchaser on July 14, 2010. The builder is not a reseller.

• Would the HST apply to the sale?

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Application of Grandfathering Rules

• A builder and a purchaser enter into a written agreement of purchase and sale on December 3, 2009 for a newly constructed house. The agreement provides that ownership and possession of the house will transfer to the purchaser in May 2010.

• Would the HST apply to the sale?

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Application of Grandfathering Rules

• A builder and a purchaser enter into a written agreement of purchase and sale for a newly constructed residential condominium unit on October 4, 2009. In accordance with the agreement of purchase and sale for the condominium unit, ownership and possession of the unit will transfer to the purchaser on July 15, 2010.

• Would the HST apply to the sale of the condominium unit if the purchaser assigns its rights under the agreement to a third party?

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Transitional Tax Adjustment

• Builders will be entitled to recover the provincial portion of the HST payable by claiming input tax credits (ITC)

• However, for grandfathered homes, builders will be required to pay a transitional tax adjustment (TTA) based on the completion of the home on July 1, 2010

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Completion of Home on July 1, 2010 Transitional Tax Adjustment (TTA)

Less than 10% 2% (100% of the TTA rate of 2%)

10% or more but less than 25% 1.5% (75% of the TTA rate of 2%)

25% or more but less than 50% 1% (50% of the TTA rate of 2%)

50% or more but less than 75% 0.5% (25% of the TTA rate of 2%)

75% or more but less than 90% 0.2% (10% of the TTA rate of 2%)

90% or more 0% (0% of the TTA rate of 2%)

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PST Transitional New Housing Credit

• PST transitional housing rebate for new homes that are subject to the provincial portion of the HST after June 2010 to provide relief for the PST embedded in the home where the home was constructed in whole or in part prior to July 2010

• For eligible condominiums or traditional apartment buildings, the PST transitional housing rebate would be available to the builder (rather than the purchaser)

• The rebate would be available for these homes where the transitional tax adjustment or the HST would apply

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Completion of Home on July 1, 2010 Transitional Rebate

90% or more 100% of the estimated PST content

75% or more but less than 90% 90% of the estimated PST content

50% or more but less than 75% 75% of the estimated PST content

25% or more but less than 50% 50% of the estimated PST content

10% or more but less than 25% 25% of the estimated PST content

Less than 10% 0% of the estimated PST content

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What You Should Do Now

• New home builders should look at the HST impact on their sales strategies

• Adjustments to accounting systems• Consider implications of transitional rules • Minimize costs/take advantage of potential

benefits

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Additional Resources

• BCRELinks http://www.BCRELinks.com

• HST Notice #3 http://www.sbr.gov.bc.ca/documents_library/shared_documents/HST/new-housing-rebates.pdf

• BC Ministry FAQhttp://www.gov.bc.ca/hst/faq.html

THANK YOU

These materials are of a general nature and do not take into consideration any

specific matter, client or fact pattern.

Please direct inquiries or comments to:

Matthew Ely, Clark Wilson [email protected] | 604.891.7784

www.cwilson.com