New townhomes like this one at Cypress Point, Black Mountain, are subject to GST.

Published in Kelowna Capital News
Sunday, February 28, 2010

Explaining the ‘real deal’ on GST for new homes

By:  Darcy Nyrose
CONTRIBUTOR

Buying a brand new home is exciting and has many benefits.

With a new home everything is in pristine condition, from appliances to flooring.  You have a blank canvas for decorating and creating the home of your dreams, and in many cases you also have the opportunity to select floor plan design and finishings.  So, when it comes to buying new, how can we better equip ourselves to understand the additional costs associated?

Since GST is on the minds of many people looking to buy a new home, I wanted to help illustrate how the cost of this tax can often be less than 5%, as I have found that many people are not aware of opportunities for potential savings – which can make a big difference for first time buyers and investors.

Outlined below are three buying scenarios where GST is less than 5 per cent.

  • Primary residence under $350,000
  • Investment property under $350,000
  • New home priced between $350,000 and $450,000

Purchasers who buy a new home as their “primary place of residence” qualify for the New Housing Rebate, which reduces the amount of GST paid to the federal government by 36%.

For example, if the purchase price of a new home is $300,000, the 5 per cent GST equals $15,000. The buyer then receives a 36 per cent rebate of $5,400 ($15,000 x 36%) which is subtracted from $15,000 to equal a total net GST payment of $9,600. The effective GST rate on this purchase is only 3.2%.

In order to qualify for the New Housing Rebate, some of the items the purchaser must certify is that they will be moving into the property and using it as their primary place of residence. Further, the purchase price must be under $350,000 to qualify for the full 36 per cent New Housing Rebate.

The New Housing Rebate generally given at closing, meaning the buyer typically pays the net GST to the vendor. However your realtor should review the contract of purchase and sale to ensure this is the case. There are certain developers (at least in Vancouver) who do not allow this rebate to be claimed at closing. This means the buyer is required to pay the full 5% on closing, with the rebate to follow after.

For purchasers who intend to rent out their new home, the Residential Rental Property Rebate allows for the net GST to be paid, but with a few variances from the New Housing Rebate.

In order to claim this rebate, the following conditions must be met:

  • The purchaser must not be entitled to claim input tax credits in respect of any part of the tax payable on the acquisition of the property.
  • The rental unit must be a “qualifying residential unit” which means the person applying for the rebate must be the owner of the unit and the unit must be a self contained residence as defined in the Excise Tax Act.
  • The unit must be held by the owner for the purpose of making exempt supplies (for example, a residential lease).
  • The unit must be used as a primary place of residence by the tenants and must be so used for at least one year.

The Residential Rental Property Rebate is applied for after closing so the purchaser (investor) must pay the full GST on closing. Supporting documentation will be required when applying for the rebate from the federal government, which includes the statement of adjustments, the contract of purchase and sale, the lease/rental agreement and the insurance policy that the purchaser has on the property.

In order to claim the full Residential Rental Property Rebate, the value of the home must be under $350,000. A partial rebate is available for rental units with a fair market value between $350,000 and $450,000 as set out below.

The federal government has allowed a rebate for homes purchased for between $350,000 and $450,000.  The rebate is gradually reduced as the home price increases, and is calculated by using the following formula:

$6,300 X ($450,000 less purchase price)/ $100,000

For example, if the value of the home is $400,000:

$6,300 X ($450,000 – $400,000)/ $100,000

The rebate would equal $3,150.  The GST payable would be $20,000 ($400,000 x 5%) less the rebate of $3,150, for a net total payment of $16,850.

Buying homes over $450,000 in today’s market is not uncommon.  Unfortunately the GST rebate is eliminated once the price of the home exceeds the $450,000, and the full 5% is payable.

We will outline the upcoming HST tax implications in the coming months, however buying and closing before July 1, 2010 will automatically ensure no HST is paid.

Darcy Nyrose is with Nyrose & Associates, Coldwell Banker Horizon Realty

250.575.1946

darcy@kelownarealestatepros.com