June 7th - 2006

New GST rate will keep dollars in homebuyers’ pockets

Ontario homebuyers can save thousands of dollars this summer on newly-built homes thanks to the Federal government plan to reduce the GST from seven per cent to six per cent, effective July 1, 2006.

Ontario homebuyers can save thousands of dollars this summer on newly-built homes thanks to the Federal government plan to reduce the GST from seven per cent to six per cent, effective July 1, 2006.
 

Take the example of a $344,000 home, the average price for a new single family detached home in Ontario in 2005 (source: CMHC). As homes under $350,000 will continue to receive a rebate of 36% of the GST paid, the savings would be $2201. On this average home, where:

  • ownership or possession is transferred before July 1, 2006, the tax the consumer will pay minus the new housing rebate is $15,411;
  • ownership and possession is transferred on or after July 1, 2006, and the Agreement of purchase and sale is signed after May 2, 2006, the tax the consumer will pay is $13, 210;
  • ownership and possession are transferred on or after July 1, 2006, but the written agreement was entered into on or before May 2, 2006, the tax remitted would be $15,411 with a transitional adjustment of $2201.

In these circumstances, where transfer of ownership and possession both take place on or after July 1, 2006, the purchaser will be entitled to file a claim with the Canada Revenue Agency to be paid a Transitional Adjustment that reflects the GST rate reduction to six per cent net of any corresponding rebate adjustment.

The proposed reduction in the GST may be an incentive for some consumers to get into the market or move up to a larger home. But for REALTORS® and brokerages it will mean some number crunching and understanding of how and when to apply the new, lower rate.

Service charges
In order to offer brokerages some guidance, KPMG Ottawa has provided sample questions and answers (see below). To facilitate the transition to the lower rate, Budget 2006 proposes transitional rules for determining the GST rate applicable to transactions that straddle the July 1, 2006 implementation date.

How do real estate brokers determine if they should charge the seven per cent or the six per cent GST rate? 

Answer: The general transitional rule will apply. That is, it will be necessary to determine when the GST on the real estate broker's fees is paid or payable:
If GST becomes payable on or after July 1, 2006, without having been paid or payable before that day, the six per cent GST rate will apply.
If GST becomes payable or is paid before July 1, 2006, the seven per cent GST rate will apply.

GST is generally payable when an invoice is issued. However, as some real estate brokerages may not issue invoices, it will be necessary to determine when the recipients of the brokers' service (i.e., the clients) are required to pay the GST under the brokers' service agreement. It is understood that this is usually on the closing/possession date. As a result, if the closing/possession date is on or after July 1, 2006, (and the broker was not paid prior to July 1, 2006) the six per cent GST rate will apply.

What would be the effect, for GST purposes, of canceling a previous agreement entered into prior to May 2, 2006, and entering into a new agreement after May 2, 2006 for the sale of a new home, for purposes of changing the date ownership and possession pass to a date on or after July 1, 2006?

Answer: The effect is that the six per cent GST rate will apply. Also, the new home may qualify for the new housing rebate, but the reduced maximum value of $7,560, rather than $8,750 will apply.

However, there should be a reason for the change, other than just reducing the GST rate, as there is a possibility that any benefit could be assessed under the General Anti-Avoidance Rules ("GAAR") in the GST legislation.

Sample questions and answers regarding the reduction in the rate of GST can be found on the Canada Revenue Agency Web site at http://www.cra-arc.gc.ca/agency/budget/2006/gstrateqa-e.html. Scroll down to Table of contents and click on Sales of Property or Real Property.

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Ontario Real Estate Association

Jean-Adrien Delicano

Senior Manager, Media Relations

JeanAdrienD@orea.com

416-445-9910 ext. 246

Ontario Real Estate Association
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