Tax Articles
Municipalities and Real Property under the HST
Brian Titanich
Public Sector Digest,
March 2010
For a municipality the impending HST could have at least two major tax implications related to real property transactions. Firstly, any tax increase that may influence the public’s willingness or ability to purchase a new home may impact a municipalities property tax base (e.g., fewer new home buyers equates into fewer property tax payers). Secondly, municipalities may not be able to recover the entire provincial component of the HST (8% Ontario and 7% in B.C.), as they do under the GST, thus municipalities will need to track the HST as accurately as possible.
Residential and Commercial Properties and the HST
Currently the GST (5%) does not apply to used housing, but does apply to almost all sales of commercial properties. These rules will continue to apply under the HST and would appear not to have a direct impact on the sale of pre-owned homes. However, many of the services that go into preparing a pre-owned home for resale (e.g., renovations and realtor fees) will see an increase in unrecoverable tax (5% to 12%/13%) that will have to be accounted for by the home seller.
Buyers of commercial properties should not experience any additional unrecoverable tax on these properties provided they are registered for the GST/HST and are using the property exclusively in commercial activities (e.g., the making of GST/HST taxable supplies). However, businesses involved in exempt activities (e.g., health care and child care services) will see the change from GST to HST result in a direct increase in cost.
New Home Purchases
Under the GST new home buyers may have been entitled to a new housing rebate that allowed the individual to recover 36% of the GST that they paid to builders to acquire a new home* . The 36% GST rebate was available on homes up to a maximum purchase price of $350,000 (maximum GST rebate of $6,300). New homes that cost more than $350,000 but less than $450,000 were entitled to a sliding scale rebate with new homes costing $450,000 or more not eligible for any GST rebate.
Under the HST new home buyers will still be entitled to the GST Rebate but would also be entitled to a new housing rebate on the provincial component of the HST. B.C. has announced that new home buyers will be entitled to a 71.43% rebate to a maximum of $26,250, while Ontario is offering a 75% rebate of the provincial component up to a maximum of $24,000**.
Both provinces offer the rebates regardless of the purchase price of the home which should result in the consumer paying no additional tax under the HST for new homes costing up to $400,000 in Ontario and $525,000 in B.C. This position is based on the fact that although PST did not apply directly to the sale of new homes it was estimated that PST equal to approximately 2% of the selling price of a new home was embedded in materials used to construct the new home.
ITC vs. Rebate
Currently a municipality is entitled to either an input tax credit (“ITC”) or a 100% rebate of the GST paid on almost all expenses it incurs. This application has resulted in some municipalities not tracking expenses to see if they result in an ITC or a rebate as full tax recovery was always available. With the introduction of the provincial component of the HST a municipality may not be able to fully recover the provincial component of the HST (rebate of 75% in B.C. and 78% in Ontario). This could result in a potential tax cost (25% and 22% respectfully) for a municipality on any taxable expense that is not eligible for a full ITC.
To best illustrate, let us take the example of a GST/HST registered municipality purchasing real property (e.g., an office building) with a purchase price of $1,000,000 excluding HST. The municipality will use the building as capital property (i.e. office space 40% in commercial activities and 60% in exempt activities). Applying the current legislation*** the municipality is entitled to full ITCs if the use of the building will be more than 50% in commercial activities and no ITCs if the use of the building is 50% or less in commercial activities. In our example the municipality would not be entitled to an ITC, but could claim a 100% rebate of the GST and a 75%/78% rebate of the applicable provincial component of the HST. This results in a BC HST cost of $17,500 and an Ontario HST cost of $17,600.
Self-assessment and the Section 211 Election
Continuing with our example, at the time of purchase the municipality will rely on the provisions of subsection 221(2) and 228(4) of the Excise Tax Act (“ETA”) and will not pay the HST to the vendor but will self-assess the tax and report the HST on form GST 60 GST/HST Return for Acquisition of Real Property. This return must be filed by the end of the month after the month in which the property was acquired. Depending on the filing frequency of the municipality cash flow may be a concern if the tax must be remitted and the municipality must wait until it can file its regular return to claim the rebate.
One option available to the municipality is the election under section 211 of the ETA. By making this election a municipality is opting out of the 50% test for claiming ITC related to the building and is able to claim ITC depending on the actual percentage of use in commercial activities (provided the municipality is using the building at least 10% in commercial activity).
By making the election the municipality would be entitled to the following:
| |
B.C. |
Ontario |
| ITC on Provincial Component |
$28,000 |
$32,000 |
| Rebate on Provincial Component |
$31,500 |
$37,440 |
| Unrecoverable (Cost) |
$10,500 |
$10,560 |
| Tax Saving with Election |
$7,000 |
$7,040 |
It is also important for all municipalities to track their real property acquisitions that are made post July 1, 2010, such that if the property is subsequently sold and HST is applicable to the sale, the municipality may be entitled to a recovery of the portion of the HST that was not recoverable at the time of acquisition.
* Refer to GST/HST Guide RC4028, GST/HST New Housing Rebate for more information on the eligibility requirements for this rebate.
** Residential Rental Rebates are also available for new homes purchased for rental.
*** The pending release of legislation may impact the rules discussed in this article. Readers are advised to review the legislation before taking tax planning actions.
