Let's
Address This New Harmonized Sales Tax
Charles Hanes
May 7, 2009
Every week I receive a massive inflow of emails from people who plan to buy a condo, loft
and/or townhouses in Toronto. Recently, a surprising majority of these emails are based on
the writer not being able to figure out Toronto’s new confounding harmonized sales
tax and the impact it will have on their costs.
Now Douglas Porter and Sal Guatieri, two senior economists at the Bank of Montreal are
saying that the tax could produce all kinds of negative side-effects, from holding back
first-time buyers to taking a serious bite out of the provincial economy.
Here’s the Reader’s Digest version . . . . in its 2009 budget, the McGuinty
government proposed combining the 8 per cent Provincial Sales Tax (“PST”) with
the 5 per cent Goods and Services Tax (“GST”) starting July 1, 2010, creating at
13 per cent Harmonized Sales Tax (“HST”).
As it sits today, newly-built condos, lofts and townhouses (homes as well but I seldom
deal with them so I’m limiting this editorial to my field of specialization) are
levied with a GST but no PST. Under the new scheme, people who buy a property for less
than $400,000 would receive a rebate to offset the tax, those who spend less than $500,000
would receive a partial rebate, and those who buy something costing more than $500,000
would be hit with the full HST.
Porter and Guatieri emphasize that the difference between something priced just under
$400,000 (and therefore eligible for the rebate) and something priced at $500,000 would be
an extra $37,000. That makes an effective marginal tax rate of 37 per cent on the $100,000
increase in value! “This is a huge impediment for home purchases in the half-million
dollar range,” these respected economists state in their report.
Here are a few of the possible consequences they set out:
Builders would likely shift towards building units under the $400,000 mark and might skimp
on quality and size as a result. Consumers might have to pay separately for upgrades,
landscaping and standard finishes.
Builders could also focus on the very high-end, where taxes may be less of a deterrent to
buyers. That means middle-income families could be struck harder.
Logically, more buyers are likely to veer towards resales (existing properties). For a
$500,000 unit, the tax differential would amount to a hefty $65,000. This would in turn
raise the price of resales, these economists predict.
Fewer investors would want to buy condos in the price brackets hit by the tax so fewer
units would be built, leading to upward pressure on rents. |
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The one benefit of
the HST they foresee for builders is that it would reduce their costs by about 2 per cent,
which is the amount they now pay for the embedded PST on building supplies. But Builders
would correspondingly likely have to endure falling demand for their products.
The economists believe the HST generally has merit, but it's the presale market that gives
them pause. They have advised the Premier to reduce the HST on new product from the
proposed 13 per cent to 7 per cent which is the equivalent of the current 5 per cent GST
and the 2 per cent embedded PST currently levied on building materials.
They also suggest graduating the provincial portion of the tax on new homes priced above
$400,000, so that the tax applies only to the portion of the price above $400,000.
As for the schedule for phasing all of this in, these BMO economists are wondering the
same thing as everyone else: “Will the HST apply only to homes purchased after July
1, 2010”? I’ve already received emails from numerous clients that have already
bought condos and I’ve contacted my lawyer about it but he tells me that despite
having requested clarification from the government he does not have a definitive answer to
the question.
The budget didn't say, but Porter and Guatieri hope the government will grandfather both
sold and unsold units that are currently being built and won't be occupied until after the
HST comes into effect.
“This would ensure that current projects remain viable and retain financing, so they
can be completed as planned, thus preserving commitments to workers, purchasers and
lenders.”
To sum up, Porter and Guatieri are saying that buyers would see a jump in tax burdens and
that growing families could face a shrinking supply of move-up, mid-priced units. They
estimate that 30,000 construction jobs could be lost and the resulting hit to Ontario's
annual gross domestic product would be about 0.5 per cent. “A significant loss of
construction jobs and decline in residential construction would add pressure to an
industry already under severe stress, and hit the economy just when it is emerging from a
lengthy recession,” is the report's gloomy conclusion.
So, what can I tell you! These guys are much better informed than I am. I’m just your
average grunt in the street but in the street I am and I’m here to try to keep you
informed so tune in frequently and as things develop and become more clear you can rest
confident that I’ll be here telling it like it is.
I’m Charles Hanes and that’s it for now. |
