GST and Buying New Construction Housing
Newly constructed and substantially renovated housing is GST-taxable. Except in very limited circumstances, the builder must charge and collect GST from the purchaser.
There are four general rules to remember when dealing with GST on new residential property:
1. Pre-May 3, 2006 contract / Pre-July 1, 2006 possession and ownership: where a written agreement to purchase a new house was signed before May 3, 2006 and either possession or ownership transfers to the purchaser before July 1, 2006, the 7% GST rate applies.
2. Pre-May 3, 2006 contract / Post-June 30, 2006 possession and ownership: where a written agreement to purchase a new house was signed before May 3, 2006 and possession and ownership transfer after June 30, 2006, the purchaser will pay 6% GST, after claiming the Transitional Rebate.
3. Post-May 2, 2006 contract / Pre-July 1, 2006 possession and ownership: where a written agreement to purchase a new house was signed after May 2, 2006 and either possession or ownership transfers before July 1, 2006, the 7% GST rate applies.
4. Post-May 2, 2006 contract / Post-June 30, 2006 possession and ownership: where a written agreement to purchase a new house was signed after May 2, 2006 and possession and ownership transfer after June 30, 2006, the 6% GST rate applies.
Simply put, the Transitional Rebate reduces the purchaser’s GST on new or substantially renovated housing to 6% (ignoring the New Housing Rebate), even though the contract to purchase was signed before May 3, 2006 when GST rate was still 7%. This rebate only applies to contracts entered into before May 3, 2006 and only when possession and ownership transfer on or after July 1st. The purchaser still pays 7% GST under the contract, but separately claims the Transitional Rebate which will be 1% of the purchase price, assuming the purchaser is not entitled to the New Housing Rebate.
Example: 1% Transitional Rebate for a New House Priced at more than $450,000
A purchaser signs a contract to purchase a new $450,000 house on March 1, 2006. Possession and ownership of the house will not pass until July 15, 2006, once construction is complete. The contract was signed at a time when the GST rate in effect is 7%, but because possession and ownership passed on July 15th, the purchaser’s GST will be reduced to 6% after claiming the Transitional Rebate.However, if possession or ownership transfers to the purchaser before July 1st, the Transitional Rebate cannot be claimed, leaving the purchaser to pay the full 7% GST stipulated in the original purchase contract.
Purchasers have two years to claim the Transitional Rebate and may claim this rebate even if not entitled to the New Housing Rebate. The builder cannot pay or credit the Transitional Rebate to the purchaser. This rebate does not apply to commercial real property.
Any purchaser can claim the Transitional Rebate so long as (a) the property is new or substantially renovated housing, (b) the purchaser does not claim an input tax credit for any GST paid on the purchase of the property, (c) the contract was entered into before May 3, 2006 and (d) possession and ownership transfer on or after July 1st, 2006.
The New Housing Rebate – From $8,750 down to $7,560
The GST New Housing Rebate reduces, to some extent, the GST burden on the purchaser of a new residential property, where the house is priced less than $450,000. Before July 1st, the maximum New Housing Rebate is $8,750. On or after July 1, 2006, the maximum New Housing Rebate is $7,560. For new houses priced $350,000 or less and possession and ownership passes to the purchaser on or after July 1, 2006, the rebate is the least of:
(a) 36% of GST paid or,
(b) $7,560. ($350,000 x 6% x 36% = $7,560)
The New Housing Rebate is still phased out for new houses priced $350,000 to $450,000 and is $Nil for new houses priced more than $450,000. The 6% GST rate change has similarly reduced the New Rental Housing Rebate, the Cooperative Housing Rebate, and the Rebate for Owner-Built Housing Rebate.
The Transitional Rebate and the New Housing Rebate
Where eligible, the New Housing Rebate refunds a portion of the GST paid by the purchaser on the new housing. In some cases, the purchaser may assign the New Housing Rebate directly to the builder. In any case, after receiving the New Housing Rebate, the purchaser’s net GST burden is less than 7% on the property and an adjustment to the Transitional Rebate is made. This is why, when the purchaser receives a New Housing Rebate, the Transitional Rebate is not exactly 1% of the purchase price of the new housing.
For contracts entered into before May 3, 2006 for the purchase of a new house priced $450,000 or more, the New Housing Rebate will always be $zero and the Transitional Rebate will always be 1% of the purchase price.
In the case where a contract to purchase a new house priced less than $450,000 is entered into before May 3, 2006, the purchaser’s New Housing Rebate must be taken into account when calculating the Transitional Rebate.
Example: Transitional Rebate and the New Housing Rebate
Assume the purchaser buys a new home priced at $200,000 plus GST and is entitled to the new housing rebate. The Transitional Rebate works out to $1,280 rather than $2,000.
Here’s why:
First, the new housing rebate on a $200,000 house is $5,040 – that is, 36% of the 7% GST paid on $200,000.
Second, the Transitional Rebate is adjusted because the purchaser is only out of pocket $8,9602 of GST on the full $200,000 purchase price of the new house. In actual fact, the Transitional Rebate works out to be $1,2803, not the $2,000 that the purchaser may be expecting.
Renegotiated Contracts
The reason for the renegotiated contract must be something other than to artificially access a 1% GST rate reduction. If a pre-May 3, 2006 contract is renegotiated after May 2nd for the sole purpose of extending the possession and ownership date to a day that falls on or after July 1st, the CRA will consider the renegotiated contract to be a new contract and may invoke an “anti avoidance” rule to collect the GST benefit from your client.
However, if a pre-May 3, 2006 contract is renegotiated after May 2nd to include an upgrade to a premium appliance package, the contract is not considered to be a new contract and the purchaser will still be entitled to claim the Transitional Rebate if possession and ownership transfer on or after July 1, 2006.
Example: Renegotiated Contract to Include Upgrades
A purchaser enters into contract on March 1, 2006 to buy a new $500,000 house that will be completed by the builder on August 15, 2006. On May 15th however, the purchaser negotiates a $40,000 appliance upgrade. So long as possession and ownership transfer on or after July 1, 2006, the purchaser will pay 7% GST on the original $500,000 contract price plus 7% GST on the $40,000 appliance upgrade.
However, because the contract is still considered to be a pre-May 3, 2006 contract (notwithstanding the renegotiated upgrades) and possession and ownership transfer on or after July 1, 2006, the purchaser will be entitled to a Transitional Rebate. This rebate will be $5,400, computed on the total amount ($540,000) paid for the new house. Overall, the GST burden is 6%.This is exactly the same 6% GST result as if the contract was signed on or after May 3, 2006 for the purchase of the new $540,000 house (including upgrades) with possession and ownership transferring on or after July 1, 2006.