HST on New Construction
Compared with HST on resale residential properties, HST on new construction is considerably more complicated.
As discussed in our previous article, there is usually no HST tax payable on the purchase of an existing residential property in the province of Ontario, but when you are buying new construction, there is indeed HST tax to pay.
And of course, because the government is involved, things can get very complicated.
When buying from a builder, keep in mind that there is always HST to pay on new construction residential real estate. The good news is that there is also an HST “rebate” which is often factored into the purchase price. So while HST is payable on your new construction condo, there is actually a credit already built into the purchase price which saves you from paying all or part of the HST due. And getting that credit is contingent on how you intend to use your new home.
Whether or not you get the discounted price with the built-in rebate is dependent on if you intend to use your real estate purchase as your own residence, or if you intend to rent it out as an investment.
Builders usually incorporate the HST with its accompanying rebate into their offer price. For example, if the quoted price for a new condo is, say $500,000, that is the total price payable, with both HST and HST rebate included. What you need to look out for is what is payable if you lose the rebate. More on that shortly.
Disclaimer: while we do our absolute best to give you up-to-date and useful information about HST issues as they affect real estate, the intricacies of taxation can be extremely complicated. You must consult with your lawyer and accountant to be sure of all the facts.
What is HST?
HST is the “Harmonized Sales Tax”, which is the 13% tax that is paid when a purchaser purchases most things in Ontario
HST is a combination of the 8% province of Ontario sales tax, and the 5% GST tax of the federal government.
HST has been around for a decade or so. Because real estate involves large numbers, the HST tax, when it applies, can be substantial. For example, on a $500,000 purchase of a new condo, the HST payable would be $65,000 ($500,000 x .13). Fortunately, we have a built-in HST rebate when purchasing new construction real estate, and in fact there are two types of rebates.
Two Types of HST Rebate
The first thing to know is that there are actually two types of HST rebate:
- the basic built-in rebate for those purchasers who intend to use the property as their own personal residence, or as a residence for a member of their immediate family (NHR rebate)
- another type of rebate that can be applied for, when an investor purchases new construction real estate, and they intend to rent out the property (NRRPR rebate)
Key Distinction: Personal Residence versus Investor
The determining factor on which HST rebate you qualify for is whether you or your immediate family will be living in the new home yourself or if you are an investor who will be renting out the property after closing.
When you purchase a property from a builder, and you are planning on living in the unit yourself, you will be required to fill out an application for the New Home Rebate (NHR).
Under an NHR, you’ll receive the HST rebate based on the fact that you (or immediate family member) will occupy the new property as your principal residence for at least 12 months.
In the majority of cases, particularly when buying a pre-construction condo in the Greater Toronto Area (GTA), you’ll receive the HST rebate right away in the form of a discounted purchase price. Most condo and home developers already factor the HST rebate into their prices, so it’s built in.
If you sell the property before the 12 months are up, the Canada Revenue Agency (CRA) will require that you pay back the HST rebate in full.
- The new homebuyer (or immediate family member) must occupy the new home as their principal residence for at least 12 months
- If you sell the property before the 12 months are up, you will be required to pay back the HST rebate in full
- Only the new homebuyer or an immediate family member can occupy the new property as their principal residence. The CRA defines “immediate family” as children, parents, siblings, spouses or common-law partners
- If your are ever challenged by the CRA, it’s important to be able to prove that the new home is your principal residence. A utilities bill in your name is probably not going to be enough, and it is recommended that you change your driver’s license address at minimum
- be very careful with co-signers. A co-signer who is not an immediate family member can invalidate your HST rebate, and you will be required to pay
There is a different set of rules if you have bought your new property as an investment, and are intending on renting it out.
In this scenario, you will be required to pay the HST due, up front on closing (the built-in NHR rebate no longer applies), so this can add to your closing costs substantially.
As an investor, of course, you can claim the HST as a legitimate business expense.
In addition, you can also apply to the CRA for a second type of rebate that is designed for real estate investors, called the New Residential Rental Property Rebate (NRRPR).
To receive the HST rebate through an NRRPR, you must provide a one-year lease agreement in order prove the new home will be rented to a tenant for at least 12 months after closing.
The new home must be leased for at least 12 months before it’s sold. If you as an investor-owner sell the property before 12 months are up, the HST rebate no longer applies, and if you have received the rebate, the entire amount must be paid back in full.
When you apply for the investor rebate (NRRPR), it takes about 2 to 3 months to get your refund.
- Investors must provide a one-year lease agreement and rent the new home for at least the first 12 months
- If the new home is sold before 12 months are up, the HST must be paid back in full
- Under an NRRPR, investors must pay the HST in full upfront on closing and will only receive the rebate two or three months after the lease agreement is submitted. As an investor, you need to be prepared for the additional cash requirements at closing
- Investors who plan on the renting the unit get their rebate by filing for an NRRPR
- You can apply for an HST rebate up to a maximum of two years after closing. Once 24 months have passed, you’re no longer eligible to apply for the rebate
How much is the HST rebate?
Harmonized Sales Tax in Ontario adds up to 13% of a new home’s purchase price—a total of 5% GST and 8% PST.
The rebate program allows for new homebuyers to receive a significant portion of the HST back, but there are maximum amount limits for the rebate.
The HST rebate amount is dependent on the purchase price of the new home. As with many government programs, the arithmetic is complicated, especially as there are two layers of government involved – both provincial and federal. There are differing percentage amounts of rebate available, but the maximum amounts are $24,000 from the province, and an additional $6,000 from the federal government, for a total rebate of $30,000.
Tax issues in real estate, including HST on new build construction, can be very complicated. But this is just the starting point. Consider the following examples of possible tax problems:
- are commercial properties subject to HST? answer – yes they are!
- is vacant land subject to HST? – answer – probably!
- what about commercial property partially converted to residential – call your lawyer!
- what happens if I make my purchase as a numbered company? does that affect HST? answer – yes it does, but check with your lawyer!
- what if the buyer is a non-resident of Canada? answer – probably not a problem, but check!
- what about assignment sales? who is responsible for HST? – better to check with both the builder, and your lawyer!
- does the HST rebate apply to newly built cottages? answer – no, only to principal residences and rental properties!
- what if the house is owned, but the land is leased? check with your lawyer!
You get the idea.. for all of these scenarios, it is important for you to check with your lawyer, and ideally also with your tax accountant. As a realtor, we can’t give anyone legal or tax advice, but we hope that we have been able to give you at least a foundation of basic knowledge as a starting point.
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