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Ontarios New Harmonized Sales Tax and Real Estate

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The Ontario government has now passed legislation and signed a HST integration and coordination agreement with the Federal government that will harmonize the 8% provincial Retail Sales Tax (RST) with the 5% federal Goods and Services Tax (GST) to form a new 13% Harmonized Sales Tax (HST), effective July 1, 2010 (the “Implementation Date”).

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.

APPLICATION OF THE HST TO COMMERCIAL REAL PROPERTY

What is the Treatment of Commercial Real Property under the HST?

The definitions in the Excise Tax Act, R.S.C. 1985, c. E-15 (the “Excise Tax Act”) relating to real property and the Canada Revenue Agency’s (CRA’s) current policies regarding the application of the GST to sales of real property will apply under the HST. The HST at 13% will generally apply to the sale of commercial and other nonresidential real property, including retail and industrial properties, as well as vacant land for future development.

Corporations in the business of developing commercial properties and selling them in the course of commercial activities, that are registered for GST/HST purposes and claim  input tax credits (ITCs) for the 5% GST that they pay on construction inputs, will be entitled to claim ITCs for the 13% HST payable on construction inputs. Under the new HST regime, developers will be entitled to claim ITCs to recover the 13% HST paid or payable on most purchases of construction inputs and operating expenses used to construct commercial properties. Many of these inputs are currently not taxable under the RST structure. For example, under the HST regime, a developer would claim ITCs for the HST paid or payable on:

  • a lease of commercial real property for use as an office or storage;
  • building materials;
  • plumbing and electrical subcontracts;
  • inspection services; and
  • legal and accounting services.

How Soon Will the HST Apply to a Sale of Commercial Real Property?

Generally, the HST will apply to a taxable supply by way of sale of non-residential real property where both ownership and possession of the property are transferred to the purchaser on or after July 1, 2010. Where either ownership or possession of the real property transfers before July 2010, the HST would not apply to the sale. However, the GST at 5% would still apply to such a sale.

For sales of non-residential real property, the date the agreement of purchase and sale is entered into does not affect the application of the HST. There is no grandparenting provision for sales of non-residential real property as there is for certain sales of new housing. For information on grandparenting in respect of housing, please see the section below on grandparented sales of new housing.

APPLICATION OF THE HST TO NEW RESIDENTIAL REAL PROPERTY

What is the Treatment of Sales of Residential Housing under the HST?

The HST will apply to a builder’s sale of a newly constructed or substantially renovated residential complex, including a multiple unit residential complex (e.g., an apartment building). The sale of housing that has been previously occupied by an individual as a place of residence and that is exempt from GST would also be exempt for purposes of the HST.

How soon will the HST Apply to a Sale of New Residential Real Property?

Generally, the HST will apply to a builder’s taxable supply by way of sale of a newly constructed or substantially renovated residential complex where both ownership and possession of the complex are transferred to the purchaser 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.

When would the HST Not Apply to a Sale of New Residential Real Property?

The HST would not apply to a builder’s taxable supply by way of sale of a newly constructed or substantially renovated residential complex where either ownership or possession of the complex is transferred, under a written agreement of purchase and sale, to the purchaser 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.

The HST would also not apply if the sale of the newly constructed or substantially renovated residential complex is grandparented (see the section below on grandparented houses). In this case, GST at 5% would apply to the sale of the residential complex.

What is a Grandparented Sale of a House?

Where a written agreement of purchase and sale for a newly constructed or substantially renovated detached house, semi-detached house, attached house, residential condominium unit or condominium complex was entered into on or before June 18, 2009, the sale would generally be grandparented if both ownership and possession of the housing is transferred to the purchaser, under the agreement, after June 2010. In this case, the provincial component of the HST (i.e. 8%) would not be payable on the sale. Only the federal component of the HST would apply (i.e. 5%). In the case of a detached house, semidetached house or attached house, residential condominium unit or condominium complex, the purchaser must be an individual in order for the grandparenting rule to apply.

While the grandparented sale of housing is not subject to the HST, the builder would be required to remit a transitional tax adjustment if the construction straddles the Implementation Date. This transitional tax adjustment is intended to approximate the amount of the RST that would have been paid in respect of the construction costs incurred after June 2010, unless the construction of the housing is 90% or more complete on July 1, 2010. The chart below provides a summary of the transitional rules and their applicable timeframes:

Date of Agreement of Purchase and Sale Possession Transferred to Purchaser Ownership Transferred to Purchaser Applicable Tax
June 18, 2009 or earlier After June 2010 After June 2010 5% GST

(Grandfathered Sale)

June 19, 2009 or later After June 2010 After June 2010 13% HST
June 19, 2009 or later Before July 1, 2010 Before July 1, 2010 5% GST
June 19, 2009 or later Before July 1, 2010 After July 1, 2010 5% GST

 

What is the Ontario New Housing Rebate?

Under the HST, the Ontario government will provide a new housing rebate (the “NHR”) for the same types of new residential housing for which a rebate is available under the GST. As such, the NHR is available for new homes purchased as primary residences across all price ranges. However, the NHR is available only in respect of the provincial component of the HST paid on the purchase of a newly constructed or substantially renovated house. Such homes will qualify for a rebate of up to $24,000.

The effect of the NHR will be to apply the provincial component of the HST at a rate of two per cent on the first $400,000 of the purchase price of a new home and at a rate of eight percent on the portion of the purchase price above $400,000. The rebate will be calculated as 75 per cent of the provincial component of the HST payable on the purchase of a new home, up to a maximum rebate of $24,000.

What are the New Disclosure Requirements for Builders under the Transitional Rules for Sales of New or Substantially Renovated Housing in Ontario?

If a written agreement of purchase and sale for a newly constructed or substantially renovated home is entered into after June 18, 2009 and before July 1, 2010, the builder is required to disclose in the written agreement whether the provincial component of the HST would apply to the sale and, if so, whether the stated price in the agreement includes the applicable provincial component of the HST, net of the Ontario NHR. If the agreement does not do so, the builder cannot pass on to the purchaser the additional cost.

If the transaction would be subject to the provincial component of the HST and the builder did not make the disclosure as outlined above, the stated price in the written agreement would be deemed under the transitional rules to include the provincial component of the HST. In such a case, the purchaser would not be required to pay the provincial component of the HST in addition to the stated price in the agreement. This is required in addition to any current GST disclosures. As such, builders will want to ensure these disclosures are included in all their agreements going forward after June 18, 2009, unless the buyer will be taking legal ownership or possession before the Implementation Date.

LEASES1 OF NON-RESIDENTIAL REAL PROPERTY

What is the Treatment of Leases of Non-Residential Real Property under the HST?

The GST currently applies to leases of non-residential real property, with few exceptions. Leases of non-residential real property are currently exempt from RST. Under the new HST regime, HST at 13% will generally apply to the lease of non-residential 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. The definitions in the Excise Tax Act that relate to real property and the CRA’s current policies regarding the application of the GST to real property leases would generally apply under the HST. Regardless of when the parties entered into the lease agreement and when possession is given, each lease payment that becomes due on or after July 1, 2010, and is wholly attributable to a period after June 2010, would be subject to the HST.

When Would the HST Apply to a Taxable Lease of Commercial Real Property?

The following rules apply based on the earlier of the date the consideration for the lease, licence or similar arrangement becomes due and the date the consideration is paid without having become due.

Lease Payment Due or Paid Without Having Become Due On or After July 1, 2010

Generally, the HST would 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 is interval, that begins on or after July 1, 2010. However, the HST would not apply to a lease payment for a lease interval beginning before July 2010 and ends before July 31, 2010.

Lease Payment Due or Paid Without Having Become Due On or After May 1, 2010 and Before July 2010

Generally, the HST would apply to any lease payment that becomes due, or is paid without having become due, during the period after April 2010 and before July 2010, to the extent the lease payment is attributable to a lease interval, or any part of a lease interval, that begins on or after July 1, 2010 (other than a lease interval that begins before July 2010 and ends before July 31, 2010). In these situations, a lessor would be required to account for the provincial component of the HST in its GST/HST return for the reporting period that includes July 1, 2010. If eligible, a lessee would be entitled to claim any corresponding ITC in its GST/HST return for the reporting period that includes July 1, 2010.

WHERE DO WE GO FROM HERE?

Builders and developers who have not yet reviewed and amended the tax clauses of their residential agreements of purchase and sale should do so now to ensure that the clause adequately deals with the HST and properly reflects assignment of the rebate. All interested parties should be cognizant of the fact that the HST regime remains a work in progress and additional rules will be released in March which will undoubtedly impact the rules outlined above. Pallett Valo LLP’s Commercial Real Estate Practice will continue to track new development attributable to a lease interval, or any part of a lease.

 


1 In this Newsletter, references to a lease include a licence or similar arrangement.


Pallett Valo LLP Commercial Real Estate Practice

We have experience in all areas of Real Estate Law, from the most complex joint ventures and land development projects to routine commercial purchase, sale and mortgage transactions. We assist our clients as they structure and negotiate their projects, and we strive to creatively and effectively overcome any obstacles which arise during the course of a transaction. Our “outside the legal box” thinking and practical, business approach allows us to best serve and protect our clients.

Areas of Practice Include:

  • Commercial and Residential Land Development
  • Commercial Transactions
  • Construction Contracts
  • Leasing
  • Rezoning and Minor Variance Applications
  • Builder Sales
  • Condominium Development
  • Joint Ventures
  • Severance Applications
  • Mortgage Financing
Ray Mikkola rmikkola@pallettvalo.com
Direct Dial: 905.273.3022 Ext. 276
Murray Box mbox@pallettvalo.com
Direct Dial: 905.273.3022 Ext. 240

This article provides information of a general nature only and should not be relied upon as professional advice in any particular context. For more information about the HST and Commercial Real Estate, contact a member of our Commercial Real Estate Practice at 905.273.3300.

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We have used over 10 Pallett Valo lawyers on different matters and find that they are always responsive.
Dr. Don Pinchin, Pinchin Environmental Ltd.