The “Tax Matters Examiner” is back from a relaxed work load this summer and will continue to provide information on the HST and other tax matters. The introduction of the HST on July 1, 2010 had a major impact on sale of residential housing. Under the RST, the house builder paid the 8% RST only on his cost of materials. His profit and labor were not included in the tax base. At first glance, the introduction of the HST, which means that both the builder’s profit and labor will be subject to an additional 8% tax grab appears to have a detrimental effect on the price of housing purchased after July 1.
However, the truth is not so obvious and the impact of the 36% New housing rebate and the introduction of a similar provincial rebate for the 8% provincial portion somewhat levels the playing field. In the highly competitive new housing sales market, the fact that house builders may now also claim the full 13% input-tax credit (instead of 5%) on all their operating costs also contributes to removing the “sting” of the introduction of the HST on new houses sales. In fact many feel that the introduction of all these “transition” measures can amount to actual savings by the new house buyer compared to the previous tax regime. In fact, since the transitory rebates decreases with the price of the house purchase, there is no global answer. Some may actually pay less for an identical house bought after July 1, once all these tax rebates are taken into account. On the other hand, there is no doubt that persons buying houses at prices exceeding $500,000 will have paid more taxes.
Which brings us to “Grandparented agreements”. This is one of the transition measures undertaken to reduce the impact of the introduction of the HST. When a written agreement for the sale of a residential unit was entered into before June 18, 2009 in Ontario or November 18, 2009 in BC, such contracts are “grandparented” (grandfathered for the sexist…) and therefore not subject to the HST but only to the GST where both the transfer and ownership of property happens after June 2010. Accordingly, if anyone paid 13% HST on houses of which they have taken possession on or after July 1, 2010, they should monitor the date of their initial written agreement as they may be entitled to a refund of tax.
Please note that this does not apply to multiple unit residential complexes (including duplexes) or to mobile and modular homes. These rules generally apply to sales of residential condominium units and condominium complexes and to sales of single unit residential complexes (detached,semi-detached, units in a row houses) made to individuals.
Often forgotten negative impact for the housebuilder: TTA
This “grandparented agreement” rule, however may have a not so evident negative impact for the housebuilder. It is called the “Transitional Tax Adjustment” or TTA. It is presumed that the housebuilder fixed his selling price (before entering into a contract on or before June 18, considering the fact that he would pay the 8% RST on his construction materials. However, to the extent that the house is completed (and materials purchased) after July 1, the builder has a benefit because he does not have as a cost the 8% on construction materials purchased after July 1. The government therefore forces the housebuilder to pay this “Transitional Tax Adjustment” with respect to such granparented agreement, to the extent that the construction is completed after July 1.
How the TTA works:
The TTA is based on the consideration (selling price) for the house multiplied by a percentage determined by the degree of completion of the housing project on July 1. TTA rates are as follows
- less than 10% completed: TTA at 2.0%
- Between 10% and 25% completed: TTA at 1.5%
- Between 25% and 50% completed: TTA at 1.0%
- Between 50% and 90% completed TTA at 0.5%
- 90% or more completed: TTA at 0.0%
It is the responsibility of the housebuilder to determine “in a reasonable manner” the degree of completion of the grandparented housing project. The TTA tax must be remitted in the same period where the tax (GST) is payable on the grandparented housing project.
While the TTA rates are not important, compliance with these rules is sure to be monitored by CRA and non-payment of the TTA could add up considering the usual interest and penalties.
And they said the GST was simple…..