THE NEW HARMONIZED SALES TAX PART II:
THE ONTARIO TRANSITIONAL RULES AND HOW THEY WILL AFFECT YOUR REAL ESTATE INTERESTS
By: Samantha Prasad,
Adam Perzow and Jodey Therriault
___________
Earlier this year, the Ontario government
announced that it will be implementing a
Harmonized Sales Tax (“HST”) regime, in which
Ontario’s current 8% PST rate will be merged
with the federal 5% GST rate to create a
combined HST rate of 13%[1].
This new tax structure is to be implemented on
July 1, 2010 (the “Effective Date”), and will be
administered by Canada Revenue Agency (the “CRA”).
In an effort to provide an orderly transition
into the new HST taxation regime, the Ontario
government released Information Notice No. 3
(the “Notice”)[2]
on October 14, 2009. Detailed within the Notice
are the general Transitional Rules (the
“Rules”), which provide guidance and instruction
on how the relevant portions of PST, GST and HST
are to be computed for transactions that
straddle the Effective Date. In particular, the
Rules provide details regarding the following
relevant dates:
1. October 14, 2009: The
“Announcement Date”
-
HST will not apply to consideration due or
payable on or before October 14, 2009.
Certain businesses and public service
bodies, however, may be required to
self-assess the HST on consideration due or
paid from October 14, 2009 to April 30, 2010
for property and services provided after
July 1, 2010.
2. May 1, 2010: The “Specified
Pre-Implementation Date”
-
HST will generally apply to any
consideration due or paid on or after May 1,
2010 for property or services provided on or
after July 1, 2010.
3. July 1, 2010: The “Effective
Date”
-
Commencing July 1, 2010, the HST legislation
will take effect and will be administered
under the Excise Tax Act (the “ETA”).[3]
4. October 31, 2010: The
“Outstanding PST Due Date”
-
To facilitate the wind-down of the previous
regime, any applicable PST not otherwise
payable on or before October 31, 2010 shall
become payable on that date.
The application of the Rules within the
context of these dates will depend on the type
of transaction being entered into. Those that
are relevant in the real estate context are
summarized here.
I.
PROPERTY LEASES
Residential Leases:
Under the new HST tax regime, long-term
residential leases for residential property in
Ontario will be exempt from HST, as they have
historically been exempt from GST, and
accordingly, from HST.
Commercial Leases:
HST will generally apply to
any supply of property by way of lease, license
or similar arrangement for the portion of a
lease interval that occurs on or after July 1,
2010. There is, however, one important caveat
to this general rule: HST will not apply to a
lease period that begins before July 1, 2010 and
ends before July 31, 2010.
Non-consumer tenants[4]
will be required to self-assess HST with respect
to lease payments that are due or paid after
October 14, 2009 and before May 2010 in any of
the following circumstances:
1. The leased premises are
not used exclusively in the course of the
commercial activity of
the tenant;
2. The tenant is using the
property exclusively in the course of their
commercial activity, but
the property is
subject to input tax credit restrictions or
recapture;
3. The tenant is using any
simplified procedures under the ETA to
calculate their net tax;
4. The tenant is a
selected financial institution that is using
special attribution methods to
determine
their net tax.
If a non-consumer tenant is
required to self-assess in any of these
circumstances, they must account for the tax on
their GST/HST return for the reporting period
including July 1, 2010 (if the due date for that
return is before November 2010), and, in no
event, any later than October 31, 2010.[5]
While many commercial
leases provide an express obligation on the part
of one of the parties to pay GST on rent and
other charges, many do not. The absence of such
a provision, however, will not defeat the
requirement for its collection; it is prescribed
under the ETA that GST must be collected on
taxable services and supplies, such as rent. As
such, it is important to ensure your leasing
arrangements provide for tax payment
obligations. This can be accomplished by
including a holistic definition of “Sales Tax”
in your agreement, such as:
“Sales Taxes” means all business
transfer, multi-stage sales, sales, use,
consumption, value-added or other similar taxes
imposed by any federal, provincial or municipal
government upon Landlord, or Tenant in respect
of this Lease, or the payments made by Tenant
hereunder or the goods and services provided by
Landlord hereunder including, without
limitation, the rental of the Premises and the
provision of administrative services to Tenant
hereunder.
II. PROPERTY CONSTRUCTION AND SALES
Residential Rental Property:
Builders of newly
constructed or substantially renovated
residential rental properties subject to a
lease, license or similar arrangement are to pay
and collect tax under the self-supply rules.
Self-supply is deemed to occur at the later of
either the time at which the construction or
renovation is at least 90% complete or the time
at which possession of the unit is given to the
first occupant to be used as a place of
residence. HST will apply to a self-supply that
is deemed to occur after July 1, 2010.[6]
Purchasers of newly
constructed or substantially renovated
residential rental properties will also be
subject to HST where the ownership and
possession are transferred after July 1, 2010.
This is the case irrespective of when the
agreement of purchase and sale was entered into.
A PST transitional housing
rebate will also be available for a portion
(75%) of the PST component of the HST paid by
builders (under the self-supply rules) and
purchasers of newly constructed or substantially
renovated residential rental properties. This
new rebate will provide up to a maximum of
$24,000 per qualifying rental unit, and will
apply regardless of the purchase price or fair
market value. In order to receive the rebate,
the individual paying the HST must apply
directly to the CRA.
Residential Housing:
Once in effect, HST will
apply to the sale of a newly constructed or
substantially renovated residential property if
both ownership and possession are transferred
after July 1, 2010. There is, however, an
important exclusion to this general rule: if a
written agreement of purchase and sale is
entered into prior to June 18, 2009,
grandfathering rules might apply so as to
exclude the provincial (8%) portion of the HST.
Written agreements for the
sale of newly constructed or substantially
renovated housing units that are entered into
after June 18, 2009 and before July 1, 2010 are
required to provide whether the PST portion of
the HST will apply to the sale, and if so,
whether the stated price includes this portion
or not. Failure to make this disclosure will
cause the PST to be deemed to be included in the
stated price so that the purchaser will not be
required to pay any additional amount with
respect to HST.
Relief can be found in the
Rules for residential housing units that are
still under construction on the Effective Date,
provided the construction is at least 10%
complete. More specifically, builders that are
required to self-assess and/or purchasers that
are required to pay the HST might be eligible
for the PST transitional housing rebate
previously discussed.
Non-Residential Real Property:
Sales of non-residential
real property in which both ownership and
possession are transferred after July 1, 2010
will be subject to HST. The date of the
agreement of purchase and sale is not relevant
in this context.
Vendors selling
non-residential real property to qualified
registrants (i.e. – persons registered under the
ETA) will not have to collect HST on closing.
Rather, the purchasers will be required to
follow the self-assessment and offsetting input
tax credit procedures currently provided for
under the GST legislation.
Print
