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HST & Residential Real Estate

Ontario has in place a Harmonized Sales Tax (HST), which effectively combines the Goods and Services Tax (GST at 5%) with Provincial Sales Taxes (PST at 8%). In Ontario, the HST total is currently 13%. HST and/or its components (GST/PST) show up in residential real estate in several ways: (I'm highlighting a few)
 

1. RESALE RESIDENTIAL PROPERTIES

First, the good news! You do not have to pay HST on the purchase price of a resale residential property. However, a "substantially renovated" home (including condos) is treated in the same manner as buying new construction from a builder and HST will generally apply to the purchase; you'll read about this in the next section. I mention this because many folks buy a resale home, make substantial renovations to it and subsequently sell it. 

Revenue Canada defines "resale residential property" to include a previously occupied house, condominium, summer cottage, vacation property or non-commercial hobby farm. Land may also be exempt from tax.
 

2. PRE-CONSTRUCTED OR NEWLY CONSTRUCTED RESIDENTIAL PROPERTIES

The purchase of a pre-constructed or newly constructed home (including a condominium) is subject to HST (unlike the purchase of a 'resale' that hasn't been substantially renovated). A pre-constructed or newly constructed home can be purchased as one's primary place of residence or for investment purposes, such as for rental purposes. 

If a residence being purchased has been substantially renovated, it will be treated in the same manner as buying new construction from a builder and HST will generally apply to the price paid.  A 'substantial renovation', refers to a renovation where at least 90% of the interior of a building (excluding the foundation, external walls, internal supporting walls, roof, floors and staircases) has been removed or replaced (CRA Bulletin B-092). In the case of condominiums, the interior of a building excludes the common areas.

A rebate is available and it reduces a portion of the HST typically included in the purchase price. The rebate potentially consists of two components; one is for the GST (federal portion) and the other for the PST (provincial portion). There are several qualifying requirements but EITHER the buyer will use the unit as their primary residence (click here if this applies to you) OR the buyer will rent out the unit for at least one year from the time of ownership (click here if this applies to you). Each option has different implications & it's important to let the builder (as well as your lawyer and lender) know your intention from the outset.

Many builders show a purchase price net of the HST rebate to make the pricing more enticing for Buyers (this is almost an industry norm) and in turn they have the buyer assign any rebates due over to the builder; this is typically a clause in the Purchase and Sale Agreement. The builder/developer presumes the buyer will meet the criteria but what if it turns out the buyer fails to qualify for the GST/PST rebates? Unfortunately, the GST/PST rebate will be owed to the Canada Revenue Agency (CRA) and you, the buyer will have to "pony" up a significant amount of cash that you didn't budget for!

The key takeaway is that the developer/builder presumes the Buyer will qualify for the HST rebate! Therefore, always make sure that you know the amount of taxes and HST rebate included in your purchase price as well as the eligibility criteria for the rebates.

With a knowledgeable real estate agent on your side. the above situation can be avoided.

For those of you interested in roughly estimating the amount of the GST/PST rebate as it relates to newly constructed homes, please keep on reading....The rules are complex and a knowledgeable lawyer should be consulted.

How to very roughly estimate your GST Rebate: (newly constructed homes)

What I'd like you to know are a few important things: (there are formulae but let's not get in the weeds)

• The GST rebate is 36% of the GST payable on the first $350,000 of the 'base' price (see next bullet point for definition) which is reduced to NIL as the 'base' price increases from $350,000 to $450,000, with no GST rebate after a 'base' price of $450,000 (not even a partial amount).
• The 'base' price excludes any taxes/rebates; sometimes referred to as 'consideration'.
• The maximum amount of the GST rebate (federal portion of the rebate) is $6,300 (occurs at a 'base' price of $350,000).    The 'base' price is different than the price that is typically quoted by the builder (referred to as the 'SPNR' or selliing price net of rebate.  

How to roughly estimate your PST Rebate: (newly constructed homes)

Purchasers may recover 75% of the 8% provincial portion up to a maximum rebate of $24,000; achieved at a 'base' price of $400,000. In other words, the provincial portion of the rebate doesn't apply to any 'base' price in excess of $400,000.

Example

Assume the base price from a builder is $500,000 (this is the price excluding any taxes/rebates)

Determine the HST

GST   $25,000 ($500K x 5%)
PST   $40,000 ($500K x 8%)
Total  $65,000

Determine the Rebate

GST $0   (No rebate when the base price equals or exceeds $450K)   
PST  $24,000 ($400K x 75% x 8%); recall that the government offers a rebate on the first $400K only)
Total $24,000

The net HST payable (after the rebate of $24,000) is $41,000 (65K - $24K). Purchase price = $541K ($500K base price + $41K net HST).

Most builders/developers will show the purchase price net of the amount of the PST/GST rebate ($541K in our example), under the assumption that the buyer will fulfill the requirements entitling them to the rebate. If the buyer fails to fulfill the rebate requirements, the buyer will owe the amount of the rebate! In my example, this would be $24K! The key takeaway (from this section) is to understand whether the price you are being quoted from the builder includes the net GST/PST or not & to know the amount of any taxes and rebates. Beware!

Primary Residence Requirement

To be eligible for the HST home rebate, a new house or condo unit must be used as the primary place of residence by the purchaser or their immediate family (meaning people related by blood, marriage, common-law partnership, or adoption). There are a number of factors considered by the CRA when determining whether or not a house is a person's primary residence. These factors include how long the individual has lived in the unit, whether the person considers the house as their main residence, and if they have used that address on any personal or public records such as a driver's license, etc. Home and condo builders in southern Ontario typically credit the total amount of a buyers' HST home rebate towards the purchase price of the house. In rare circumstances, the builder will pay the rebate directly to the purchaser. This can provide the buyer with enough money to furnish their new property without requiring a cash back mortgage.

If you purchase newly constructed real estate in Ontario and want to qualify for the HST rebate new home program, you must use the property as the primary place of residence for yourself or someone closely related to you such as a child, grandchild, grandparent, brother, sister, or someone you are related to by marriage or common-law partnership. Friends, business associates, and even uncles, aunts, nephews, nieces, and cousins are all excluded from eligibility. 

HST Rebates on New Homes with More Than One Buyer

Prior to a court ruling in March 2016, according to a Toronto Star story, a large number of people in Ontario received demands from the Canada Revenue Agency to repay the HST new-home rebate they received upon closing on their real estate purchase. The claim typically arises when a third party has been added to a home or condos' title at the insistence of the mortgage lender. According to the CRA, the Excise Tax Act says that if even a single registered buyer does not qualify for the new home HST rebate, then all the buyers are disentitled. One news story on thestar.com quotes a real estate lawyer from Vaughan explaining that several of his clients have been dinged for more than $26,000 each (the maximum rebate amount plus interest) because an uncle or aunt was registered as a 1% owner to help the buyer(s) qualify for a mortgage. The problem is, an uncle or aunt is not considered a "close relative" according to the CRA, which means that if their primary address is not also the unit in question, then no one officially qualifies for an HST rebate.

According to CRA, if you purchase newly constructed real estate in Ontario and want to qualify for the HST rebate new home program, you must use the property as the primary place of residence for yourself or someone closely related to you as defined by CRA (see above). If anyone part of an excludable category owns even a small percentage of your new home or condo, you are not eligible for the HST new home rebate. It is not possible to receive an allocated percentage of the rebate based on how much of the real estate you own; either everyone qualifies for the rebate or no one does.

Note that a Tax Court decision has ruled against the CRA's position and the government isn't going to appeal the decision. I suggest you click here & scroll to the article titled "Beware of wary of HST rebate rules before buying a NEW home/condo. My takeaway is that the conflicting rulings on this matter have created uncertainty for anyone in this situation. If this situation applies to you, speak to a lawyer (one knowledgeable on this matter).

According to several Canadian newspapers, the CRA has been actively challenging HST new home rebate claims made on purchases of new homes and new condos and disallowing the rebate if the applicant did not follow all the rules. If anyone is listed on the title (even just for mortgage qualification reasons) that does live on the premises and is not "closely related", no rebate will be issued. The CRA also charges interest on all outstanding amounts, and has been very successful when challenged in tax court, so always make sure you understand all the rules and regulations before applying for a new property rebate. 

By the way, the CRA allows "voluntary disclosure," which means if you made a mistake and requested an HST rebate for a new home and were not actually eligible, you can correct the problem before it becomes a more serious issue. It is possible to buy a new condo in downtown Toronto with the idea of living it, but then something in your life changes and you end up selling it very soon after taking possession. When you closed on the unit, you considered it to be your primary residence, so you claimed the full HST new condo rebate that you were entitled to, but the fact that you sold it soon after makes the purchase look like a buy and flip in the eyes of the CRA.

HST Rebate for 'New Condo' Flippers

The intention of a buyer affects their eligibility for a rebate according to a court case (Wong v. Her Majesty the Queen). A buyer must have bought the property with the intention of using it as their primary residence or the primary residence of a close relative. The buyer's intent only matters at the time of the initial purchase, not at any later time. This means that an individual who purchases a new condo to flip it for profit is not eligible for a rebate since the condominium was never intended to be their primary residence. The exact amount of time that a purchaser must reside in a home in order to be granted the rebate is handled on a case-by-case basis and the main determining factor is how legitimate is the claimant's usage of the property as his or her primary residence.

There have been many stories in the news about purchasers of new condos in Toronto pretending the units are going to be their primary residence in order collect the HST rebate on new homes. Although it is the condo builder who technically pocketed the HST rebate from the Federal Government after the rights to it were transferred, the CRA comes after the condo buyer since they were the ones offside on their taxes. A significant number of the condo flippers that were incorrectly claiming HST new condo rebates were purchasing pre-construction condos and then selling them as soon as they were built. While this strategy has paid off handsomely in the Toronto area, the CRA is now coming after these individuals for the HST rebates they erroneously received as well as interest and penalties. 

3. NEWLY CONSTRUCTED RESIDENTIAL INVESTMENT PROPERTIES

Let's begin by talking about any GST/PST rebate available for those intending on purchasing a condo unit (as an example) as an investment and renting it out during the 'occupancy period'.  The rebates are available but can only be applied for by you (the purchaser) after closing and never by the vendor (unlike a 'new' unit you intend to live in, where the vendor applies for the credit on your behalf and typically reduces the purchase price accoringly). This creates an additional financial burden on anyone buying a brand new rental property as they are forced to pay the full purchase amount including HST upfront and eat the interest costs until the rebate is granted. For this reason, anyone who buys a new home or condo as an investment property should promptly apply for the rebate. The 'New Residential Rental Property' (NRRP) rebate must be filed within two years of a new home or condo closing. You should have an Agreement to Lease for 1 year when you apply for the rebate. The first people to occupy the new residential rental property must be tenants; these first occupants cannot include the landlord. Also, the re-sale of the property to a subsequent purchaser before the first anniversary of the first purchaser’s acquisition for rental use will disqualify the first purchaser’s transaction for the NRRP Rebate and that first purchaser will be required to repay the equivalent of the NRRP Rebate.  This means that anyone who buys a brand new investment property, rents it out immediately, but then sells it quickly, is likely not eligible for the NRRP rebate. However, I believe that if the new purchaser uses this as their primary residence, the seller can retain/collect the rebate. In such a situation, it's advisable to get the new purchaser to sign an Affidavit stating the purchased unit is to be used as the primary residence.

If you are applying for an HST renovation rebate, you have up to 2 years to apply following the completion of construction. 

People who buy a 'new' condo, co-op apartment, townhome, house, duplex, triplex, fourplex, or other investment property to rent out can only apply for the HST new residential rental property rebate if they have a tenant sign a lease for the unit. Proof of the lease agreement will need to be submitted to CRA when you submit your rebate application (along with other documentation).

4. RESIDENTIAL RENTAL PROPERTIES

Let's turn our attention to renting your residential rental property, whether you acquired it as a pre/newly constructed property or as a resale property. HST is exempt on rents charged to tenants of residential rental properties. Whether you’re in the “business” of renting out residential properties or not, you can’t charge your tenants HST. Easy enough, right?

However, the landlord’s ability to claim HST on any rental expenses incurred to derive the rental income depends on whether or not you’re in the “business” of renting out rental properties. Most of the time, this is an easy determination and on a separate tab, I’ve outlined some of the factors to consider. There’s a different set of rules in terms of claiming HST for those operating “businesses” so to speak. Click here for more detail. Scroll down to "A few parting comments" (towards bottom of webpage).

So, let’s say you’re ‘renting out’ your residential unit & that you’re not in the “business” of doing so. We already know that there’s no HST on the rents charged, but how about any HST paid on the rental expenses, such as advertising, accounting fees, utilities, motor vehicle expenses, etc.? Unfortunately, this also means that landlords are not entitled to claim input tax credits and cannot recover GST/HST paid on purchases. Input tax credits is a fancy term for expenses incurred to generate ‘business’ income. It’s more complicated than this but sufficient for our purposes.

In our example, there would be no HST returns to prepare since there’s no HST collected on the rents and no “ITC” available on the HST related to the rental purchases. Remember, this assumes you're not in the 'business' of renting out properties. This takes care of any HST filing obligations but as a landlord, remember that you incurred rental expenses for which HST may have been paid.

When you file your personal income tax return (or have it prepared), Form T-776 needs to be completed. This is where all rental income and expenses are entered. Generally, any HST paid on rental expenses will be shown inclusive of HST. So, although you’re not getting a dollar for dollar reimbursement of any HST paid (as you would when you file HST returns assuming you were in the 'business' of renting out residential properties), its inclusion on Form T-776 effectively reduces your tax liability by the amount of HST reported/claimed multiplied by your marginal tax rate. For a more detailed discussion regarding other tax considerations (besides HST) impacting your residential rental property, please click here and scroll down to "Renting All or Part of your Property - Tax Implications".

5. OTHER AREAS HST IMPACTS RESIDENTIAL REAL ESTATE

HST also applies to most of the services provided in completing the real estate transaction including commissions, appraisal fees, surveys, home inspections, moving costs and legal fees. Note that PST only is charged on mortgage insurance (required by the lender if your downpayment is less than 20% of the value of the property). HST is charged on these fees regardless of whether or not the property is HST exempt.

For additional information regarding any of the issues discussed above, consider contacting CRA, your accountant and/or your lawyer. Make sure your lawyer or accountant is sufficiently knowledgeable in the area that's the subject of your question!