There's been a great deal of confusion about what impact the proposed HST (Harmonized Sales Tax) will have on the cost of purchasing real estate. With that in mind, I have asked Sam Dabner of Fulton & Co to clarify what we know as at this date: (November 18, 2009). Here's a copy of that article from my Newsletter "The Mortgaging Multitudes"…
Sam Dabner, Associiate Fulton & Co LLP
Harmonized Sales Tax and Residential Real Estate in BC
by Sam Dabner, Fulton & Co. LLP
Since the implementation of the HST was announced by the BC Provincial Government on July 23/2009, more and more is being disclosed as to how it will apply to various industries in BC. In the residential real estate sector, several rebates will be available with respect to the tax payable on purchase of a new home, but effectively the amount of tax payable will still go up.
Current Status of GST and PST
At present, GST (5%) is generally payable when a new home that has never been occupied is purchased from a builder or developer. A GST new housing rebate is available for homes valued less than $450,000. The full rebate amounts to 36% of the total GST paid, and is available for houses priced up to $350,000. There is also a diminishing, pro-rated rebate for houses priced between $350,000 and $450,000. As examples, the GST payable (net after rebate) on new homes are as follows:
| Purchase Price | Total GST | Rebate | Net GST Payable |
| $350,000 | $17,500 | $6,300 | $11,200 |
| $420,000 | $21,000 | $1,890 | $19,110 |
Currently, PST (7%) is not directly applicable to purchase of any residential real estate. Because the HST combines both GST and PST, the application of HST will effectively increase the tax payable on the purchase of a new home (subject to available rebates).
Application of HST
Once harmonization is implemented, the HST will generally apply to the purchase of a new home at a rate of 12%. Rebates will be available on new homes for both the former Federal GST component and the new Provincial PST component.
The rebate on the Federal GST portion of the HST will remain the same as it is currently (as described above). The rebate on the Provincial PST portion will amount to 5% of the purchase price up to a maximum rebate of $26,250.
As examples, the HST payable (net after rebates) on new homes based will be as follows:
| Purchase Price | Total HST | Rebates (both PST and GST) | Net HST Payable |
| $350,000 | $42,000 | $23,800 | $18,200 |
| $420,000 | $50,400 | $22,890 | $27,510 |
As can be seen, the net HST on the purchase of a new home will be higher than the existing net GST. For homes priced at $525,000 or less, the increased tax amounts to an additional 2% of the value of the property. Above $525,000, the increased tax escalates over 2% and can be as high as an additional 4% or more for higher priced homes.
Some commentators have suggested that there will, in effect, be tax neutrality for new home buyers because there is currently estimated to be 2% PST embedded in the price of a new home. The theory is that new home prices will drop once builders and developers start receiving credits for PST paid, and no longer have to charge embedded PST back to consumers. The embedded PST will go away, but the consumers will pay additional tax in the form of HST – which theoretically will even out the tax with the available rebate(s).
However, the neutrality will only exist if the benefit of the savings from the lack of embedded PST is actually passed on to consumers by builders and developers lowering new home prices accordingly. It is difficult to envision prices being lowered this way.
Therefore, it appears that unless the Provincial Government makes the improbable move to increase the rebate amount on the PST portion of the HST above 5%, new home buyers can expect to pay additional tax of 2% or greater when purchasing new homes from builders and developers after July 1, 2010.