Let’s face the simple fact that we all want to save money whenever possible.  There are ways to save money but unfortunately sometimes we simply don’t know what they are.  Our firm wants to inform you of some ways that you too can minimize the tax obligations arising from purchase of new homes by saving money through the tax rebates that are currently available to purchasers of new homes in Ontario.*

 

Then contact our office so that we can guide and assist you through this somewhat complex, time consuming process giving you the peace of mind that you are in the right hands!

 

How are property purchases taxed in Ontario?

As of July 1, 2010, the harmonized sales tax (“HST”) has been in place in Ontario at the rate of 13%.  This tax is composed of two separate parts: a 5% goods and services tax (“GST”) and an 8% retail sales tax (“RST”).  In general, the potentially hefty HST is applied to any purchase unless it falls within one of the limited exemptions.

 

What types of properties are subject to the HST?

New homes are not exempt from HST, in Ontario leaving the purchaser of these types of home on the hook for a potentially large tax obligation.  The main exemption where the HST does not apply is the sale of “used housing” or resale homes.  It is important to note that this exemption does include different types of resale homes including residential condominium units.

 

What exactly is the rebate program?

There are two distinct parts to the rebate program: the federal rebate and the Ontario rebate.  The GST portion of the tax is payable on the purchase of a house at a rate of 5% of the purchase price.  The federal rebate then comes into effect allowing for a rebate of 36% of the GST paid for the first $350,000 of the purchase price.  The rebate percentage is then reduced for any amount paid between $350,000 and $450,000 leaving the seller entitled to no rebates for anything over $450,000.

 

On the other hand, the Ontario rebate allows the buyer to recover a rebate in the amount of 75% of the 8% RST paid on the purchase price of the new home.  Once again, there is a limit allowing the buyer to only recover on the first $400,000 of the purchase price making the maximum amount that can possibly be recovered capped at $24,000.  ($400,000 x 6% = $24,000)

 

What homes qualify for these rebates?

New homes are the most commonly affected type of property but what exactly qualifies as a new home?  New construction or substantially renovated housing is subject to the HST and possibly entitled to these rebates.  This includes when a home is purchased from a builder or when the renovations are done by an outside contractor.  Also included in this list are rebuilt homes that have been destroyed by fire as well as nonresidential property that has been converted to residential housing.  Buying into a cooperative and building a major addition to your existing home would also possibly qualify you for the rebate.

 

Does every purchase of a qualifying home allow for the receipt of the rebate?

The short answer to this question is no.  For one to qualify for the rebate, the home must be his or her principal residence.  This is still the case even if the home is owned jointly with someone else so long as both parties qualify.  What matters is whether you intend for the home to be your permanent residence, whether or not you have other properties.

 

Additionally, the rebate is applied if you are buying the property as a primary residence for a close relative.  Qualified persons under this include anyone related to you by blood, marriage, common-law partnership, adoption or anything else which is countable as a relative under the Income Tax Act. 

 

It is important to be aware that the Canadian Revenue Agency (“CRA”) has recently requested refunds for rebates paid in the past.  The reasoning behind these demands of refunds is that if one person is ever listed on the mortgage that does not qualify for the rebate (i.e. an aunt or uncle, a non-family member), all people are disqualified from receiving the rebate.  A real-world example occurs when a purchaser lists a family member such as an aunt or uncle on the mortgage in order to qualify for the mortgage.  Unfortunately, since these family members are not considered closely-related the purchaser is subsequently disqualified from any part of the rebate.

 

Please note that if one purchases a new home as an investment rental property, the rebate discussed above will not apply but the property may be eligible for the new residential rental property rebate (“NRPR”).

 

How much will I pay in taxes absent the rebate program?

Let’s say for example that you just purchased a home at a price of $325,000.  Taking into account the HST, the buyer can expect to pay an extra 13% of the purchase price or $42,250.  If the home does not qualify for the rebate the purchaser can expect to pay a total of $367,250 when HST is included.

GST Portion:

325,000 x .05 = $16,250

 

RST Portion:

325,000 x .08 = $26,000

 

Total HST owed:

16,250 + 26,000 = $42,250

 

 

How much rebate can I expect to receive?

Continuing with the example above in real dollars this rebate would save a total of $5,850 of the $16,250 (5%) GST portion and $19,500 of the $26,000 (8%) RST portion of the tax.  In total, this rebate adds up for a total savings of over half of the harmonized sales tax originally paid at $25,350 saved.

GST Portion Rebate:

16,250 x .36 = $5,850

 

RST Portion Rebate:

26,000 x .75 = $19,500

 

Total Amount of HST Rebate:

5,850 + 19,500 = $25,350

 

 

What is the rebate process and how exactly does it work during the closing process?

Even though the rebate is not uniformly the same for all situations, most purchasers will see the net of the rebate applied in the agreement of purchase and sale.  Once calculated, your lawyer will provide the vendor’s lawyer the following required documentation: (1) The rebate application to be sent to both the CRA and the Ontario Ministry of Revenue (OMR); (2) An assignment of each rebate to the builder if the purchaser did not pay for the taxes directly; and (3) A document formally confirming that the new home will be your primary place of residence and also agreeing to indemnify the vendor for the amount of the application for rebate in the case that the application is rejected by either agencies.

 

Generally, any rebate received is sent directly to the builder making it unnecessary to issue a rebate cheque to the purchaser.  In rare circumstances the vendor will give it directly to the purchaser of the home.  Either way, it is important to remember that the deadline to file for this rebate is 2 years.

 

If you have any questions about the tax rebate available to purchasers of new homes, please feel free to contact us.

 

Milad Haghani

Haghani Law

Tel: 416-655-7994

Toll-Free: 1(800) 945-8053

Email: [email protected]

 

**Please note that this includes the Ontario area with the exclusion of the Toronto region.