November 19, 2009

No. 2009-34

B.C. Releases HST Transitional Rules for
New Home Builders

Builders and buyers of new homes in British Columbia will be affected by the province’s proposal to harmonize its provincial sales tax with the federal goods and services tax. Today B.C. released amendments to the new housing rebate together with the transitional rules for new housing transactions that will straddle July 1, 2010, the effective date of the harmonized tax.

This TaxNewsFlash-Canada summarizes the B.C. HST new housing rebate and the transitional rules proposed in a B.C. Ministry of Finance News Release dated November 19, 2009 and an accompanying HST Notice #3 dated November 18, 2009 (the Notice). References to “new homes” in this TaxNewsFlash-Canada include both newly constructed and substantially renovated housing.

New housing rebate
B.C. proposes to provide qualifying new home buyers a rebate of the provincial component of HST equal to 5% of the purchase price of new homes, including mobile and floating homes. When B.C. originally announced its intent to harmonize on July 23, 2009, the full rebate was to have applied to homes priced up to $400,000. New homes priced in excess of $400,000 were to be eligible for a flat $20,000 rebate.

In response to industry concerns regarding the impact of the HST on new housing in B.C. markets with relatively high new home prices, B.C. today announced that the threshold will be increased to $525,000. New homes purchased for $525,000 or more will be eligible for a flat rebate of $26,250.

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.

New rental housing rebate
B.C. proposes an HST rebate for new rental housing similar to the rebate for new homes.

The proposed rebate will apply for new rental housing 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 $26,250.

Landlords who purchase new rental property will be eligible for the rebate, calculated as 5% of the purchase price of a new rental property, up to a maximum rebate of $26,250. Landlords who build rental housing and will be subject to HST under the “self-supply” rules will also be eligible for the rebate.

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 floating homes for use as primary residences. A rebate will also be available for leased land where the land is used for residential purposes. This rebate will be 5% of the lease amount up to a maximum of $8,663.

B.C.’s transitional rules for residential real property

New home sales
Generally, sales of new homes will be subject to HST when both ownership and possession of the home are transferred after June 2010, subject to the grandfathering rules outlined below.

The provincial portion of the HST will not apply to builders’ sales of new homes that are taxable under the 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
Builders of new single homes or residential condominiums who rent out their new homes or condos (or, in the case of new traditional apartment buildings, the first unit in the building) are generally required to self-assess GST when they rent out the homes under the “self supply” rules.

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.

Grandfathering rules
Under the proposed 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 providing that:

·         there is no novation of the agreement,

·         the original purchaser and the original builder are persons who are not associated persons and who are dealing at arm’s length, and

·         the original builder or any specified related party does not acquire or reacquire by way of sale any legal or beneficial interest in the home.

The Notice also sets out situations in which taxable re-sales of new homes may be grandfathered where the original purchase and sale agreement was entered into on or before November 18, 2009.

Grandfathering will not apply to traditional apartment buildings, duplexes, mobile homes, floating homes and homes built by owners for their individual use. However, these homes may qualify for one or more of the PST transitional new housing rebates described below and the B.C. new housing rebates described above.

Transitional tax adjustment for grandfathered homes
Builders will be entitled to recover the provincial portion of the HST payable on their expenditures by claiming input tax credits (ITC), subject to the restrictions on claiming the provincial portion of the HST on certain purchases applicable to large businesses (those with annual GST/HST taxable revenues in excess of $10 million).

However, for grandfathered homes, builders in B.C. will generally be required to pay a “transitional tax adjustment” based on the completion of the home on July 1, 2010 to account for PST that would have otherwise been embedded in the grandfathered homes under the current PST system.

The transitional tax adjustment for grandfathered sales of new single homes and condominiums will have different calculations for each category.

Grandfathered single unit homes
For grandfathered single unit 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 greater of the purchase price and the fair market value of the home as at July 1, 2010, assuming the home was substantially complete as of that date, based on the extent of the construction or substantial renovation completed as of July 1, 2010, as follows:

For example, where a builder entered into an agreement to sell a new home to an individual purchaser for $500,000 on or before November 18, 2009 for completion in October 2010 and the home was 55% completed on July 1, 2010, the builder will be required to pay a transitional tax adjustment of $2,500 ($500,000 × .5% = $2,500).

Grandfathered condominiums
For grandfathered condominiums, the builder will be required to pay a transitional tax adjustment of 2% of the greater of the sale price and the fair market value of the home as at July 1, 2010, assuming the home was substantially complete as of that date, of the condominium unit or building, as applicable. However, the builder may be entitled to the PST transitional housing rebate.

PST transitional housing rebate
B.C. has proposed a 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.

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 in respect of which the transitional tax adjustment would be payable by the builder (see above).

For eligible HST-taxable single homes (including detached, semi-detached and attached homes and duplexes), the PST 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 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.

Transitional rebate calculations
The PST transitional rebate will be based on the proportion of the estimated embedded PST in the home and on the degree of completion of the home as of July 1, 2010.

B.C. proposes two methods for eligible applicants to estimate the embedded PST content: either an amount based on a prescribed amount of $60 per square metre of floor space in the home or an amount calculated as 2% of the total value of consideration or fair market value, as the case may be.

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 $60,000 HST in October 2010. If the home was 55% complete 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 PST content × 75% = $7,500).

The PST transitional new housing rebate will be administered by the CRA. As a condition of obtaining the rebate, a builder will be required to obtain a “clearance certificate” from the province and attach it to the first PST transitional new housing rebate application submitted to the CRA. Generally, a clearance certificate will be provided where a builder has no outstanding provincial tax debts.

Disclosure requirements for agreements signed after November 18, 2009
B.C. has proposed the following disclosure requirements for purchase and sale agreements entered into after November 18, 2009 and before July 1, 2010. In such cases, the builder is required to disclose in the written agreement whether the provincial portion of the HST will apply to the sale and, if so, whether the stated price in the agreement includes the applicable provincial portion of the B.C. HST, net of the B.C. new housing rebate and the PST transitional new housing rebate, where applicable.

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
Your KPMG adviser can help you with this or other provincial or federal indirect tax matters that may affect your real estate development business. We can also keep you abreast of the progress of the B.C. tax harmonization proposals as they make their way into law. For details, contact your KPMG adviser. 

Information is current to November 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.

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