As we all know, the provincial government has now passed legislation to combine the 8% Provincial Sales Tax (PST) with the 5% Federal Goods and Services Tax (GST), creating a 13% Harmonized Sales Tax (HST) that will apply to all goods and services in Ontario.
If nothing else, the news is sobering. And amidst all of the grunting and groaning, outrage and sheer panic, many of us are asking, “how will this affect me?”
While all services provided in Ontario will be universally affected by the new single sales tax, we'll focus on how the HST will affect typical real estate transactions and services for buyers, sellers, condo owners and renters. We'll also take a look at some important transitional rules to be aware of leading up to its implementation.
CONTENTS:
General Information
Information for Buyers
Information for Sellers
Information for Condo Owners
Information for Renters
Additional Information
What is the HST?
The HST is a Harmonized Sales Tax resulting from the provincial government’s initiative to combine the existing 8% Provincial Sales Tax (PST) with the 5% federal Goods and Services Tax (GST), thus creating a single sales tax (HST) of 13%.
While Ontarians currently pay a combined 13% tax on almost all goods purchased, the implementation of the HST will mean an increased tax of 8% on all services and goods which are currently subject only to the 5% GST.
While Ontarians currently pay a combined 13% tax on almost all goods purchased, the implementation of the HST will mean an increased tax of 8% on all services and goods which are currently subject only to the 5% GST.
When will the HST come into effect?
The HST will come into effect on July 1, 2010.
What will be affected by the HST?
The HST will apply to all services, including moving costs, renovations, legal fees, home inspection fees and commissions charged by brokers and real estate salespersons.
The purchase price of newly constructed homes will also be subject to HST.
Does the HST implementation affect my new home purchase?
Generally, if you purchased a new home and entered into an Agreement of Purchase and Sale on or before June 18, 2009, the sale would not be subject to the provincial portion of the HST. This applies even if both possession and ownership are transferred on or after July 1, 2010.
If you entered into an Agreement of Purchase and Sale after June 18, 2009, the provincial portion of the HST would not apply to sales of new homes under written Agreements of Purchase and Sale entered into after June 18, 2009, so long as there is no clause otherwise addressing the HST in your Agreement of Purchase and Sale and possession or ownership is transferred before July 1, 2010.
Important Timelines for HST Implementation and Tax Impact
Date of Purchase (Agreement of Purchase and Sale) | Possession / Ownership Transferred | Tax Impact |
|---|---|---|
| On / before June 18, 2009 | Anytime | Generally, the sale would not be subject to the provincial portion of the HST. However, GST under existing rules still applies. |
| After June 18, 2009 | Before July 1, 2010 | Same as above. |
| After June 18, 2009 | July 1, 2010 or later | Subject to HST. |
How will my home purchase be affected by the HST?
New Homes
The purchase price of newly constructed homes will be subject to HST.
It should be noted that new home sales have always been subject to the federal portion (5%) of the HST which will not change with the implementation of the single sales tax. However, the HST will mean additional taxes on new home purchases.
The province is proposing a rebate so that new homes purchased as primary residences (including investment properties to be rented out for use by the tenants as primary residences) across all price ranges would be eligible for a 75% rebate of the provincial (8%) portion of the HST payable, up to a maximum rebate of $24,000.
The HST, after the rebate has been applied, will affect new home sales as follows
- The first $400,000 of a new home purchase would be subject to an additional 2% tax;
- The portion above $400,000 would be subject to an additional 8% tax.
Livehigh Observation:
The Ministry of Revenue claims that for new homes under $400,000, no additional tax would apply, on average, compared with the current system.
This justification stems from their claim that a retail sales tax (PST in Ontario) has always been embedded into the price of new homes, much like a “hidden cost”. The government has apparently examined this embedded tax and has assessed that it works out, on average, to be approximately 2-3% of the purchase price buyers pay with the current system.
They assert that with the implementation of the HST, these formerly embedded taxes would no longer be hidden, and instead, would be paid up front by buyers in the form of the provincial portion of the single sales tax on new home purchases up to $400,000 (amounting to 2%) -- hence their claim that no additional tax would apply to new home purchases up to $400,000.
Upon deeper examination and a lot of number-crunching, we’ve concluded that this claim could only be true if Builders’ prices on new homes were to collectively drop by a respective 2%; otherwise, it would appear that on a $400,000 purchase, buyers would face an additional tax of $8,000. For a breakdown of our calculation, please see our table below.
Resale Homes
HST will not apply on the purchase price of resale homes. Bear in mind however that associated services (such as those listed above) will indeed be subject to HST.
HST Impact on New Home Sales Across Various Price Points
Purchase Price | Additional Taxes After Rebate | Detailed Calculation |
|---|---|---|
| $350,000 | $7,000 | $350,000 x 2% |
| $400,000 | $8,000 | $400,000 x 2% |
| $500,000 | $16,000 | $400,000 x 2% + $100,000 x 8% |
| $700,000 | $32,000 | $400,000 x 2% + $300,000 x 8% |
| $1,000,000 | $56,000 | $400,000 x 2% + $600,000 x 8% |
INFORMATION FOR SELLERS
I’m planning to sell my home this year. How will the HST affect me?
The HST will apply to all services provided after the HST implementation date of July 1, 2010. Where services straddle this date, the tax charged for the service may have to be split or pro-rated; however, the provincial portion of the HST will generally not apply to a service if at least 90% of the service is performed before July 2010.
Example:
Let’s suppose that you enlist the services of a REALTOR® in the sale of your home, beginning on June 10, 2010. Let’s further suppose that your home is sold firm on July 2, 2010, with a closing date of July 30, 2010. Given that more than 90% of the realtor’s services for the sale of your home would have been provided before the implementation date of July 1, you would not likely pay the provincial portion of the HST on the commission owed. However, any fees incurred for services provided thereafter, such as lawyer’s closing fees and moving costs, would be subject to the HST.
INFORMATION FOR CONDO OWNERS
Generally, 13% HST will be applicable on all services hired by condo corporations (such as cleaners and garbage pickup) that were previously taxed at the GST rate of 5%. This additional tax will result in increased expenses for the condo corporation, which will likely be passed on to individual owners in the form of increased maintenance fees. Some condo boards have already announced increased condo fees as a result of the HST.
INFORMATION FOR RENTERS
I’m currently renting my home. Will the HST affect me?
The HST will only apply to costs that are currently subject to GST. As residential leases aren’t taxed, rents will not directly be subject to HST. Having said that, it has been suggested that tenants will indirectly be affected by the single sales tax as landlords pass on the cost of additional tax that will be incorporated into goods and services previously exempt (such as property management fees, maintenance, repairs and utilities) through increased rents.
ADDITIONAL INFORMATION
While we've done our best to cover the basic rules that will affect most typical real estate transactions, please note that the information available is constantly evolving, and there may also be circumstances, rules and exceptions not covered in this post.
Additional information and the latest updates on the HST can be found at the Ministry of Revenue website or by calling 1-800-337-7222.
