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June 22, 2009 No. 2009-20
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Ontario Releases HST Transitional Rules for Builders and buyers of new homes in Ontario will be affected by the province’s proposal to harmonize its retail sales tax with the federal goods and services tax. Ontario recently released transitional rules for some new housing transactions that will straddle July 1, 2010, the effective date of the harmonized tax. Ontario also proposed changes to the new housing rebate announced in its 2009 budget. Background — Ontario HST In its 2009 budget, Ontario proposed to harmonize its 8% provincial retail sales tax (RST) with the 5% federal goods and services tax (GST) to create a single, value-added HST at a 13% rate, effective July 1, 2010.
The Ontario HST will generally use the same rules and tax base as the GST. As a result, new homes in Ontario that are subject to GST will become subject to the provincial component of the HST as well. This TaxNewsFlash-Canada summarizes the proposed changes to the Ontario HST new housing rebate and some of the transitional rules proposed in Ontario Revenue’s Information Notice No. 2, released on June 18, 2009. References to “new homes” in this TaxNewsFlash-Canada include both newly constructed and substantially renovated homes. New housing rebate Under the enhanced rebate announced on June 18, 2009, the $500,000 threshold to qualify for a rebate will be eliminated. As such, new homes purchased as primary residences across all price ranges will qualify for a rebate of up to $24,000 of the 8% provincial component of the HST. The rebate will be 75% of the provincial portion of the HST payable on the purchase of a new home, up to a maximum rebate of $24,000 (i.e., $400,000 × 8% provincial component = $32,000 ×75% rebate = $24,000). New home buyers may also be eligible for the federal GST new housing rebate, which generally equals 36% of the tax paid on the first $350,000 of the purchase price. The amount of the GST rebate is phased out on a straight-line basis for homes priced between $350,000 and less than $450,000.
The Ontario HST rebate will be provided for the same types of new residential properties as the GST new housing rebate. Qualifying housing will include substantially renovated housing, co-operative housing, owner-built housing, housing on leased land, mobile homes and modular homes for use as primary residences. KPMG observation Similar to the GST system, Ontario proposes to limit the new housing rebate to homes for use as primary places of residences. As such, recreational properties such as cottages and ski chalets not used as primary residences would generally not qualify for the new housing rebate. New rental housing rebate The proposed rebate will apply for new rental housing, including investment properties to be rented out for use by the tenants as primary residences. This rebate will apply across all price ranges up to a maximum of $24,000. Landlords who purchase new rental homes will be eligible for the rebate, calculated as 75% of the provincial portion of the HST payable on the purchase of a new rental home, up to a maximum rebate of $24,000. Landlords who build their own rental homes and who would be subject to HST under self-supply rules will also be eligible for the rebate. In the case of traditional (non-condominium) apartment buildings, the rebate calculation will be based on the value of each rental unit rather than the entire apartment building. KPMG observation For example, if a landlord purchased a new taxable building with 10 apartments for $1 million, the rebate would be calculated based on a purchase of 10 apartments at $100,000 each. This example is simplified for illustration purposes — other areas in the building that are not for apartments, such as leased commercial space, would have to be taken into account in determining the value of each apartment. This rebate will be provided for the same types of new residential real properties for which a GST rebate is available. Qualifying housing will include substantially renovated rental housing, co-operative rental housing, additions to traditional apartment buildings, long-term residential care facilities, rental mobile homes and rental modular homes for use as primary residences. The rebate will also be available for leased land where the land is used for residential purposes. Transitional rules for residential
real property New homes The provincial portion of the HST will not apply to builders’ sales of new homes that are taxable under GST when, under a written agreement of purchase and sale, ownership or possession of the home is transferred before July 2010. New rental homes —
Builder-landlords These builders will be required to pay the provincial portion of the HST on the self-supply if they rent out the new homes or condos (or the first unit of a new traditional apartment building) after June 2010. If these builders rent out the homes before July 2010, they will not be required to pay the provincial portion of the HST on the self-supply. New rental homes —
Purchaser-landlords If under a written agreement of purchase and sale, ownership or possession of the home is transferred before July 2010, the provincial portion of the HST will not apply to builders’ GST-taxable sales of new homes. Grandfathering rules Transitional tax adjustment for
grandfathered homes However, for grandfathered homes, builders will generally be required to pay a “transitional tax adjustment” based on the completion of the home on July 1, 2010 to account for RST that would have otherwise been embedded in the grandfathered homes under the current RST system. The transitional tax adjustment for grandfathered sales of new single homes and condominiums will have different calculations for each category. For single homes (including single detached, semi-detached and attached homes), the builder will be required to pay a transitional tax adjustment, calculated as a percentage of 2% of the total purchase price of the home as established for GST purposes, based on the extent of the construction or substantial renovation completed as of July 1, 2010, as follows:
For example, a builder sells a new home to an individual purchaser for $500,000 plus $65,000 HST. If the home is 55% completed on July 1, 2010, the builder will be required to pay a transitional tax adjustment of $2,500 ($500,000 × 2% TTA rate = $10,000 × 25% TTA = $2,500). For condominiums, the builder will be required to pay a transitional tax adjustment of 2% of the total purchase price, as established for GST purposes, of the condominium unit or building, as applicable. However, the builder may be entitled to an RST transitional housing rebate. RST transitional housing
rebate The rebate will generally be available for non-grandfathered single homes, condominiums and traditional apartment buildings. The rebate will also be available for grandfathered condominiums for which the transitional tax adjustment would be payable (see above). For eligible HST-taxable single homes (including detached, semi-detached and attached homes and duplexes), the RST transitional housing rebate would be available to individuals purchasing the home (or builders who first rent the home) after June 2010. Individuals will have the option to apply for the rebate directly with the CRA or through the builder. Individuals will be required to obtain from the builder a certification of the percentage of completion of the home as of July 1, 2010 to make a claim with the CRA. The rebate will not apply to grandfathered homes. For eligible condominiums or traditional apartment buildings, the RST 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. Transitional rebate
calculations Ontario proposes two methods for eligible applicants to estimate the embedded RST content: the “floor space method” will be based on a prescribed amount per square metre of floor space in the home and the “selling price method” will be based on the selling price of the home (i.e., 2% of the price established for GST purposes). At the time of writing, the prescribed amount per square metre of floor space has not yet been announced. The rebate will be calculated based on the extent of construction or substantial renovation completed as of July 1, 2010, as follows:
For example, an individual purchases an eligible new home for $500,000 plus $65,000 HST. If the home is 55% completed on July 1, 2010, the individual may be entitled to a transitional rebate of $7,500 under the “selling price method” ($500,000 × 2% = $10,000 estimated RST content × 75% = $7,500). Ontario Revenue’s notice provides details on the proposed time period to file for the rebate. Eligibility for the RST transitional housing rebate will not affect the purchaser’s or builder’s ability to claim the new housing rebate or rental housing rebate, as applicable. Ontario also noted that more guidelines on this transitional rebate will be provided in the coming months. Transitional rules at a
glance Disclosure requirements
for agreements signed after June 18, 2009 If the builder does not make the disclosure as noted above, the stated price in the written agreement would be deemed to include the provincial portion of the HST and the purchaser would not be required to pay the provincial portion of the HST in addition to the stated price in the agreement. We can help |
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Information is current to June 19, 2009. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500. KPMG LLP, a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm affiliated with KPMG International, a global network of professional firms providing Audit, Tax, and Advisory services. Member firms operate in 145 countries and have more than 123,000 professionals working around the world. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. Each KPMG firm is a legally distinct and separate entity, and describes itself as such. KPMG's Canadian Web site is located at www.kpmg.ca © 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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