Real Estate, Corporate & Estates Law: HST and Rebates on New Homes, Renovations, and Rental Properties

On July 1, 2010, the HST tax was implemented by the government, which included an additional 8% (the former PST) being included in the amount to be taxed on new homes in Ontario. To help alleviate the additional financial pressure, the government introduced a rebate program to kick back a percentage of the additional tax for new homes. The rebate operates as follows:

Which homes or renovations are eligible for this rebate?

Events that would trigger eligibility for this rebate include:

  • Building a home or contracting someone to build one.
  • Buying a newly constructed or substantially renovated home from a builder.
  • Buying a newly constructed house from a builder, where you lease the land from the builder under the same agreement to buy the house.
  • Substantially renovating a home or building a major addition to one.
  • Rebuilding a home destroyed by fire; or
  • Buying a share of the capital stock in a newly constructed cooperative housing project.

How long must one live in a property in order for it to be eligible for rebate?

Whether or not an individual is eligible for this rebate depends on the intention of the buyer according to a recent case. (Wong v. Her Majesty the Queen.) The buyer must have purchased the property with the intention of using it as his or her primary place of residence, or the primary place of residence for a close relative. The purchaser’s intent matters only at the time of the initial transaction and not at any time thereafter. The end result is that on a buy and flip, since the property was never intended to be the person’s primary residence, there will be no rebate granted. The time that one must reside in a building is dealt with on a case-by-case basis, and usually hinges on how reasonable a claimant’s usage of the property as their primary residence seems taking into consideration all of the facts.

How does the HST affect purchase of new homes?

As of July 1, 2010, a 13% HST tax, consisting of 5% federal tax and 8% Ontario tax, was imposed on new home buyers. The tax applied to a builder’s sale of newly constructed or substantially renovated homes where both ownership and possession are transferred after June 30, 2010.

There are two exceptions to this rule where the old GST rules will continue to apply:

  • If either ownership or possession was transferred before July 1, 2010; or
  • If a written agreement of purchase and sale was entered into on or before June 18, 2009.

Rebates are available for both the GST portion and the Ontario provincial portion of the HST Tax, and both operate differently.

The GST Rebate on New Homes

The GST rebate is available upon the purchase of new homes valued at less than $450,000. This rebate will amount to a 36% kickback of the 5% GST portion of the HST. For instance, in a new home that is valued at $100,000 the GST portion of the HST would be $5,000. Multiply this amount by 36% and an individual will be eligible for a rebate of $1,800 on the purchase of this new home. This will be true for any purchase of a new home of which its value does not exceed $350,000. Once this amount is exceeded, there will be a gradual dwindling of the amount rebated until the value of $450,000 is exceeded, at which point such rebate will total $0. The formula to calculate the amount that the rebate will decline can be found on the GST191 form, and this rebate operates separately from the Ontario Provincial Rebates.

The Ontario Provincial Rebate on New Homes

The Ontario provincial rebate is available upon the purchase of new homes for any amount up to $400,000. This portion of the available rebate operates differently, however, in comparison to its GST counterpart. A house priced in excess of $400,000 will not result in forfeiture of the entire rebate, as is the case for the GST portion, but rather a rebate will be awarded for every dollar spent up to $400,000 but none thereafter. This rebate is applicable for 75% of the amount charged for the PST portion of the HST (8%) on the first $400,000 spent. For example, if one were to purchase a new home valued at $500,000, the PST portion of the HST rebate would be 8%, or $40,000. Of this amount, only $32,000 was taxed on the first $400,000, and this only this amount will be eligible for rebate calculations. You must then multiply this number by the 75% portion that will be returned as a rebate, resulting in a rebate of $24,000. This is the maximum amount available for a rebate on any new home valued over $400,000.

How the Builder Applies the Rebate

The Ontario new housing rebate will enable builders to pay or credit the Ontario new housing rebate to the individual purchaser of new housing, just as they currently can pay or credit the GST new housing rebate. If a builder did not pay or credit the rebate at the time of purchase, the individual will be able to file a rebate application for the Ontario new housing rebate with the government directly. To apply for this rebate, an individual would use Form RC7190-ON, GST190 Ontario Rebate Schedule. Typically, however, these rebates are incorporated into the price listed upon the sale and purchase of the new home. If this discount is in fact incorporated into the price, then the rights to the proceeds of it are being transferred to the builder upon signing the agreement.

The HST as Applied to Rental Buildings

Builders of newly constructed or substantially renovated rental housing, who make a supply by way of lease, licence or similar arrangement of the house, apartment or condominium unit are considered to have paid and collected tax under the self-supply rules for rental housing. Where the self-supply occurs after June 2010, the HST at 13% would apply. The HST would be calculated on the fair market value of the property, including the building and the land reasonably necessary for the use of the housing as a place of residence for individuals. The self-supply is deemed to occur at the later of the time of construction (or substantial completion of the substantial renovation) and the time possession or use of the rental property is given under a lease, licence or similar arrangement to an individual who is the first to occupy it as a place of residence. If a builder is required to pay tax on a self-supply before July 2010, the provincial part of the HST would not apply. However, the GST at 5% would apply. Purchasers who rent out a new home so that the first occupant of the new home is a tenant are entitled to the New Residential Rental Property Rebate (NRRPR) but cannot obtain the NRRPR from the builder. Such Purchases must apply for the NRRPR directly after closing.

An example of a property which would qualify as a self-supply would be as follows. An individual (“Individual A”) hires a contractor to substantially renovate a house that they own and that they intend to rent out to an individual who will occupy it as a place of residence. The substantial renovation is substantially complete in August 2012, and on November 1, 2012, they give possession of the house under a lease to an individual who is the first to occupy it as a place of residence following the substantial renovation. Individual A meets the definition of “builder” for GST/HST purposes. Individual A will be considered to have made a taxable self-supply (sold and repurchased) the house on November 1, 2012, which is the later of the time the substantial renovation of the house is substantially complete and the time that you first give possession of the house to the individual. Since the self-supply occurs on or after July 1, 2010, the HST applies and Individual A will be considered to have paid and collected the HST on the fair market value of the house (i.e. building and land) on November 1, 2012.

Furthermore, for residential properties which are purchased for the first time which is to be used as a rental property in a non self-supply fashion, the application of such rebate is slightly different than the standard New Home Rebate. Despite the fact that they operate fundamentally in the same fashion, the way that they are applied differs. For rental properties, the rebate is obtained via an application for reimbursement after closing the deal, whereas in the New Home Rebate, the rebate is often incorporated into the sale price of the home and the builder will apply for it for themselves. This may put some additional, albeit temporary, financial strain on those purchasing an investment property.

The Ontario Portion of the HST Rebate and Its Applicability to Rental Properties

The Ontario new residential rental property rebate would be available in respect of the provincial part of the HST so that qualifying newly constructed or substantially renovated properties of any price would qualify for a maximum rebate amount of up to $24,000 per rental unit. Landlords who purchase newly constructed or substantially renovated residential rental properties and pay the HST would be entitled to claim the Ontario NRRP. Landlords who build their own residential rental properties and are required to account for the HST under the self-supply rules would also be entitled to claim the rebate.

The Ontario NRRPR would be available for the same type of residential rental properties for which a GST NRRPR is available. Qualifying housing would include newly constructed and substantially renovated rental housing, new additions to traditional apartment buildings, co-operative rental housing and long-term residential care facilities. This rebate, however, would not apply to a property where the purchaser simply “buys and flips” a property. A purchaser who qualifies for an NRRPR must not sell the home to anyone other than a purchaser who will be using the unit for their primary place of residence within a year of its purchase, or else this rebate will be forfeited. One is able to apply for the NRRPR for up to two years, after which point it may be forfeited. (This typically would not be an issue for the NHR, as it is usually applied at closing.)

Conclusion

Thus the NRRP Rebate and the New Housing Rebate operate fundamentally the same, with the sole difference being the application of the rebate. The New Housing rebate is often applied at closing through an assignment process back to the purchaser or vendor, whereas the NRRP Rebate must be applied for after closing, and thus it creates an additional monetary burden on the purchaser (who will be forced to eat the financial costs until the rebate is granted.)