by Stuart Hough

A lot has been made of the Ontario government's decision to combine the province's PST/RST regime with the federal GST, the dreaded HST. As of July 1, 2010 most goods and services will now be HST taxable at 13%. Arguably, no sector will be harder hit by the new HST than the real estate sector. Unfortunately, there appears to be a lot of misinformation with respect to how the HST will affect the purchase and sale of real estate in Ontario and the purpose of this article is to try to dispel any such misinformation.

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Generally the current GST rules will apply to the new HST and thus, a lot of the services that were not previously subject to PST/RST will now be HST taxable. This change will increase the cost of purchasing and selling residential real estate in Ontario. Examples of these services in the context of a typical residential real estate transaction would be the following:

a) Real Estate Commission;
b) Legal Fees and Disbursements;
c) Appraisal Fess;
d) Home Inspection Fees; and
e) Moving Costs.

With these services being HST taxable at 13%, as opposed to only GST taxable at 5%, OREA expects that the increase in costs involved with closing a real estate transaction as a result of the implementation of the HST at the average list price in Ontario of $318,366.00 will be $1,513.00.

Home ownership costs are also expected to increase as a result of the implementation of the HST, as home owners will face increased costs for services, such as maintenance, renovations, replacement purchases, service contracts, cable television, internet, telephone, snow removal, and landscaping. Furthermore, home insurance premiums are expected to increase due to the fact that insurance providers are exempt suppliers under the Excise Tax Act. Thus while insurers will not charge HST directly on insurance premiums, they will not have an ability to claim input tax credits on the HST charged on their operating costs and as a result are expected to pass this additional cost on to consumers.

Whereas the above discussion focused on the resale real estate market, the new housing market will also feel the effects of the HST. Currently, builders are required to charge and remit GST on the supply of new housing to consumers, but cannot charge PST/RST. As a result of this practice a certain amount of PST/RST becomes imbedded in the purchase price, as builders have to pay PST/RST on building supplies but cannot charge consumers PST/RST. Under the new regime new residential housing will be HST taxable at 13%. However, much like with the GST on new residential housing, much of the HST will be offset in the form of rebates and typically the HST net of rebates will be included in the purchase price. The major rebate will be the HST New Housing Rebate, which is expected to make the purchase of new homes with a purchase price under $400, 000 neutral, when compared with the previous regime. However, individuals that are purchasing new housing with a purchase price over $400,000 are expected to take a significant tax hit, as the HST New Housing Rebate will not be available over the $400,000 threshold. For those individuals with agreements already in place with a builder it is important to note that a transaction will not be HST taxable at 13% if either: (a) the agreement was executed before June 18, 2009; or (b) ownership or possession are transferred before July 1, 2010.

While this article touches on some of the areas of concern regarding the HST it is certainly not exhaustive and as always it is important to seek out and obtain sound professional advice when entering into contracts for the purchase and sale of real estate.

This article has been written by Stuart Hough. Stuart is a lawyer at Giffen LLP. He advises clients in the areas of business and financial services, real estate, wills, trusts and estates law.