What is the Harmonized Sales Tax (HST)?
On July 23, 2009, Premier Gordon Campbell and Finance Minister Colin Hansen announced that, effective July 1, 2010, BC will adopt a Harmonized Sales Tax (HST), combining the 7% Provincial Sales Tax with the 5% federal Goods and Services Tax for a single sales tax rate of 12%. The federal government will provide BC with $1.6 billion in transitional funding.
For consumers, goods and services (with some exceptions) will be subject to the HST in the same manner as they are currently subject to GST. Therefore, all items on which GST is not payable, such as basic groceries, prescription drugs and medical devices, would also not be subject to the HST. (Source: BC Government website, www.gov.bc.ca/hst/faq.html, accessed September 28, 2009)
What has to happen before the HST takes effect?
- The provincial and federal governments will continue to negotiate terms, with negotiations expected to be complete by the end of September.
- Ideally, the provincial government will consult with British Columbians throughout late 2009 and early 2010.
- The provincial government will introduce enabling legislation in spring 2010.
- The legislation will be debated in the legislature and go through the formal process of readings and committee hearings.
- The federal government will have to seek the approval of the Governor in Council to enter into an agreement under Part III.1 of the Federal-Provincial Fiscal Arrangements Act consistent with the terms of the Memorandum of Agreement, signed in July 2009.
- Assuming the both pieces of legislation receive Royal Assent, the HST will take effect on July 1, 2010.
Exactly how will the HST be applied?
The provincial government released the General Transitional Rules for BC on October 14, 2009. While they address commercial property, commercial leases, construction and renovations, rules for new residential housing have yet to be published. Click here for the General Transitional Rules for BC.
How will the HST impact the real estate sector?
As proposed, the HST will increase the cost of buying or selling all types of property and becomes essentially an additional tax on home ownership. REALTOR® commissions, appraisals and other services will be subject to a 12% HST, replacing the 5% GST now charged, and new homes will be subject to the full HST.
The HST would generally apply to a supply of a service to the extent that the service is performed on or after July 1, 2010. The HST would generally not apply, however, to a supply of a service if all or substantially all (90% or more) of the service is performed before July 2010.
For more information and to see the General Transitional Rules for BC, click here.
PROVINCE INCREASES NEW HOUSING REBATE THRESHOLD
November 19, 2009
VICTORIA – The Province is proposing to increase the threshold for the B.C. HST new housing rebate from $400,000 to $525,000 to ensure that, on average, purchasers of new homes up to $525,000 pay no more tax due to harmonization, Finance Minister Colin Hansen announced today.
We heard the concerns from consumers and industry about how the HST might affect home buyers, and this increase will move the threshold to above the average new home price in the province. At $26,250, this provides the highest maximum provincial rebate in Canada,‖ said Hansen.
A similar rebate will also support the construction or substantial renovation of affordable rental housing.‖ Purchasers of new homes would be eligible for a rebate of 71.43 per cent of the provincial portion of the HST paid on a new home, up to a maximum of $26,250. Homes above $525,000 would receive a flat rebate of $26,250. This enhanced rebate represents a 30 per cent increase in the threshold and maximum rebate available.
The Province is also proposing transitional rules for new housing. The provincial portion of the HST would not apply to sales of new homes where ownership or possession is transferred before July 1, 2010. In addition, sales of new homes under written agreements of purchase and sale entered into on or before Nov. 18, 2009, would generally not be subject to the provincial portion of the HST, even if both ownership and possession are transferred on or after July 1, 2010. On July 1, 2010, British Columbia intends to adopt the HST, combining a seven per cent B.C. rate with the five per cent federal Goods and Services Tax.
At 12 per cent, B.C. would have the lowest HST rate in Canada. It is estimated the HST would remove over $2 billion in costs for B.C. businesses, including an estimated $1.9 billion of sales tax removed from business inputs and an estimated $150 million annually in compliance costs.
For more information on the proposed transitional rules for new housing, visit www.gov.bc.ca/hst.
Will HST apply to commercial transactions and leases?
The HST will apply if ownership and possession are transferred to the buyer on or after July 1, 2010.
According to a July 28, 2009 article by Clark Wilson LLP’s Commercial Real Estate Group, 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 buyers for the full amount paid.
According to BDO Dunwoody, the net effect of an HST sale of a commercial building should be zero if the purchaser is a GST/HST registrant and uses the building entirely in commercial (taxable) activity. The HST charged on real estate commissions to sellers of commercial real property should be fully recoverable, provided the seller is an HST registrant and was using the land exclusively in commercial activities.
For more information and to see the General Transitional Rules for BC, click here.
What about Residential leases?
According to BDO Dunwoody, leases of residential property that were not subject to the GST will also not be subject to the HST. However, it is important to note that most, if not all, of the costs associated with the rental of residential property that were subject to the GST will become subject to the HST as of July 1, 2010. Since the anticipated increase in costs for residential landlords cannot be claimed as an input tax credit, it will be imperative for residential landlords to review their leases with legal counsel to determine if an increase in rent to account for the additional tax can be applied.
Will property managers be affected?
Yes. Property management services are typically subject to GST, and will become subject to the HST. According to BDO Dunwoody, depending on the nature of the property being managed (i.e., commercial vs. residential), and the GST/HST registration status of the owner of the property, the increase from the 5% GST to the 12% HST may not result in any additional cost for the owner. If the owner is entitled to a full input tax credit for GST purposes, they should be entitled to a full input tax credit under the HST. If the owner of the property is not registered for the GST or is not entitled to a full input tax credit (e.g., the property is a residential apartment building), the additional 7% of the HST will become a cost for the owner.
How will bare land be impacted?
According to BDO Dunwoody, the sale of land is currently the one supply where the GST may become collectible, regardless of the GST registration status of the seller. With the implementation of the HST, land sales that are subject to the 5% GST will become subject to the 12% HST. Any person who sells land should determine whether the HST is applicable to the sale. PST does not apply to the sale of bare land.
GST taxable sales of bare land do not require (or allow) for the seller to collect the GST from the buyer if the buyer is registered for the GST at the time of the sale. These same rules are expected to apply for the HST. A seller who makes a taxable sale of bare land to a buyer who claims to be registered for the HST should verify the HST registration with the Canada Revenue Agency (CRA). The CRA has established its own website (www.cra-arc.gc.ca/esrvc-srvce/tx/bsnss/gsthstrgstry/menu-eng.html) that allows a person to verify the registration status of a seller.
When a buyer who is registered for the HST acquires land that is subject to the tax, they are required to self-assess the HST payable on their HST return. Generally, when the land is used more than primarily (50%) in the buyer's commercial (taxable) activity, a full input tax credit can be claimed on the same return. The reporting of the self-assessment and the entitlement to claim a full input tax credit should result in no net tax for the buyer.
The HST charged on real estate commissions related to sales of bare land should be fully recoverable, provided the seller is an HST registrant and was using the land exclusively in commercial activities.
When does HST become payable?
BDO Dunwoody anticipates transitional rules similar to those imposed for other harmonization and used in the recent federal reductions of the GST. If these rules apply, where a purchase and sale agreement for a new home is entered into on or after July 23, 2009, and ownership or possession of the house is given to the purchaser before July 1, 2010, the GST at 5% should apply to the sale. For new homes where the purchase and sale agreement is entered into on or after July 23, 2009, and both ownership and possession is given to the buyer after June 30, 2010, the HST at 12% is expected to apply to the sale.
For new homes where the purchase and sale agreement was entered into with the buyer before the July 23, 2009 government announcement, it is expected that only the GST at 5% will apply, regardless of when ownership and possession transfers to the buyer.
Is there any relief for buyers of new homes?
To offset the increase in costs, the Government of BC plans to offer a partial rebate of the provincial portion of the HST for new (and substantially renovated existing) housing to ensure that new homes up to $400,000 will bear no more tax than under the current PST system, while homes above $400,000 will receive a flat rebate of about $20,000. New home sales over $400,000 will be dramatically impacted, as buyers will have to pay an additional 7% tax, even with the $20,000 flat rebate.
How will the proposed rebate for new and substantially renovated existing homes work?
|
Proposed to Take Effect on July 1, 2010
|
|
| New Home Price Level | Rebate |
|
Up to $350,000
|
100% rebate of 12% HST |
|
$350,000 t0 $400,000
|
100% rebate of PST component (7%) of HST (Total impact equivalent to existing tax system before July 1, 2010) |
|
$400,000 to $450,000
|
Payable: 7% PST component of HST minus $20,000 flat rebate |
|
Over $450,000
|
Payable: 12% HST minus $20,000 flat rebate |
|
Existing System Before July 1, 2010
|
|
| New Home Price Level | Rebate |
|
Up to $350,000
|
100% rebate of 5% GST |
|
$350,000 to $450,000
|
No rebate |
|
Over $450,000
|
No rebate; 5% GST charged |
Why was $400,000 chosen as the threshold
for the rebate for new homes?
This $400,000 threshold reflects the median price of new housing in urban areas in BC in 2008, so that on average those purchasing houses at or below the median price would generally be fully protected from a tax increase. Those above the median price would still receive the maximum $20,000 rebate. The rebate would be available whether the new housing is to be owner occupied or rented. (Source: BC Government website, www.gov.bc.ca/hst/faq.html, accessed July 28, 2009)
How will the HST apply to construction
and renovation projects?
The HST would generally apply to progress payments on contracts to construct, renovate, alter or repair real property to the extent that the progress payment can reasonably be attributed to property delivered or services performed on or after July 1, 2010.
In the case of written contracts to construct real property where it can be reasonably expected that the contract will require more than three months to complete, if the construction is substantially completed (90% or more) before June 2010, the construction would be deemed to have been substantially completed on June 1, 2010. Pursuant to the general GST rules, any consideration or part of the consideration payable on such a contract that had not been paid or become due on or before July 31, 2010 would be deemed to have become payable on July 31, 2010 and any portion of such payment attributable to construction on or after July 1, 2010 would be subject to the HST.The progress payments rule would not apply to sales of newly constructed or substantially renovated homes, which would be subject to the transitional rules for new residential housing, which have yet to be released.
For more information and to see the General Transitional Rules for BC, click here.
How will the PST transition work for residential construction contracts?
According to the General Transitional Rules for BC, regarding residential property, a PST rebate would be available to provide relief in respect of the PST embedded in construction materials used in residential real property contracts that are subject to the HST. This rebate would be available to a real property contractor for the PST paid on construction materials that are purchased or produced for the contractor’s own use, held in inventory at the end of the day on June 30, 2010 and used in a residential real property contract to which the HST would apply.
The rebate would not be available in respect of inventory for which the PST is otherwise recoverable by the contractor or any other party.
Qualifying residential real property contracts would include contracts to repair or improve land and items permanently attached to land, such as buildings and patios. Residential real property contracts for repair or improvements to rental housing, condominium and apartment buildings and long-term residential care facilities may qualify for this rebate.
For more information and to see the General Transitional Rules for BC, click here.
How will the HST work with the Property Transfer Tax?
In the case of new housing, where GST applies, the GST is not included for the purposes of determining the fair market value of the property. Similarly, the HST would not be included in the fair market value of the property for the purposes of determining the PTT payable. (Source: BC Government website, www.gov.bc.ca/hst/faq.html, accessed July 28, 2009)
This additional layer of taxation enhances the already heavy burden carried by BC homebuyers. Therefore, BCREA is focused on achieving fairness for consumers.
How will presales be affected?
On July 1, 2010, many homes in BC will be partially constructed or the subject of incomplete transactions. While no transitional rules have been announced by the BC government to date, they are expected to be similar to those created for Ontario, where a similar HST will come into effect on July 1, 2010. Ontario's transitional rules were recently released and are available here. (Source: Clark Wilson LLP, Commercial Real Estate Group, "BC's HST and Real Estate," BCRELinks website, www.bcrelinks.com/articles/dtd10.htm, accessed July 29, 2009)
According to the Ontario transitional rules, the rebate would generally be calculated as a proportion of the estimated embedded RST in the newly constructed or substantially renovated home, based on the degree of completion of the home as of July 1, 2010. If a written agreement of purchase and sale for a newly constructed or substantially renovated home or rental home is entered into after June 18, 2009 and before July 1, 2010, the builder would be required to disclose in the written agreement whether the provincial portion of the proposed single sales tax would apply to the sale and, if so, whether the stated price in the agreement includes the applicable provincial portion of the proposed single sales tax, net of the new housing rebate.
How will businesses be affected?
The provincial government describes the HST as a value-added tax, because it reduces the burden on business. In a July 2009 Tax Bulletin, BDO Dunwoody identifies two key benefits:
Recovery of PST
Unlike the GST, BC businesses pay PST on many business inputs with no ability to recover the tax. This embedded PST becomes part of the costs of the business. Examples of unrecoverable PST include the PST incurred on fixed-asset purchases or goods that are used in the business (i.e., not resold to customers). Under a harmonized sales tax system, input tax credits will be available to recover the provincial component of the tax, which will result in lower costs—savings that can be passed on to consumers through lower prices. (Note: the provincial portion of input tax credits will be restricted during the first five years of the new system for certain purchases by financial institutions and businesses with taxable sales in excess of $10 million annually, and after that, full input tax credits will be phased in over three years. If the fiscal situation permits, the temporary restriction may be phased out sooner.) In addition, PST will not be charged on certain costs incurred by REALTORS® and brokerages, which may result in some savings.
Reduction of Paperwork
Instead of dealing with two sales tax systems, businesses will find their compliance burden substantially reduced by a harmonized sales tax system. There will only be one tax collector—and as a result, only one sales tax return to file. Businesses will no longer be subject to sales tax audits by two levels of government. Purchase exemption certificates, which allow for the purchase of certain business inputs to be exempt from PST, will become a thing of the past as the provincial component of an HST will be recovered by claiming an input tax credit. For entities that are eligible to claim full input tax credits, there will also be no need to self-assess any sales tax on goods purchased from non-registered vendors that are used in a business in BC, which is something PST auditors currently look for on tax audits.
Businesses will also have to convert their systems to accommodate the HST. Invoices, sales receipts, purchase orders and expense reports will likely require modification.
How many other provinces have an HST?
Four: Newfoundland and
Labrador, Nova Scotia and New Brunswick (1997) and Quebec (1992, Quebec
Sales Tax, which doesn’t fully harmonize the GST with provincial tax).
In early 2009, the Ontario government announced its intention to
implement an HST on July 1, 2010.
“Copyright British Columbia Real Estate Association. Reprinted with permission.”
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