Be wary of HST rebate rules when buying a new home
Posted: 20 Apr 2016 04:00 AM PDT
Bob Aaron in Legal in Home Buying, Condo Buying
A decision by the Tax Court of Canada last month has muddied the waters about who is — and is not — entitled to the new-home owner’s HST rebate.
In recent years, Canada Revenue Agency (CRA) has been aggressively clawing back HST rebates of $24,000 or more from some buyers who received them on closing.
In those cases, a third party who is not a close relation is registered on title at the insistence of a mortgage lender when the buyers do not qualify for a mortgage based on their own credit.
The rebate will be allowed only if a child, grandchild, brother or sister, spouse or common-law partner is a registered owner, but does not live in the home with the principal owner.
But when a cousin, aunt, uncle, nephew, niece, friend or business associate is registered on title for mortgage purposes, even if they have only a 1 per cent share, none of the buyers can get the rebate.
CRA has always taken the position that all of the buyers must qualify, not just most of them.
That’s what happened in 1999 when Phil Davidson bought a duplex in Calgary from a builder, but the mortgage lender required his friend Carol Waterhouse to go on title. Davidson did not qualify for financing himself.
CRA said Davidson wasn’t entitled to any of the rebate because Waterhouse wasn’t living in the property as her primary residence, and the Tax Court of Canada upheld the clawback.
Relying on this ruling, CRA has routinely re-assessed many buyers of new homes in similar situations, and ordered them to pay back the entire rebate — often as much as $26,000.
All that may change in light of a ruling in February by Justice Joe E. Hershfield of the Tax Court of Canada on almost identical facts.
Sheryl Crooks bought a property in Vaughan from a builder but did not qualify on her own for a mortgage from her Credit Union. Her friend, Donna Richards, agreed to take a 1-per-cent interest in the property so that the mortgage would be approved. She did not live in the house.
On closing, Crooks received a $24,000 credit for the HST rebate, but the CRA later re-assessed her, and ordered her to repay it. Crooks appealed to the Tax Court of Canada.
In a detailed, 4,900-word decision, Justice Hershfield ruled that Crooks was entitled to the rebate.
“There is no possible policy reason,” he ruled, “to come to a different conclusion . . . Adding a person to title to meet the requirements of a mortgagee should not result in the loss of the rebate.”
The result, he noted, is consistent with the objects of the Excise Tax Act, and ensures that the objects of the legislation have been met.
The judge acknowledged that his analysis and findings “diverge” from rulings by other judges in the same court. He added, “I encourage the CRA to review its assessing practices.”
At press time, Alisa Apostle, counsel for the Department of Justice Canada, advised that the government was not going to appeal the decision.
In the meantime, with conflicting court decisions, buyers of new homes who need friends or relatives to go on title for mortgage purposes, are unable to determine whether or not they qualify for the rebate.
The Minister of National Revenue, Diane Lebouthillier, needs to step up to the plate and acknowledge that the Crooks decision is correct, allowing future home buyers to plan their lives and finances accordingly.
As well, all prior purchasers who have been improperly and unfairly assessed should receive a refund.
Bob Aaron is Toronto real estate lawyer. His Title Page column appears on this blog, Move Smartly, and in The Toronto Star. You can follow Bob on Twitter @bobaaron2 and at his website aaron.ca Email Bob
Posted: 20 Apr 2016 04:00 AM PDT
Bob Aaron in Legal in Home Buying, Condo Buying
A decision by the Tax Court of Canada last month has muddied the waters about who is — and is not — entitled to the new-home owner’s HST rebate.
In recent years, Canada Revenue Agency (CRA) has been aggressively clawing back HST rebates of $24,000 or more from some buyers who received them on closing.
In those cases, a third party who is not a close relation is registered on title at the insistence of a mortgage lender when the buyers do not qualify for a mortgage based on their own credit.
The rebate will be allowed only if a child, grandchild, brother or sister, spouse or common-law partner is a registered owner, but does not live in the home with the principal owner.
But when a cousin, aunt, uncle, nephew, niece, friend or business associate is registered on title for mortgage purposes, even if they have only a 1 per cent share, none of the buyers can get the rebate.
CRA has always taken the position that all of the buyers must qualify, not just most of them.
That’s what happened in 1999 when Phil Davidson bought a duplex in Calgary from a builder, but the mortgage lender required his friend Carol Waterhouse to go on title. Davidson did not qualify for financing himself.
CRA said Davidson wasn’t entitled to any of the rebate because Waterhouse wasn’t living in the property as her primary residence, and the Tax Court of Canada upheld the clawback.
Relying on this ruling, CRA has routinely re-assessed many buyers of new homes in similar situations, and ordered them to pay back the entire rebate — often as much as $26,000.
All that may change in light of a ruling in February by Justice Joe E. Hershfield of the Tax Court of Canada on almost identical facts.
Sheryl Crooks bought a property in Vaughan from a builder but did not qualify on her own for a mortgage from her Credit Union. Her friend, Donna Richards, agreed to take a 1-per-cent interest in the property so that the mortgage would be approved. She did not live in the house.
On closing, Crooks received a $24,000 credit for the HST rebate, but the CRA later re-assessed her, and ordered her to repay it. Crooks appealed to the Tax Court of Canada.
In a detailed, 4,900-word decision, Justice Hershfield ruled that Crooks was entitled to the rebate.
“There is no possible policy reason,” he ruled, “to come to a different conclusion . . . Adding a person to title to meet the requirements of a mortgagee should not result in the loss of the rebate.”
The result, he noted, is consistent with the objects of the Excise Tax Act, and ensures that the objects of the legislation have been met.
The judge acknowledged that his analysis and findings “diverge” from rulings by other judges in the same court. He added, “I encourage the CRA to review its assessing practices.”
At press time, Alisa Apostle, counsel for the Department of Justice Canada, advised that the government was not going to appeal the decision.
In the meantime, with conflicting court decisions, buyers of new homes who need friends or relatives to go on title for mortgage purposes, are unable to determine whether or not they qualify for the rebate.
The Minister of National Revenue, Diane Lebouthillier, needs to step up to the plate and acknowledge that the Crooks decision is correct, allowing future home buyers to plan their lives and finances accordingly.
As well, all prior purchasers who have been improperly and unfairly assessed should receive a refund.
Bob Aaron is Toronto real estate lawyer. His Title Page column appears on this blog, Move Smartly, and in The Toronto Star. You can follow Bob on Twitter @bobaaron2 and at his website aaron.ca Email Bob
Buying a Home? Get the Facts on HST
HST Info Sheet from Canada Revenue Agency
29/Oct/2010;
The info sheet “Harmonized Sales Tax: Provincial Transitional New Housing Rebates for Housing in Ontario and British Columbia” is now available by clicking here.
This info sheet explains how the provincial transitional new housing rebate applies to purchasers and builders of newly constructed or substantially renovated housing in Ontario or B.C., including builder-landlords who construct or substantially renovate rental housing.
REF. October 27, 2010 Volume 18, No.42 OREB News letter
The info sheet “Harmonized Sales Tax: Provincial Transitional New Housing Rebates for Housing in Ontario and British Columbia” is now available by clicking here.
This info sheet explains how the provincial transitional new housing rebate applies to purchasers and builders of newly constructed or substantially renovated housing in Ontario or B.C., including builder-landlords who construct or substantially renovate rental housing.
REF. October 27, 2010 Volume 18, No.42 OREB News letter
Most Ontarians confused about HST and resale
56% mistakenly believe HST applies to purchase price
Toronto, Ontario, October 27, 2010 – An Ipsos Reid survey commissioned by the Ontario Real Estate Association (OREA) and released today reveals that fully 56 percent of Ontarians mistakenly believe that the new Harmonized Sales Tax (HST) applies to the full purchase price of a resale home. In fact the HST is only levied on the various transaction fees associated with the purchase of a home that has been previously occupied (i.e. not a newly-built home).
Read more...
Toronto, Ontario, October 27, 2010 – An Ipsos Reid survey commissioned by the Ontario Real Estate Association (OREA) and released today reveals that fully 56 percent of Ontarians mistakenly believe that the new Harmonized Sales Tax (HST) applies to the full purchase price of a resale home. In fact the HST is only levied on the various transaction fees associated with the purchase of a home that has been previously occupied (i.e. not a newly-built home).
Read more...
What's Taxable Under the HST and What's Not
What's Taxable Under the HST and What's Not?
Answering your questions about Ontario's Harmonized Sales Tax...
Read More for examples of common products and services and how they will be affected by the HST.
Answering your questions about Ontario's Harmonized Sales Tax...
Read More for examples of common products and services and how they will be affected by the HST.
When does the HST apply?
Jun 1, 2010;
Applying the HST: REALTOR®tips
The new harmonized sales tax (HST) takes effect July 1st. Ontario REALTORS® need to prepare for the changes now. The HST will affect certain current agreements, such as purchase and sale agreements for new homes that close on or after July 1, 2010. However, REALTORS® also need to consider how HST will apply to their services that “straddle” the start up date of July 1, 2010.
The following guidelines have been summarized from information prepared by Rob Allwright, Senior Principal, KPMG-Ottawa for CREA and can be found along with further explanations and information about the HST at www.realtorlink.ca .
HST will generally apply to the same tax base as the current GST and GST registered REALTORS® will be automatically registered for the HST. As a result, REALTORS® will apply HST to the fees for their services relating to property in Ontario and BC that are currently subject to GST. For example, rather than REALTORS® commissions being subject to GST at the rate of five per cent, REALTORS® commissions for services relating to property in Ontario will be subject to HST at the rate of 13 per cent.
In addition, REALTORS® will pay the Ontario HST on most of their costs, such as office leases, office supplies, and equipment including computers and software. Some of these costs, such as the lease of office space, were previously only subject to GST.
Although REALTORS® will pay more sales tax as a result of a broader taxable base of goods and services, they will generally be able to recover the HST they pay by claiming input tax credits (ITCs). REALTORS® will no longer have to pay unrecoverable provincial sales tax (PST) on purchases consumed in providing their services, such as computers, software and office supplies. In terms of the overall impact of harmonization on a REALTORS® costs, there should be a net benefit.
Transitional rules
Ontario and BC released general transitional rules for the HST. These rules explain how HST will apply to transactions that straddle the start-up date. For purposes of the following discussion, it is assumed that a REALTORS® commission becomes due or is paid when the property is sold or leased.
The HST would generally apply to REALTORS® services to the extent, expressed as a percentage, that the services are performed on or after July 1, 2010. However, if 90 per cent or more of the services are performed before July 1, 2010, the HST will not apply.
For example, a REALTORS® services are performed from June 1, 2010 to July 2, 2010 with the sale of the property closing on July 2, 2010. The REALTORS® commission becomes due at that time of closing. More than 90 per cent of the REALTORS® services were performed before July 1, 2010. In these circumstances, the GST at the rate of five per cent will apply to the REALTORS® services.
In another example, a REALTORS® services are performed from May 1, 2010 to July 31, 2010 with the sale of the property closing on July 31, 2010. The REALTORS® commission becomes due at that time. In this case, two thirds of the services were performed from May 1, 2010 to June 30, 2010 and one third of the services were performed from July 1, 2010 to July 31, 2010. The REALTORS® will charge GST on two thirds of the amount charged for the services and HST on the remaining third.
When service starts and ends
Based on discussions with Canada Revenue Agency and Finance Canada officials it is a question of fact when the REALTOR® service commences and ends for purposes of applying either GST or HST under the transitional rules. The Canada Revenue Agency will consider various factors when making a determination as to when the services are performed and how the GST or HST will apply to the commission. These factors include:
In general, the service commences when the agent and client sign a listing agreement or buyer agency agreement. The service may conclude when the deal has “closed” – (leased or sold). It may or may not conclude when an agreement of purchase of sale/lease has been signed because the REALTOR® could still provide some services up to the time the REALTOR® is paid when the deal closes.
Canada Revenue Agency and Finance officials have indicated verbally that a reasonable basis to apply the 90/10 percent rule and to determine how much HST will be payable on the services may be to prorate the number of calendar days:
The application of this approach will depend on your particular circumstances.
There are three general approaches that a REALTOR® may take depending on the REALTOR®’s circumstances and how conservative the REALTOR® wants to be. The most conservative approach is to charge and collect GST or HST based on when the transaction closes. If the approach is questioned by the client, the REALTOR® can decide whether or not it is appropriate in the circumstances to adjust the amount of tax (and take an offsetting adjustment in the REALTOR®’s return) or to advise the client that the client may make a tax paid in error claim.
Another less conservative approach is to allocate the fee between the services performed before July 1, 2010 and on or after July 1, 2010, based on the date of the listing agreement or buyer agency agreement and when the transaction closes.
The least conservative approach is to allocate the fee between the services performed before July 1, 2010 and on or after July 1, 2010, based on the date of the listing agreement or buyer agency agreement and when a firm agreement of purchase and sale is concluded. For example, if a REALTOR® determines in the REALTOR®’s circumstances that the REALTOR®’s services were performed prior to the date on which the agreement of purchase and sale was signed, the REALTOR® should be prepared to provide documentation to support this if the transaction is reviewed at audit. It is recommended that you discuss with your tax advisor an appropriate approach in your circumstances.
HST highlights
Applying the HST: REALTOR®tips
The new harmonized sales tax (HST) takes effect July 1st. Ontario REALTORS® need to prepare for the changes now. The HST will affect certain current agreements, such as purchase and sale agreements for new homes that close on or after July 1, 2010. However, REALTORS® also need to consider how HST will apply to their services that “straddle” the start up date of July 1, 2010.
The following guidelines have been summarized from information prepared by Rob Allwright, Senior Principal, KPMG-Ottawa for CREA and can be found along with further explanations and information about the HST at www.realtorlink.ca .
HST will generally apply to the same tax base as the current GST and GST registered REALTORS® will be automatically registered for the HST. As a result, REALTORS® will apply HST to the fees for their services relating to property in Ontario and BC that are currently subject to GST. For example, rather than REALTORS® commissions being subject to GST at the rate of five per cent, REALTORS® commissions for services relating to property in Ontario will be subject to HST at the rate of 13 per cent.
In addition, REALTORS® will pay the Ontario HST on most of their costs, such as office leases, office supplies, and equipment including computers and software. Some of these costs, such as the lease of office space, were previously only subject to GST.
Although REALTORS® will pay more sales tax as a result of a broader taxable base of goods and services, they will generally be able to recover the HST they pay by claiming input tax credits (ITCs). REALTORS® will no longer have to pay unrecoverable provincial sales tax (PST) on purchases consumed in providing their services, such as computers, software and office supplies. In terms of the overall impact of harmonization on a REALTORS® costs, there should be a net benefit.
Transitional rules
Ontario and BC released general transitional rules for the HST. These rules explain how HST will apply to transactions that straddle the start-up date. For purposes of the following discussion, it is assumed that a REALTORS® commission becomes due or is paid when the property is sold or leased.
The HST would generally apply to REALTORS® services to the extent, expressed as a percentage, that the services are performed on or after July 1, 2010. However, if 90 per cent or more of the services are performed before July 1, 2010, the HST will not apply.
For example, a REALTORS® services are performed from June 1, 2010 to July 2, 2010 with the sale of the property closing on July 2, 2010. The REALTORS® commission becomes due at that time of closing. More than 90 per cent of the REALTORS® services were performed before July 1, 2010. In these circumstances, the GST at the rate of five per cent will apply to the REALTORS® services.
In another example, a REALTORS® services are performed from May 1, 2010 to July 31, 2010 with the sale of the property closing on July 31, 2010. The REALTORS® commission becomes due at that time. In this case, two thirds of the services were performed from May 1, 2010 to June 30, 2010 and one third of the services were performed from July 1, 2010 to July 31, 2010. The REALTORS® will charge GST on two thirds of the amount charged for the services and HST on the remaining third.
When service starts and ends
Based on discussions with Canada Revenue Agency and Finance Canada officials it is a question of fact when the REALTOR® service commences and ends for purposes of applying either GST or HST under the transitional rules. The Canada Revenue Agency will consider various factors when making a determination as to when the services are performed and how the GST or HST will apply to the commission. These factors include:
- when agreements are entered into (such as the listing agreement or buyer agency agreement and the agreement of purchase and sale) and when the transaction closes;
- the records retained by the REALTOR®, such as mileage logs; and
- the time period during which the REALTOR® is engaged by the client.
In general, the service commences when the agent and client sign a listing agreement or buyer agency agreement. The service may conclude when the deal has “closed” – (leased or sold). It may or may not conclude when an agreement of purchase of sale/lease has been signed because the REALTOR® could still provide some services up to the time the REALTOR® is paid when the deal closes.
Canada Revenue Agency and Finance officials have indicated verbally that a reasonable basis to apply the 90/10 percent rule and to determine how much HST will be payable on the services may be to prorate the number of calendar days:
- before July 1, 2010 (GST applies); and
- after June 30 (HST applies)
The application of this approach will depend on your particular circumstances.
There are three general approaches that a REALTOR® may take depending on the REALTOR®’s circumstances and how conservative the REALTOR® wants to be. The most conservative approach is to charge and collect GST or HST based on when the transaction closes. If the approach is questioned by the client, the REALTOR® can decide whether or not it is appropriate in the circumstances to adjust the amount of tax (and take an offsetting adjustment in the REALTOR®’s return) or to advise the client that the client may make a tax paid in error claim.
Another less conservative approach is to allocate the fee between the services performed before July 1, 2010 and on or after July 1, 2010, based on the date of the listing agreement or buyer agency agreement and when the transaction closes.
The least conservative approach is to allocate the fee between the services performed before July 1, 2010 and on or after July 1, 2010, based on the date of the listing agreement or buyer agency agreement and when a firm agreement of purchase and sale is concluded. For example, if a REALTOR® determines in the REALTOR®’s circumstances that the REALTOR®’s services were performed prior to the date on which the agreement of purchase and sale was signed, the REALTOR® should be prepared to provide documentation to support this if the transaction is reviewed at audit. It is recommended that you discuss with your tax advisor an appropriate approach in your circumstances.
HST highlights
- Starting July 1st, the HST will be in effect in Ontario.
- Purchasers of newly constructed homes for primary residences up to $400,000 would not, on average, be subject to an additional tax burden in view of the new housing rebate up to $24,000.
- There is a new rental housing rebate, similar to the enhanced new housing rebate, for new residential rental properties.
- For new homes constructed in full or in part prior to July 1, 2010 that are subject to the HST on or after July 1, 2010, a PST transitional housing rebate is available to provide relief in respect to the PST embedded in the home.
- HST will not be applicable to a used residence for re-sale.
- For those who sell their home in Ontario, there will be a 13 per cent tax payable on the real estate commission (an eight per cent increase on top of the current five per cent.).
- Lawyer's fees will also be subject to the 13 per cent HST in Ontario, as will the cost of a Condominium Status Certificate, however the total cost of that status certificate will remain at $100.
- Moving costs, the cost of a home inspection and even home staging will increase to reflect the HST.
- This article provides additional information and clarification promised in a message sent to all members in May. This article is intended for general information only and is not to be relied upon or construed as legal, accounting or other professional advice or a substitute for professional advice. Any questions about HST should be reviewed with brokerages’ and individual REALTORS®’ accountants and other tax advisors.
Important 2010 HST deadlines
Tue, 23 Mar 2010;
The Harmonized Sales Tax will be a reality as of July 1, 2010, but there are savings to be had for some real estate clients if important deadlines are met. To view this and other RG Real Estate Bulletins in French, please visit http://www.rglaw.ca and click on the Publications link More...
The Harmonized Sales Tax will be a reality as of July 1, 2010, but there are savings to be had for some real estate clients if important deadlines are met. To view this and other RG Real Estate Bulletins in French, please visit http://www.rglaw.ca and click on the Publications link More...
Harmonized Sales Tax Seminars
In conjunction with the Canada Revenue Agency, Ontario’s Ministry of Finance is offering information seminars to help Ontario businesses prepare for the implementation of the Harmonized Sales Tax in Ontario. Seminars will address how the PST and GST currently work, and will look at how the proposed harmonized sales tax will impact your business. Participants will learn how to collect and remit these taxes, discuss tax credits and over payments, and will have the opportunity to ask specific questions related to their business.
For more specific questions, or for those who are unable to attend an information session, you can call the Ministry of Revenue at any time at 1-866-ONT-TAXS (1 866 668-8297).
Further information can be found at http://www.rev.gov.on.ca/en/events/pst-gst/index.html
HST Update
Sep 14, 2009;
Some members have inquired about how the introduction of the Harmonized Sales Tax in Ontario next summer will affect agreements and closings related to newly-built residential housing, including condominiums. The government has issued an update document which can be viewed here.
Please note that the information refers only to new construction. Resale property is not currently subject to GST and therefore will not be subject to the single sales tax; however, real estate-related services that are currently subject to GST will be affected by the new tax. Those services include real estate commissions, mortgage and title insurance, legal fees and other closing costs.
Ref: OREB NEWS
Some members have inquired about how the introduction of the Harmonized Sales Tax in Ontario next summer will affect agreements and closings related to newly-built residential housing, including condominiums. The government has issued an update document which can be viewed here.
Please note that the information refers only to new construction. Resale property is not currently subject to GST and therefore will not be subject to the single sales tax; however, real estate-related services that are currently subject to GST will be affected by the new tax. Those services include real estate commissions, mortgage and title insurance, legal fees and other closing costs.
Ref: OREB NEWS