Real Property and the New Ontario Harmonized Sales Tax 

publication 

May 2010 - (Lang Michener LLP Real Estate Brief Spring 2010)

Lang Michener LLP Real Estate Brief Spring 2010

As announced in the 2009 Ontario Budget, the Ontario government will be implementing a Harmonized Sales Tax ("HST") regime whereby the 8% Provincial Sales Tax ("PST") will be combined with the 5% Federal Goods and Services Tax ("GST") to create a 13% HST. This new tax regime will become effective July 1, 2010.

The new HST will generally apply in the same manner as the GST to goods and services supplied in Ontario, including transactions involving the sale of new residential real property, commercial real property and lease payments under commercial leasing arrangements.

Residential Properties

New Homes and Condominiums

Under the current tax regime, the sale of new homes and condominiums is subject to GST but is not subject to PST. However, under the new tax regime, 13% HST will be charged on the entire purchase price of any new home or condominium, less any applicable rebates.

Ontario announced that it will provide a rebate of 75% of the provincial portion of the HST on new or substantially renovated homes, on the first $400,000 of the purchase price, regardless of the total price. This works out to a fl at rebate of $24,000 (or 6%) on the first $400,000 of the purchase price of a new or substantially renovated home.

There are two ways in which buyers can claim the new housing rebate. Builders can either credit it to buyers on closing as they currently do with the GST New Housing Rebate, or, alternatively, buyers could apply to the Canada Revenue Agency for the rebate after closing.

Transitional Rules

HST will apply to the sale of a new or substantially renovated home where both ownership and possession of the home are transferred after June 2010. An exception exists if, among other conditions, a written agreement of purchase and sale was entered into on or before June 18, 2009.

HST will not apply to the sale of a new or substantially renovated residential home where either ownership or possession of the home is transferred to the purchaser under a written agreement of purchase and sale before July 2010, regardless of when the parties entered
into the agreement of purchase and sale. In this case, only GST at 5% would apply.

Resale Homes and Condominiums

As sales of resale homes or condominiums are currently generally exempt from GST, the Ontario government has confirmed that HST will also not apply to the sale of resale homes or condominiums.

Although resale residential will be exempt from HST, starting July 1, 2010, the costs associated with the real estate services required to close a resale transaction will be subject to HST (not just GST as in the past). For instance, real estate commissions, legal fees and disbursements, surveyor charges, appraisal fees, home inspections and home energy audits will all be subject to HST.

Commercial Properties

Sales of non-residential real property in which ownership and possession are transferred after July 1, 2010 will be subject to HST. Where either ownership or possession of the real property occurs before July 2010, HST would not apply to the sale, however, GST at 5% would still apply. There are no grandparenting provisions for the sale of non-residential real property.

The purchaser will be entitled to an input tax credit for the HST and the self assessment rules that have been applicable to GST on real property purchases will now apply to HST.

Property Leases

Leases of non-residential real property are currently exempt from PST, but are subject to GST. Under the new HST regime, HST at 13% will generally apply to the lease of nonresidential real property made by a GST/HST registrant. Leases of real property that are currently exempt under the GST rules would also be exempt under the HST rules. As well, input tax credits for commercial tenants will generally follow the existing GST treatment.

HST will apply to any lease payment that becomes due, or is paid without having become due, on or after July 1, 2010, to the extent that the lease payment pertains to the lease period
that begins on or after July 1, 2010. HST will also be collectible by the landlord on consideration that becomes due, or is paid without becoming due, between May 1, 2010 and July 1, 2010 to the extent it relates to lease payments for periods on or after July 1, 2010. However, notwithstanding the July 1, 2010 start date, HST will not apply to a lease payment for a lease period beginning before July 2010 and ending before July 31, 2010.

Under the new HST regime, long-term residential leases for residential property will be exempt from HST as they are under the current GST regime. However, many of the services paid for by residential landlords that have not typically been subject to PST will be subject to HST such as property management fees, maintenance costs, repair services and electricity. As such, residential landlords may face significantly higher costs once HST takes effect.

How to Prepare for HST

Although HST does not take effect until July 1, 2010, it is important that those in the real estate industry start to think about the transition to HST. As illustrated above, the requirement for landlord's to charge HST can start as early as May 1, 2010. As such, landlords should ensure that any offers to lease, letters of intent and leases that will be in effect as of July 1, 2010 properly address HST. Many standard form leases provide that the tenant will be responsible to pay the GST, but should be reviewed to see if they are broad enough to capture HST.

With respect to the sale of new residential homes and condominiums, builders and developers should ensure that tax clauses in their agreements of purchase and sale adequately deal with HST including addressing the tax rebate.

The HST regime is still unfolding and those in the real estate industry will have to pay close attention to the additional rules which will be released by the Ontario government over the coming months.

By Matthew German

This article appeared in Lang Michener's Real Estate Brief Spring 2010.