Tax Articles
Preparing for the HST – Construction Industry
Author: Laura McGuckin
Date: May 14, 2010
Effective July 1, 2010, Ontario’s Retail Sales Tax will be replaced with the HST. The HST will have a rate of 13% - which is a combination of a 5% federal portion and an 8% provincial portion. This bulletin will outline the impact of HST on the construction industry and discuss the rebates available to builders and purchasers.
Application of the HST
Generally, builders’ sales of newly constructed or substantially renovated homes are subject to HST when both ownership and possession are transferred after July 1st. If ownership or possession is transferred before July 1st, only GST will apply to the sale.
If the purchase and sale agreement for the new home is entered into on or before June 18, 2009 but ownership and possession are not transferred until after July 1st, these sales with be grandparented into the new system and HST will not apply and only GST will apply. However, as part of the grandparenting system, the builder will be required to pay a transitional tax adjustment to account for tax that would have otherwise been embedded in the new home under the current RST regime. If you have any contracts which may be subject to the grandparenting rules, please contact your BDO advisor for details on the grandparenting rule reporting requirements.
For sales of non-residential real property in Ontario, HST will generally apply if both ownership and possession are transferred under the agreement on or after July 1st. Sales of real property that are currently exempt under the GST rules will also be exempt for purposes of the HST.
Progress Payments and Holdbacks
For non-residential construction, the application of HST will depend on the extent of completion of construction at July 1, 2010.
HST will apply to progress payments to the extent that the progress payment can reasonably be attributed to property delivered or services performed on or after July 1, 2010. A holdback will be considered to be part of the progress payment from which it was held back and will therefore be subject to the same allocation as the progress payment.
For example, the final progress payment less a holdback is due on August 15, 2010. 70% of the final progress payment relates to work performed after July 1st. The holdback is paid on September 15, 2010. HST would be payable on 70% of the final progress payment and on 70% of the holdback. The remainder would be subject to GST only.
The progress payment rule does not apply to sales of newly constructed or substantially renovated homes.
Claiming ITCs
Construction businesses purchasing supplies after July 1, 2010 will be paying HST on the purchase of these materials and will be entitled to recover the full amount of HST paid as an ITC. ITCs will be claimed by filing a GST/HST return identical to the GST return businesses currently file. If the business has gross revenue over $10 million, they will be subject to restrictions on the provincial portion of the ITCs.
The business may also be required to electronically file their GST/HST return if any of the following apply:
- Taxable sales exceed $1.5 million
- You are required to recapture ITCs for the provincial portion paid
- You are a builder who is making sales or resales of grandparented housing
- You are a builder who is reporting a transitional tax adjustment on grandparented housing or you are reporting an Ontario transitional new housing rebate
Rebates
There are various rebates available to builders and purchasers of residential real property.
Ontario New Housing Rebate
This rebate is available in respect of the provincial part of the HST paid on the purchase of a newly constructed or substantially renovated home. This rebate is available for the same types of property for which the GST new housing rebate is available. When a house is purchased for use as the primary place of residence by the purchaser or a person related to the purchaser and the remaining conditions for the GST new housing rebate are met, a purchaser is entitled to the Ontario new housing rebate. The rebate is calculated as 75% of the provincial part of the HST paid, subject to a maximum of $24,000. There is no phase out of this rebate.
This rebate will be administered by the CRA and a single rebate application for both the Ontario new housing rebate and GST new housing rebate will be available on the CRA website by July 1st. Builders will be able to pay or credit the Ontario new housing rebate to the purchaser of a new house, similar to the GST new housing rebate. Alternatively, individuals can file an application for the rebate with the CRA if the builder does not credit the purchaser for the rebate at the time of purchase.
Owner-built homes also qualify for a rebate of 75% of the HST paid to construct the home. The maximum amount of the rebate depends on whether HST was paid on the land. If HST was paid, the maximum amount is $24,000; otherwise the maximum is $16,080.
RST Transitional New Housing Rebates
An individual who purchases a newly constructed or substantially renovated house is entitled to claim an RST transitional new housing rebate where the construction straddles July 1, 2010 and the HST is payable on the purchase. An individual is entitled to claim the rebate whether the house was acquired for the purpose of rental, resale or personal use. For a purchaser to be eligible to claim this rebate, the construction or substantial renovation of the house must be at least 10% complete as of July 1, 2010 and the builder must certify the degree of completion of the construction or substantial renovation as of July 1, 2010. This rebate is a temporary measure to give tax relief to purchasers for RST embedded in the purchase price of their home and is generally not available to builders or for owner-built homes.
A builder would be entitled to claim this rebate where the construction or substantial renovation of the housing straddles July 1, 2010 and the HST is payable in respect of a self-supply of the housing. The construction must be at least 10% complete as of July 1, 2010.
As a condition of obtaining this rebate, a builder is required to attach a valid provincial certificate to their first rebate application and file the application with the CRA. The certificate can be obtained from the Ontario Ministry of Revenue and would be issued where the builder has no outstanding provincial debts and is valid for one year from the date of issue unless revoked by the province.
The rebate is calculated based on the degree of completion at July 1, 2010 and the estimated RST embedded in the housing. The estimated RST embedded is calculated under one of two methods: the floor space method ($45 x total square metres of floor space completed) or the consideration method (2% of the total consideration paid). The rebate would then be calculated by multiplying the estimated embedded RST by the applicable rate:
Degree of completion as of July 1, 2010 |
% of Estimated RST Rebated |
| Less than 10% |
0% |
| Between 10% and 25% |
25% |
| Between 25% and 50% |
50% |
| Between 50% and 75% |
75% |
| Between 75% and 90% |
90% |
| Greater than 90% |
100% |
Applications are filed with the CRA by the purchaser and must be filed before July 1, 2014. Application forms can be found on the CRA website by July 1, 2010.
Transitional RST Inventory Rebate for Residential Real Property Contracts
This rebate is available to a real property contractor for the RST paid on the construction materials that are purchased for the contractor’s own use, held in inventory at June 30, 2010 and are used in a residential real property contract to which the HST will apply. The rebate is not available with respect to inventory for which the RST is otherwise recoverable by the contractor or any other party (i.e. a rebate claim cannot be made under this category and under the RST Transitional New Housing rebate program for the same dwelling).
The rebate will be administered by the Ontario government and contractors can file an application directly with the Ontario Ministry of Revenue. The application must be filed by December 31, 2010.
Should you have any questions about the rebates or the application of the HST to your business, please do not hesitate to contact your BDO advisor.
Sources and Additional Resources
For more information, please see the following:
