Transitional HST Rules Demystified
January 22, 2010
Effective July 1, 2010, British Columbia will harmonize its provincial sales tax (PST) with the federal goods and services tax (GST). The resulting BC harmonized sales tax (HST) will apply at the rate of 12 per cent, with a federal component of five per cent and a provincial component of seven per cent, and will apply to the same tax base as the GST, with some limited point-of-sale rebates.
Transitional rules for the implementation of the HST were released on October 14, 2009, but they did not address new residential housing pending further consultation with the real estate community. On November 18, 2009, BC released the transitional rules for new residential housing and the details of various HST new housing rebates and related PST rebates. Full details of the transitional rules are on the BC government’s HST website.
The following is a summary of the rules that will be of most immediate interest to real estate developers and landlords based on the narrative of the government’s notice announcing the transitional and rebate rules.
Sale of New or Substantially Renovated Residential Housing
The sale of newly constructed or substantially renovated residential housing will be "grandparented" if a written agreement of purchase and sale was entered into on or before November 18, 2009, and both ownership and possession of the home are transferred to the purchaser on or after July 1, 2010. Such a sale will be subject to the five per cent federal component of the HST, but not the seven per cent provincial component.
For agreements entered into after November 18, 2009, the provincial component of the HST will apply if both ownership and possession are transferred on or after July 1, 2010. However, it will not apply if either ownership or possession is transferred before July 1, 2010 based on the general rule for real property that GST/HST applies on the earlier of the transfer of ownership or possession (in other words, if either ownership or possession transfers before the July 1, 2010 implementation date, the seven per cent provincial component of the HST will not apply).
Assignments of Purchase Agreements
If a written agreement of purchase and sale for a newly constructed or substantially renovated home was entered into on or before November 18, 2009 and is subsequently assigned by the purchaser, then the assignee may benefit from the grandparenting rules if (i) there is no novation of the contract; (ii) the purchaser and the original builder dealt with each other at arm’s length, and are not "associated persons" (as defined in the Excise Tax Act); and (iii) neither the original builder nor any specified related party acquires or reacquires any legal or beneficial interest in the home (such as an option to purchase or a right of first refusal). These rules may also apply to a subsequent assignment by the first assignee if these conditions are met.
Developer Disclosure Requirements during the Transitional Period
If a written agreement of purchase and sale for a newly constructed or substantially renovated home is entered into after November 18, 2009 and before July 1, 2010, the developer must disclose in the agreement whether the provincial component of the HST applies to the sale and, if so, whether the stated purchase price includes the provincial component, net of the BC new housing rebate, and the PST transitional new housing rebate (described below). If the developer does not do so, the purchase price will be deemed to include the provincial component of the HST, and the developer will have to absorb and pay the tax from proceeds it would otherwise retain. Depending on the terms of the developer’s financing commitment, this could create a shortfall in the amount the developer is required to remit to its lender from each sale.
The government materials released to date do not state whether builders will have to absorb the HST if they do not make similar disclosure in agreements entered into on or after July 1, 2010 once the HST is in force. It is likely that, unless the agreement provides otherwise, the tax will be payable in addition to the purchase price under such agreements (as is the case now in respect of the GST). However, to avoid uncertainty and disputes, developers should nonetheless ensure that the agreement is very clear regarding liability for the HST.
HST New Housing Rebates
New homes, including single-unit houses, residential condominiums and duplexes, purchased by an individual as a primary residence for the individual, or a relation of the individual, will qualify for a rebate of 71.43 per cent of the provincial component of the HST paid, up to a maximum rebate of $26,250. All new homes priced above $525,000 will be eligible for the maximum rebate amount of $26,250.
A new housing rebate will also be available for new homes on leased land (which would include leasehold strata lots) purchased by an individual for use as a primary place of residence for that individual or a relation of the individual. The rebate will be 4.47 per cent of the price attributable to the building, up to a maximum rebate of $26,250 for homes priced at $588,000 (this figure is different from the maximum rebate for homes on fee simple land due to the different rebate calculation formula).
HST New Rental Housing Rebates
In addition to the new housing rebates, BC will also offer a new HST rental housing rebate to landlords who construct or substantially renovate their own rental housing and, as a result, would be required by the self-supply rules to self-assess and pay the HST when they first rent out the property. The rebate will also be available to landlords who purchase newly constructed or substantially renovated rental housing and pay the HST on the purchase (a similar rebate already applies to the GST). The new rental housing rebate will mirror the new housing rebate insofar as it will be calculated as 71.43 per cent of the provincial component of the HST paid, up to a maximum rebate of $26,250. This enhanced rebate will apply regardless of the price or fair market value of the new rental homes or units. For multiple-unit rental housing, the maximum rebate amount of $26,250 applies for each eligible unit.
PST Transitional New Housing Rebate
Newly constructed or substantially renovated homes fully or partially completed prior to July 1, 2010 will have the PST embedded in the price of the homes since building materials used in the construction of homes are subject to the PST. If sales of these homes are subject to the provincial component of the HST on or after July 1, 2010, then the PST transitional new housing rebate will be available to purchasers of newly constructed or substantially renovated single-unit homes, and to builders of newly constructed or substantially renovated residential condominiums or apartment buildings. The PST transitional new housing rebate is meant to reflect a proportion of the estimated embedded PST based on the degree of completion of the construction or substantial renovation of the building component of the home as of July 1, 2010.
Eligible applicants will be permitted to calculate the estimated embedded PST by choosing either the Floor Space Method ($60 per square metre of floor space in the home) or the Selling Price Method (two per cent of the total value of consideration or fair market value, as the case may be, established for GST purposes).
The PST Transitional New Housing Rebate must be applied for before July 1, 2014, subject to possible extension in extenuating circumstances.
Commercial and Non-Residential Real Property Sales
For sales of commercial and non-residential real property, the provincial component of the HST will generally apply if both ownership and possession of the property are transferred to the purchaser on or after July 1, 2010. For example, if a corporation enters into an agreement to sell a shopping centre on January 1, 2010, and the transaction closes on August 16, 2010, then the HST will apply to the sale since ownership and possession of the shopping centre were transferred after July 1, 2010. The provincial component of the HST will not apply if either ownership or possession is transferred before July 1, 2010. There are no grandparenting rules applicable to commercial and non-residential real property based on the date the agreement is entered into as there are for new and substantially renovated residential housing. However, the self-assessment rules for HST-registered purchasers will apply, allowing these purchasers to offset the HST payable by any available input tax credit in the same way that the GST is currently offset.
Commercial and Non-Residential Real Property Leases
Where commercial and other non-residential real property is supplied under a lease, licence or other similar arrangement, landlords will generally be required to collect the HST on rent that is due on or after July 1, 2010, or that is prepaid for any period on or after July 1, 2010, unless the prepayment was made on or before October 14, 2009, when the general transitional rules were originally announced.
With respect to rental periods that straddle the July 1, 2010 implementation date, only the rent for the period on or after July 1, 2010 will be subject to the HST ─ unless the rental period begins before July 1, 2010 and ends before July 31, 2010. With respect to rent that is due, or prepaid, on or after May 1, 2010 and before July 1, 2010, the HST will apply to the part of the rent that relates to the period that occurs on or after July 1, 2010, unless the rental period begins before July 1, 2010 and ends before July 31, 2010.
Certain businesses and public service bodies may also be required to self-assess the BC component of the HST on rent that is due, or prepaid, after October 14, 2009 and before May 1, 2010, if the consideration is for part of a rental period that occurs on or after July 1, 2010 (subject to the exception for rental periods beginning before July 1, 2010 and ending before July 31, 2010).
Commercial parking and short-term accommodation rentals (such as hotel rooms) will be treated as leases for the purposes of the transitional rules.