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Harmonized Sales Tax

HOW IT APPLIES TO RESIDENTIAL REAL ESTATE

GENERAL DISCUSSION
On July 23, 2009, British Columbia announced its plans to implement a Harmonized Sales Tax (“H.S.T.”) for B.C. effective July 1, 2010. The H.S.T. is a combination of the 7% Provincial Sales Tax (“P.S.T.”) with the 5% federal Goods and Services Tax (“G.S.T.”) for a single sales tax rate of 12%.

For consumers, goods and services (with some exceptions) will be subject to the H.S.T. in the same manner as they are currently subject to GST. This applies to real estate as well.

For both used and new homes, there are some extra costs for buyers or sellers but these are for the services required to buy or sell, not on the price of the home.

Buyers of used residential real estate can expect to pay H.S.T. on items such as home inspectors, appraisals and other such services. Lawyer fees will not change as they have been forced to charge P.S.T. for years.

Sellers of used residential real estate can expect to pay H.S.T. on realtor commissions, and any other services they may use (we can’t think of any).

H.S.T. has different implications for used residential real estate and new residential real estate. There are also different rules for commercial properties, mobile homes and other types of real estate. Below is an explanation of each situation.

USED RESIDENTIAL REAL ESTATE
There is no H.S.T. on the price of used residential real estate, much like the current rules regarding G.S.T. There are no extra closing costs on the purchase or sale of a used residential house, subject to the comments above.

NEW HOUSING
Here is where the costs will increase.

H.S.T. will be payable on the sale of new or substantially renovated homes, where the Contract of Purchase and Sale was entered into after November 18The Provincial Government is proposing a New Housing Rebate (“the Rebate”) to ensure that purchasers of homes priced up to $525,000 would pay no more tax, on average, than under the current P.S.T.

The Rebate is 71.43% of the provincial component of the H.S.T. paid, up to a maximum of $26,250.00.

To illustrate this, let’s assume a purchaser is purchasing a new home for $500,000.00.
, 2009 and both ownership and possession of the home is transferred after June, 2010. H.S.T. will not be payable on sales of newly constructed or substantially renovated homes where ownership or possession of the home is transferred before July 2010, or where the Contract of Purchase and Sale is dated prior to November 18, 2009.

New Housing Rebate

 

 

 

Current Tax Payable
G.S.T

Proposed Tax Payable
H.S.T
Purchase Price $ 500,000.00 $ 500,000.00
G.S.T. $ 25,000.00 $ 25,000.00
H.S.T. additional tax - $ 35,000.00
Rebate of H.S.T. (71.43% of H.S.T. additional tax) - $ 25,000.50
     
Total Purchase Price $ 525,000.00 $ 534,999.50


Note that in the above example the purchaser is paying about $10,000 more with the H.S.T. This is approximately 2% more than under the current G.S.T.

The government states that while sales of new homes in B.C. are not directly subject to the P.S.T., building materials used in the construction of homes are subject to the 7% P.S.T. The total amount of P.S.T., on average, embedded in the selling price of a new home is estimated to be equal to two percent. As a result, the government claims that purchasers of homes priced up to $525,000 would pay no more tax, on average, than under the current P.S.T. This of course assumes that the price of homes drop 2% due to the elimination of P.S.T. on building supplies.

Note also that the maximum rebate is $26,250.00. This means that the extra tax will increase dramatically for homes over $525,000.00. Consider the following example for a home priced at $900,000.00.

 

Current Tax Payable
G.S.T

Proposed Tax Payable
H.S.T
Purchase Price $ 900,000.00 $ 900,000.00
G.S.T. $ 45,000.00 $ 45,000.00
H.S.T. additional tax - $ 63,000.00
Rebate of H.S.T. (maximum of $26,250.00) - $ 26,250.00
     
Total Purchase Price $ 945,000.00 $ 981,750.00


Using the above example, the purchaser of a new home priced at $900,000 will pay an additional $36,750.00 with the imposition of the H.S.T.

The new housing rebates would be federally administered in a manner similar to the G.S.T. rebates for new housing. Individuals would be able to file an application for the rebate directly with the Canada Revenue Agency. However, in the case of homes sold by the builder, similar to the G.S.T. new housing rebates, the builder would have the option of paying or crediting the new housing rebate to the purchaser at the time of purchase.

Other rebates
New housing rebates would be available for the provincial component of the H.S.T. paid for all types of housing eligible for G.S.T. new housing rebates. This includes rebates for the following:

New housing rebate – for purchasers of new houses together with leased land
New housing rebate – for purchasers of new mobile homes and floating homes
New housing rebate – for houses acquired through the purchase of qualifying shares in a housing co-op
New housing rebate – for owner-built homes
New rental housing rebates


Rather than retyping the government announcement on these rebates, please visit this doc This has complete details on all of the above rebates. It also has information on rentals of new homes by builder-landlords and purchaser-landlords, as well as transitional rebates for partially constructed homes.

We have been unable to find information related to the change in use of properties (primarily short term rental property).


The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult a lawyer for individual advice regarding your own situation.

Copyright © 2005 by Spagnuolo & Company Real Estate Lawyers. All rights reserved. You may reproduce materials available at this site for your own personal use and for non-commercial distribution. All copies must include this copyright statement.

 

 

H.S.T. on Realtor Commissions

GENERAL DISCUSSION
H.S.T. will apply to realtors’ services for work done after July 1, 2010. The full 12% H.S.T. will apply on listings that start after July 1, 2010.

The confusing part arises when work is done on listings that commence prior to July 1, 2010, and the house sells after July 1, 2010.

For situations like this, the realtor must determine what percentage of the work was performed prior to July 1, 2010 and what percentage is performed after. Generally there are two ways to measure the work that was performed. A realtor can use the number of days after July 1 as compared to the number of days prior to July 1. Alternatively, the realtor could use the actual work performed. There is nothing expressly in the transitional rules on this but we have checked with Revenue Canada on their helpline on H.S.T. (1 800 959 8287). It was confirmed to one of my lawyers that the realtor, in calculating the percentages, would have the discretion to choose either the number of days listed or actual amount of work done, as long as it was a reasonable determination.

If the realtor determines that 90% or more of the services are performed before July 1, 2010, the H.S.T. will not apply. G.S.T. will continue to be charged at 5%.

For example, a listing commences June 1, 2010 and the realtor performs the initial work in taking the listing, placing it on MLS and all of the other functions. A Contract of Purchase and Sale is negotiated and subjects are removed prior to July 1, 2010. The Completion Date is July 2, 2010 at which point the commission becomes due and payable. Using either method of calculation more than 90% of the realtor’s services were performed prior to July 1, 2010. Thus only the 5% GST would apply on the commission.

If the realtor determines that less than 90% of the services were performed prior to July 1, 2010, the services and the resultant tax on the commission will have to be prorated as per the work that was performed. Let’s use two examples.

There are two different listings with the same realtor. The vendors are different but both are listed June 1, 2010 on MLS.

On the first listing, an offer comes in quickly and there is an accepted offer by approximately June 10. The Vendor is unable to vacate for a considerable period of time and therefore the Completion Date is September 1, 2010. In this example, the realtor would choose the actual amount of work done option which would be reasonable as most of the work would have been done in June prior to July 1, 2010. Therefore most of the commission would be subject to GST only.

For the second listing, a Contract of Purchase and Sale has its subjects removed on July 2, 2010 but the Completion Date is July 10, 2010. In this example, the realtor would in all likelihood choose the actual number of days listed option so that only about 25% of the commission would be subject to H.S.T.

Note that in any issue with taxes Revenue Canada may argue that more taxes ought to have been charged. Realtors should ensure proper notes and documentation is kept so that they can support their position of the percentage that was charged.
 
Posting courtsey of our associates at: http://www.bcrealestatelawyers.com
 

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