Tax Alert - The Transition from HST to PST in British Columbia – New Homes
On February 17, 2012, the British Columbia Ministry of Finance released HST Notice #12 (the “B.C. Notice”) outlining the transition rules in support of the re-implementation of the B.C. Social Services Tax (PST). The PST is scheduled to come into effect on April 1, 2013, with the Harmonized Sales Tax (HST) being repealed and replaced with the Goods and Services Tax (GST) effective the same day.
Further details of how the PST will be re-implemented will be released in the coming months. It is expected that the complete policy and administrative details will be released later this spring.
The purpose of this Tax Alert is to briefly address particular issues and questions related to the transitional rules for new housing.
Key concepts and dates referred to
2% - The generally accepted amount of PST that was embedded in the purchase price of a new home before HST was introduced (7% PST was paid on materials, but not on the land or the labour).
5% - The federal GST rate.
7% - The B.C. PST rate.
12% - The HST rate (5% federal portion plus 7% provincial portion)
July 1, 2010 – Implementation date of the HST.
April 1, 2012 – Effective date for B.C. New Housing Rebate
April 1, 2013 – Implementation date of PST.
Enhanced rebates for purchasers of primary and rental residences
Currently, the purchaser of a new home pays 12% HST on the purchase price. If the purchaser occupies the home as his primary place of residence, or rents the home out to a tenant who occupies it as his primary place of residence, the purchaser can claim a B.C. New Housing Rebate equal to 71.43% (i.e. 5/7) of the provincial portion of the HST. This rebate is payable on the first $525,000 of the purchase price (which results in a maximum of $26,250).
Effective for purchases where the HST becomes payable on April 1, 2012 and thereafter, B.C. New Housing Rebate is now payable on the first $850,000 of the purchase price, resulting in a maximum rebate of $42,500 ($850,000 x 7% x 71.43%).
The B.C. New Housing Rebate is effectively 5/7 of the provincial portion of HST paid, leaving approximately 2% of provincial tax payable. This was meant to approximate the amount of PST that is paid on the materials used to construct new housing under the “old” and now “new” PST regimes.
The net result is that, for purchasers of primary residences and rental residences, the total B.C.tax paid on homes up to $850,000 in value is effectively the same from April 1, 2012 onwards through the re-implementation of PST.
Types of homes that qualify
A number of different rules apply depending on the nature of the property:
- New homes (single-unit homes, residential condominium units and duplexes) purchased together with land. Rebate is payable to the purchaser up to a maximum of $42,500.
- New homes purchased together with leased land. The builder has to self-assess HST on the value of the property for this type of transaction. The purchaser will be eligible for a rebate equal to 4.47% of the value of the building up to a maximum of $42,500.
- New mobile homes and floating homes. Rebate is payable to the purchaser up to a maximum of $42,500. Where the mobile home is purchased together with leased land, see rule 2 immediately above. Where only the mobile home is purchased to attach to land owned by the purchaser, the rebate can be claimed under either rule 1 above or 5 below – but the rebate will be the same regardless.
- New homes acquired through the purchase of qualifying shares in a co-op. Generally the housing co-op is required to pay HST on the purchase (or self-assess HST on the construction) of the housing complex. The purchaser of the share will be entitled to claim a rebate equal to 4.47% of the price paid, to a maximum of $42,500.
- Owner-built housing. An enhanced rebate is available, but the maximum depends on whether HST was paid on the land. If so, the rebate is 71.43% (5/7) of the provincial portion of the HST up to a maximum of $42,500. Where HST was not paid on the purchase of the land, the rebate is 71.43% of the provincial portion of the HST up to a maximum of $28,475 (i.e. 67% of $42,500).
Note that in order to qualify for the rebate, construction (or substantial renovation, as the case may be) of the home must become substantially complete on or after April 1, 2012.
New rebates for second homes and vacation homes
Purchasers of second homes and vacation homes in B.C. paid significantly more provincial tax when the HST was implemented, as the B.C. New Housing Rebate was not extended to such properties. So, rather than absorbing PST on the construction materials equal to a rate of approximately 2% of the purchase price of the property, purchasers of second homes and vacation homes were paying 7% of B.C. HST, with no rebates.
To recognize this, the B.C. government has extended the residential rebates described above to second homes and vacation homes, subject to the $850,000 (or $42,500 of rebate) limit, where such homes are outside the Greater Vancouver and Capital regional districts. Note that this change is in the Finance Minister’s press release but not the detailed bulletin.
How to claim the rebates
For primary residences purchased from a builder, the purchaser can either apply to the Canada Revenue Agency (CRA) for the rebate, or assign the rebate to the builder who can grant an immediate credit and then submit the application with the builder’s GST/HST Return for the period.
For rental homes purchased from a builder, self-constructed homes, and all other types of homes mentioned above, the rebate must be claimed directly from CRA by the purchaser.
Note that for vacation homes and second homes, no mention was made in the press release as to whether a purchaser can assign the rebate to the builder and receive an immediate credit therefor.
Transitional taxes
The new housing rebate rules work efficiently where the particular home in question is constructed between July 1, 2010 and March 31, 2013, and sold and/or occupied before April 1, 2013. In such a situation, the builder will have incurred no PST costs and will have claimed full input tax credits for HST paid on the acquisition of the land and construction of the property. The purchaser/owner will have paid 12% HST on the property and, after claiming B.C. New Housing Rebates, will pay a net 2% provincial tax on the property.
This gets more complicated if the home is partially constructed before April 1, 2013 and then sold/occupied on or after that date (in other words, after the HST has been replaced with GST).
Since PST will not be payable on such homes, the B.C. government has introduced a B.C. Transition Tax, which is intended to ensure that the province receives its customary 2% of taxes on new housing.
The 2% transition tax will apply to the sale of newly constructed or substantially renovated housing where all of the following apply:
- HST does not apply to the sale (i.e., GST applies at 5% instead of HST at 12%).
- The construction or substantial renovation of the new housing is 10% or more completed as of April 1, 2013.
- Ownership or possession of the new housing transfers, or a deemed sale of the new housing (i.e., self-supply), occurs before April 1, 2015.
The principle behind the above rules is fairly straightforward. If at least 10% of the home is completed under the HST system (where the builder can presumably claim input tax credits), and no PST is paid when the home is sold/occupied, the B.C. government is charging a 2% tax which equates to what the approximate PST would have been had PST applied during the period of construction. So, the transition tax of 2% is payable on the value of the property when sold/occupied (same time as when GST becomes payable).
For purchased housing, the B.C. Transition Tax is collected by the builder and is remitted to the CRA. For self-supplied homes, the B.C. Transition Tax must be remitted by the builder and is payable on the day that the self-supply occurs (substantial completion or occupation of the residence).
The B.C. Transition Tax will generally not apply to sales of mobile homes, floating homes and homes built by owners for their personal use (i.e. owner-built homes). If possession of a mobile home (without land) transfers on or after April 1, 2013 (in other words, with only 5% GST being charged), PST of 7% will apply to the transaction regardless of when the contract to purchase was entered into.
Transitional rebates for builders
The previous section discusses how purchasers and builders of new housing will pay a 2% B.C. Transitional Tax if the home was partially (at least 10%) completed before HST is repealed, but sold or self-supplied after HST is repealed.
Since the transition tax is triggered if as little as 10% of construction is completed by April 1, 2013, there will be a PST component included in the cost of new housing and the transition tax that will be charged on top of that cost. To prevent double taxation in such circumstances, the builder will be eligible for a B.C. Transition Rebate which is calculated (roughly) as follows:
2% x selling price/value x percentage of construction on or after March 31, 2013
Going back to the 2% principle, this formula represents a rough estimate of the amount of PST paid on construction materials acquired on or after April 1, 2013. The exact rebate calculation is actually a stepped table, calculated by reference to how much of the construction (expressed as a percentage) is completed as of April 1, 2013:
Percentage complete as of April 1, 2013 |
Rebate as a percentage of fair market value |
Less than 10 percent
Between 10 percent and 24.99 percent
Between 25 percent and 49.99 percent
Between 50 percent and 74.99 percent
Between 75 percent and 89.99 percent
90 percent or greater |
Not applicable
1.5 percent
1.0 percent
0.5 percent
0.2 percent
No rebate |
Different rebate amounts apply for homes where construction started prior to July 1, 2010 but is not completed as of April 1, 2013 that are similar in concept to the rules just described.
Builder disclosure requirements
Given the potential application of the B.C. Housing Rebate, B.C. Transition Tax, and B.C. Transition Rebate in addition to federal GST rebates for new housing (not discussed in this Alert), there was concern that purchasers may not understand which taxes and/or rebates are included in the sale price stated in the purchase agreement. For these reasons, builders will be required to make certain disclosures to purchasers and to the CRA.
The disclosure requirements are detailed and builders who fail to fully and accurately disclose the required information will be subject to a penalty of up to 1% of the home price (maximum of $10,000 per home). The penalty increased to 4% of the home price (maximum of $40,000) in circumstances amounting to gross negligence or knowingly failing to fully and accurately disclose the required information.
These disclosure requirements are effective immediately, and also apply to transactions entered into prior to February 17, 2012 (the announcement date of these transition rules), if the B.C. Transition Tax will apply to the sale.
For more information on how these rules will affect you, contact your BDO Advisor.
