February 2010

In This Issue...

The HST Transitional rules – What is the cost to the developer?

Since the recent announcement of the BC HST transitional rules on November 18, 2009 for residential housing there have been a lot of questions as to how these will apply.

In the following article Altus will touch on the potential impact to the developer of residential condominiums and rental apartment buildings, with the focus on the Transitional Tax Adjustment and the PST Transitional New Housing Rebate and their application with grandparented and non-grandparented sales.

Residential Condominiums

Firstly we note there are a number of new terms being talked about. We note the definitions below focus on residential condominiums.

Situation Definition Impact Who Pays
Grandparented Home
  • An agreement of purchase and sale is entered into between the builder and purchaser on or before November 18, 2009 and both ownership and possession of the home are transferred after June 2010.
The Provincial portion of the HST does not apply  
Non-Grandparented Home
  • An agreement of purchase and sale is entered into between the builder and purchaser after November 18, 2009 and;
  • Both ownership and possession of the home are transferred after June 30th 2010
The Provincial portion of the HST does apply Purchaser of new home
Transitional Tax Adjustment (TTA)
  • Calculated at 2% of the value of consideration for the condominium unit. Only payable on grandparented homes.
Not a HST tax impact Builder / Developer
PST Transitional New Housing Rebate (PST TNHR)*
  • Available in the following situations:
    • For non-grandparented newly constructed or substantially renovated homes complete or partially complete prior to July 1st 2010.
    • For grandparented condominiums where the transitional tax adjustment is payable.
  • Calculated at either:
    • $60 per square meter of floor space in the home or;
    • 2% of the selling price or fair market value of the home
Not an HST tax impact Builder / Developer claims this rebate

*Note

The following table outlines the percentage of the PST Transitional New Housing Rebate that the developer is entitled to based on the percentage completion of their project.

Completion of construction on July 1, 2010 Percentage of rebate
Less than 10% 0%
Between 10% and less than 25% 25%
Between 25% and less than 50% 50%
Between 50% and less than 75% 75%
Between 75% and less than 90% 90%
More than 90% 100%

For the sake of clarity we have provided our understanding of a few examples for new residential condominiums applying the rules above. These scenarios are based on high level examples. The actual calculations should be done on a unit by unit basis, specific for each project.

Example #1

Project Stats

  • Total number of units – 200
  • Average size of the units – 700 square feet
  • Average price per square foot of the units - $550
  • Project completion – May 2010
  Number of Units Does HST apply to the purchasers? Does the transitional tax adjustment apply? Does the PST transitional new housing rebate apply? HST calculation
Purchase and sale agreements entered into prior to November 18, 2009 with units closing prior to July 1, 2010 125 No No No No HST Payable
Purchase and sale agreements entered into prior to November 18, 2009 with units closing after to July 1, 2010 25 No Yes Yes Value of units - $9,625,000 Transitional Tax adjustment - $192,500 or 2% Transitional new housing rebate - $192,500
Purchase and sale agreements entered into after November 18, 2009 with units closing prior to July 1, 2010 25 No No No No HST payable
Purchase and sale agreements entered into after November 18, 2009 with units closing after July 1, 2010 25 Yes No Yes Value of units - $9,625,000 Transitional Tax adjustment - $192,500 (i.e. 2%) Transitional new housing rebate - $192,500

Based on the above scenario there is a combined net rebate of $192,500 available to the developer for the units which entered into an agreement after November 18,2010 and closed after July 1, 2010.

Example #2

Project Stats

  • Total number of units – 200
  • Average size of the units – 700 square feet
  • Average price per square foot of the units - $550
  • Project Completion – December 2010
  • Percentage complete as at July 1, 2010 – 75%
  Number of Units / total square meters Does HST apply to the purchasers? Does the transitional tax adjustment apply? Does the PST transitional new housing rebate apply? HST calculation
Purchase and sale agreements entered into prior to November 18, 2009 with units closing after July 1, 2010 (Grandparented) 125 / 8,130 m. sq. No Yes Yes Value of units - $48,125,000 Transitional Tax adjustment - $962,500 or 2% Transitional new housing rebate - based on 90% of 2% of the value $866,250 or - based on $60 per square meter of floor area - $439,020
Purchase and sale agreements entered into after November 18, 2009 with units closing after July 1, 2010 (Non-Grandparented) 75 / 4,877 m. sq. Yes No Yes Value of units - $28,875,000 Transitional Tax adjustment - $0 Transitional new housing rebate - based on 90% of 2% of the value - $519,750 or – based on $60 per square meter of floor area - $263,358

We note the above scenario assumes that the percentage complete will be certified for the building and not for each individual unit.

Based on the above scenario the maximum rebates available to the developer would be $423,500 calculated as follows:

PST TNHR ($866,250) + PST TNHR ($519,750) - TTA ($962,500) = $423,500

Together the Transitional Tax Adjustment and the PST Transitional New Housing Rebate, on average, are estimated to equate to the net taxes paid under the current PST regime.

We note the purchasers required to pay HST on their purchase would also be eligible for a rebate given they meet all the criteria. The value of the rebate will be a function of the unit value.

New Rental Housing – How will the HST work?

When a builder constructs or substantially renovates a building whose specific use will be residential rental, they are currently required to pay GST on the self-assessed value of each unit which is determined by the overall value of the building divided by the units share.

A rebate for the provincial portion of the HST payable on new rental housing will be provided for the same properties that were eligible for a GST rebate. The same GST rebate system will still be in place and apply to the federal portion of the HST.

The amount of the provincial portion of the HST payable on a new rental building would be equal to 2% on the first $525,000 of each unit and 7% on the amount above $525,000. The table below outlines an example of the provincial portion of the HST payable and the provincial portion of the HST rebate available on a new rental building.

Unit Value # of Units Total Value Provincial Portion of HST Payable (7%) Provincial Portion of HST Rebate (5%) Provincial Portion of HST Payable % of Provincial Portion of HST Payable
$450,000 20 $9,000,000 $630,000 $450,000 $180,000 2.0%
$500,000 20 $10,000,000 $700,000 $500,000 $200,000 2.0%
$550,000 20 $11,000,000 $770,000 $525,000 $245,000 2.2%
Total 60 $30,000,000 $2,100,000 $1,475,000 $625,000 2.1%

In the above scenario Altus has used BC’s rebate calculation which equates to a max rebate of $26,250 based on a unit value of $525,000. You will note the additional cost to the developer with the implementation of the HST is $625,000 which equates to 2.1% of the total value. The province has estimated the embedded PST cost is 2% of the purchase price and given that PST will no longer be charged on materials supplied for the project and should therefore result in a savings during construction. You will note the net amount of the provincial portion of the HST payable is slightly more than 2% in the above example as some of the units are valued at more than $525,000.

As long as the average value of the units in the building is less than $525,000, the province has anticipated there will be zero impact on the total final cost. We note however that 1) this will be dependant on any savings achieved from the embedded PST being passed on to the Developer by the contractors and 2) in the event of a high end building the embedded PST cost savings will not offset the additional HST costs.

Impact of HST on Construction Costs
  • When entering into a contract with a contractor or subcontractor prior to July 1, 2010 whose work will span this period it is important to know that an invoice submitted prior to this date will include embedded PST however an invoice submitted after this date will not as they will now be entitled to claim a full rebate for the HST charged. Therefore the contractor or subcontractor will gain an immediate savings of the PST they previously had to pay on their materials and this should be reflected in their pricing.
  • When entering into a contract with a contractor or subcontractor after July 1, 2010 the developer needs to be aware that the contractor is no longer paying PST on any materials but rather they are paying HST for which they receive full rebates, therefore this should be reflected in their pricing. Further bid analysis should be undertaken to ensure these savings are being passed along. Likely, this will be ultimately based on current market conditions.

Altus previously published a report for the Canadian Home Builders’ Association outlining the potential impact of the HST on the construction renovation sector. A few key points from this report are as follows:

  • It will increase the annual tax burden on homeowners and rental housing investors in Ontario and B.C. combined by close to $1 billion annually;
  • It could negate substantial on-going efforts by governments to promote housing affordability and choice;
  • It could potentially shift more activity into the “underground economy” with implications on government tax revenue, renovation quality and homeowner liability; and
  • It could potentially negate the on-going programs by governments to promote economic development and environmental objectives through targeted homeowners renovation assistance.

The complete Altus Group report on the potential impacts of Sales Tax Harmonization on the residential renovation sector can be found on the BILD website.

http://www.bildgta.ca/BILD/uploadedFiles/Media/Releases_2009/impacts.pdf

If you have any questions or require additional information please contact
Valuation Questions: David Eger 778-329-9251 david.eger@altusgroup.com
  Pedro Tavares 778-329-9270 pedro.tavares@altusgroup.com
  Carl Nilsen 778-329-9244 carl.nilsen@altusgroup.com
     
Cost Questions: Ryan Perrie 778-329-9276 ryan.perrie@altusgroup.com
  Steve Elias 778-329-9280 steve.elias@altusgroup.com
Liam Murray 778-329-9264 liam.murray@altusgroup.com
     
Property assessment questions: David Howard 778-329-9252 david.howard@altusgroup.com
  Ed Furlan 778-329-9240 ed.furlan@altusgroup.com
  Phil Gertsman 778-329-9293 phil.gertsman@altusgroup.com

Please click on the three links below to view our previous newsletters
October 2009 July 2009 April 2009 September 2008 March 2008 October 2007

 

Altus Group Limited
The Grosvenor Building - Suite #630
1040 West Georgia Street
Vancouver, BC  V6E 4H1
www.altusgroup.com