Jul
26

HST & HST REBATE ON PRE-CONSTRUCTION BUYING & INVESTING.

HST

The topic of HST and HST rebate is one that has created much confusion over the years since its inception back in 2010. Since the introduction of HST by the Mcguinty government in July 2010, there’s been multiple perceptions, confusion and opinions about how it works, who gets it and who benefits from it. HST and how it affects pre-construction purchasers, specifically investors (i.e. up to 80% of the Condo market right now), is a terribly unclear issue.

Back in April, we briefly discussed HST in another post  10 THINGS TO KNOW ABOUT BUYING PRE-CONSTRUCTION CONDOS IN THE GTA. and obviously we didn’t have the opportunity to delve deeply into this topic for our clients and readers alike. At this point, we believe its necessary to shed more light on this topic as we find that most first time home buyers and younger or first time investors have multiple questions surrounding this topic. Buyers and investors alike want to know how HST rebates can be of benefit to them when buying/investing in a pre-construction project (low, mid and high-rise). I believe this post will present you with all the information needed to have working knowledge of how it works and how it benefits you as a buyer or an investor. That being said, I must point out that every real estate purchase or investment opportunity is unique in and of itself and so independent legal and accounting advise from a seasoned professional is always needed. We can point you in the right direction if you need a lawyer or an accountant to help shed more light on these when buying or investing.

WHY DOES ONTARIO REBATE HST ON NEW HOMES?

Harmonized Sales Tax was implemented in Ontario on July 1, 2010, which raised the tax on new homes in the province from 5% (GST) to 13% (HST). In an effort to help homeowners deal with the increased cost of buying a new home, the Government introduced a rebate program to reimburse buyers for a portion of the additional new home tax.

HST Housing Rebate in Ontario

The Ontario HST rebate for new homes is available to anyone in the province who purchases a new home or condo from a builder, or who hires a builder to construct a new house. When purchasing a new home or condo to live in, or for a family member to live in, the Ontario HST rebate is frequently assigned to the builder upon closing. This rebate is used by the builder to consequently lower the purchase price of the project by the rebate amount. This allows the home builder or condo developer to advertise a lower “sticker price” increasing sales, and enables a buyer to more easily qualify for a mortgage large enough to afford the property. For most developers, there is an HST rebate built into the price of every pre-construction project sold in the GTA. The assumption is that the buyer of any given pre-construction project is an end-user (meaning that these buyers are buying for their personal use, not to flip for profit, or to rent out to a tenant), therefore they qualify for this rebate which the builder collects on their behalf. Investors also qualify for this rebate but under a different program known as the Ontario New Residential Rental Property Rebate program.

Ontario New Residential Rental Property Rebate (NRRPR)

For Investors, when purchasing a new condo or home to rent out, the Ontario NRRP Rebate can only be applied for by the investor after closing and never by the builder (this is important). This creates an additional financial requirement when buying a brand new rental property as you will have to pay the full purchase amount including HST upfront until the rebate is granted (This should never be a discouragement when investing as you have to consider the overall ROI on your purchase in comparison to cost and this is not a permanent cost considering that there’s a rebate). For this reason, anyone who buys a new home or condo as an investment property should promptly apply for the rebate.

NRRP Rebate and HST Rebate Application Service

If you recently bought a new house or condo and did not transfer rights to your new home rebate to the builder in exchange for a lower purchase price, you can obtain a rebate of up to $32,000 (we will explain this in detail). Applying for the rebate on your own can be difficult and confusing; our trusted service ensures you receive your maximum eligible rebate as fast as possible (we can recommend service providers that will help you with such and our lawyers can guide you accordingly as well).

Ontario HST Rebate New Home Eligibility

You may be eligible for an HST rebate of up to $24,000 if you have done any of the following in Ontario:

  • Purchased a newly constructed home
  • Purchased a new condo
  • Built a house
  • Contracted someone to build a house
  • Substantially renovated a house or condominium
  • Contracted someone to extensively renovate a home or condo
  • Added a major addition to a home
  • Rebuilt a home that was destroyed by fire
  • Bought shares in a newly constructed cooperative housing project
  • Converted a non-residential property into a home

What is the Maximum New Housing HST Rebate Possible?

We will have to do some math here, so please don’t run away just yet.lol. Put on your math cap and follow the examples. This is simple math and it can save you a whole lot as a buyer or investor.

New home buyers in Ontario are charged 13% HST on their purchase, which consists of a 5% federal tax and 8% provincial tax. The new house HST rebate in Ontario essentially kicks back a percentage of the Ontario portion of the HST (PST) depending on the percentage of completion of the development as of July 1st, 2010. So since we will only be investing and buying newer projects in the GTA in 2015 you can expect that you will get 100% of the PST portion of the HST paid back in rebate up to a new home purchase amount of $400,000. This results in a maximum rebate of $32,000 ($400,000 x 0.08). In other provinces, the new home rebate is clawed-back for any house purchase over $450,000. This is not the case in Ontario, however, where the rebate is never clawed back it simply only applies to the first $400,000 meaning the largest rebate possible even for a million dollar home is $32k.

The provincial transitional new housing rebate is based on the degree of completion of the construction or substantial renovation of the housing as of July 1, 2010, and the estimated RST/PST content embedded in the housing. For housing that is 90% or more complete as of July 1, 2010, the rebate is equal to 100% of the estimated PST embedded in the housing price. The rebate decreases based on certain degree of completion thresholds and no rebate is available where the housing is less than 10% complete as of July 1, 2010. The following table illustrates the various degree of completion thresholds and the rebate percentage that applies for each of those thresholds. The rebate percentage is used to determine the amount of the rebate.Extracted from Calculating the provincial transitional new housing rebate.

CRA

EXAMPLE:   If the price from a builder is $500,000.00, the gross 8% PST component of the HST would be 8% on the first 400,000 which will amount to $32,000.00.

An investor-buyer who will rent out the unit will NOT qualify for assignment of PST rebate to the builder and, therefore, on closing, must pay the purchase price of $500,000.00 plus the gross PST of $40,000.00, (being a total of $540,000.00) and then, after closing apply to the government for the rebate of $32,000.00 to be received if the investor qualifies (must be owning for one year and rent to a tenant who is reasonably expected to live in the unit for one year, although the rebate application can be made as soon as the purchase from the builder is closed).

Qualifying  for a Rebate (GST or PST) when Buying from a Builder
In order to qualify for GST or PST rebates, the property purchased from a builder must be intended to be a primary place of residence, which means that if a person has more than one residence in the world, (in order to qualify for the rebate) the unit must be the main place of residence and not a secondary residence.

Also, the residence purchased must be used as a primary place of residence by the buyer or a relation of the buyer.  Relation of the buyer includes an individual who is related by blood, marriage, adoption or common law (including a former spouse or a former common law partner).  Blood relation is limited to parents, siblings, children, grandchildren but does not include cousins, uncles or aunts.

How Long Does It Take To Receive The HST Rebate?

NRRP rebates and new housing HST rebates are typically received from the Canada Revenue Agency (CRA) within two months. Rebates can be as fast as 4 weeks, but can occasionally take up to six months to process. We have a list of documents and information required from the homeowner in order to prepare the rebate application on their behalf. We review all expenses and supporting documentation to ensure eligibility before we submit a claim to the CRA.

1) Documentation Required

You must submit the following documents: (i) copy of your lease agreement which must be a minimum of a 1 year lease (12 months), (ii)statement of adjustments with respect to pre-construction condo purchased which is provided by your lawyer, and (iii) Canada Revenue Agency form GST524 which can be downloaded from the CRA website. GST Forms Listed By number.

2) Fill in GST524 properly

For information on eligibility and requirements with respect to filling out this form correctly, consult the Guide RC4231, GST/HST New Residential Rental Property Rebate. This can also be found on the website of the Canada Revenue Agency. For further counsel on filling this form, we recommend you consult with an accountant specialized in real estate. GST524 NRRP Form. Investors of pre-construction Mississauga condos need to budget some extra money for the HST payable on closing. Though this money will be returned to you within a few months of filing the appropriate paperwork, you will need the extra liquidity to close the deal.

HST Rebate New Home Deadline

The Ontario new home HST rebate or NRRP rebate must be filed within two years of a new home or condo closing. If you are applying for an HST renovation rebate, you have up to 2 years to apply following the completion of construction.

When building a home, you can apply for the NRRPR or HST rebate as soon as construction is more or less complete and you, a close relative, or a tenant is occupying the property. When buying/investing in a brand new home or condominium, you can apply for the HST or NRRP rebate as soon as you close on the property. It is suggested that you wait until 100% of the work has been completed, however, since you can only apply once so it’s important that you maximize the value of the rebate by including every last renovation. People who buy a new condo, co-op apartment, townhome, house, duplex, triplex, fourplex, or other investment property to rent out can only apply for the HST new residential rental property rebate if they have a tenant sign a lease for the unit.

Primary Residence Requirement

To be eligible for the HST home rebate, a new house or condo unit must be used as the primary place of residence by the purchaser or their immediate family (meaning people related by blood, marriage, common-law partnership, or adoption). There are a number of factors considered by the CRA when determining whether or not a house is a person’s primary residence. These factors include how long the individual has lived in the unit, whether the person considers the house as their main residence, and if they have used that address on any personal or public records such as a driver’s license. Home and condo builders in southern Ontario typically credit the total amount of a buyers’ HST home rebate towards the purchase price of the house. In rare circumstances, the builder will pay the rebate directly to the purchaser. This can provide the buyer with enough money to furnish their new property without requiring a cash back mortgage.

HST Rebates on New Homes with More Than One Buyer

A recent story in the Toronto Star highlighted the large number of people in Ontario that are receiving demands from the Canada Revenue Agency to repay the HST new-home rebate they received upon closing on their real estate purchase. The claim typically arises when a third party has been added to a home or condos’ title at the insistence of the mortgage lender. According to the CRA, the Excise Tax Act says that if even a single registered buyer does not qualify for the new home HST rebate then all the buyers are disentitled. One news story on thestar.com quotes a real estate lawyer from Vaughan explaining that several of his clients have been dinged for the maximum rebate amount plus interest because an uncle or aunt was registered as a 1% owner to help the buyer(s) qualify for a mortgage. The problem is, an uncle or aunt is not considered a “close relative” according to the CRA, which means that if their primary address is not also the unit in question then no one officially qualifies for an HST rebate.

If you purchase newly constructed real estate in Ontario and want to qualify for the HST rebate new home program, you must use the property as the primary place of residence for yourself or someone closely related to you such as a child, grandchild, brother, sister, or someone you’re related to by marriage or common-law partnership. Friends, business associates, and even uncles, aunts, nephews, nieces, and cousins are all excluded from eligibility. If anyone that fits into this excludable category owns even a small percentage of your new home or condo, you are not eligible for the HST new home rebate. It is not possible to receive an allocated percentage of the rebate based on how much of the real estate you own;either everyone qualifies for the rebate or no one does. If you did receive an Ontario HST new housing rebate even though one or more of the individuals listed on the title will not be living at the residence and are not closely related, it’s advised that you contact the CRA immediately. When the CRA eventually flags the transaction (which they likely will), you will be charged interest on the total amount of the refund which can add up quickly. For this reason it’s best to solve the issue immediately, rather than accrue thousands of extra dollars’ worth of interest.

People allowed to receive the new home rebate even if the property is not their primary residence:

  • Spouses
  • Parents
  • Grandparents
  • Siblings

People disqualified from receiving the HST rebate if the home or condo is not their primary residence:

  • Aunts
  • Uncles
  • Cousins
  • Nephews
  • Nieces
  • Friends
  • Business Associates

The CRA allows “voluntary disclosure”, which means if you made a mistake and requested an HST rebate for a new home and were not actual eligible, you can correct the problem before it becomes a more serious issue. It’s possible to buy a new condo in downtown Toronto with the idea of living it, but then something in your life changes and you end up selling it very soon after taking possession. When you closed on the unit you considered it to be your primary residence, so you claimed the full HST new condo rebate that you were entitled to, but the fact that you sold it soon after makes the purchase look like a buy and flip in the eyes of the CRA.

According to several Canadian newspapers, the C.R.A. has been actively challenging HST new home rebate claims made on purchases of new homes and new condos and disallowing the rebate if the applicant did not follow all the rules. If anyone is listed on the title (even just for mortgage qualification reasons) that does live on the premises and is not “closely related”, no rebate will be issued. Likewise, if you don’t properly apply for the HST rebate on rental property (NRRPR), you could retroactively receive a Notice of Assessment or Notice of Reassessment from the CRA that states your HST rebate claim has been denied and that you owe money for not qualifying for the rebate. The new residential rental property rebate requirements state that a tenant must have signed a lease for the investment property owner to qualify. The CRA also charges interest on all outstanding amounts, and has been very successful when challenged in tax court, so always make sure you understand all the rules and regulations before applying for a new property rebate.

Is The Home Builder or Condo Developer Charging Me HST?

In an effort to lower the “sticker price” of a newly constructed condo or house, the builder or developer will often incorporate the rebate into the listed price of a new home or condo. In this scenario, the rights to the proceeds of the new housing rebate are transferred to the developer upon signing the purchase agreement, and in exchange they deduct the HST rebate amount from the purchase price. Essentially, the vendor is lending the buyer money knowing they will be paid back when they buyers’ HST new housing refund is issued. This scenario is very commonplace since it lowers the purchase price for the buyer, and relieves them from the headache of having to file for the refund themselves.

There are two components to the new housing HST rebate in most provinces, the federal portion and the provincial portion, but in Ontario the rebate only applies to the provincial portion of the HST which is 8%. Having a condo developer or home builder apply the maximum HST rebate for new homes to your purchase allows you to borrow the least amount of money possible in order to afford the property. Rather than taking out a larger mortgage to cover the house, townhome, co-op, or condo’s full cost including HST, your mortgage only has to cover this amount minus the amount of your H.S.T. rebate. If the price of the new house or condo includes a deduction of the HST rebate amount, however, you will not be eligible to apply for the rebate on your own since the rights to it belong to the vendor.

Misrepresentation

There have been many stories in the news lately about purchasers of new condos in Toronto pretending the units are going to be their primary residence in order collect the HST rebate on new homes. Although it’s the condo builder who technically pocketed the HST rebate from the Federal Government after the rights to it were transferred, the CRA comes after the condo buyer since they were the ones offside on their taxes. A significant number of the condo flippers that were incorrectly claiming HST new condo rebates were purchasing first phase pre-construction condos and then selling them as soon as they were built. While this strategy has paid off handsomely in the Toronto area, the Canada Revenue Agency is now coming after these individuals for the HST rebates they erroneously received as well as interest and penalties. The idea is to hold for at least a year or more. Our investment strategy with our investors is to have them hold for 2-4 years to get the maximum ROI and also to avoid situations like this.

If you have patiently read through our longest blog post ever, and still have questions about how this works; our in-house pre-construction buying and investing expert and Realtor Samuel C. Anyanwu can always provide some more insight and explain things better in detail. Click on the link to see more about him and how to contact him.

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