Author: Stephen Rukavina (Miller Thomson LLP)
Commodity taxes always have a big impact on transactions related to real property. A 7% tax on the purchase price of your hamburger and fries at lunch is not a big deal, but a 7% tax on the purchase price of your new house has an impact in the thousands of dollars. That is especially true in BC, where the city of Vancouver and its suburbs have some of the highest housing prices in the world. For that reason, the transition from the harmonized sales tax ("HST”) to the provincial sales tax ("PST”) will have a major impact on individuals and businesses involved in construction, sale or lease of real property in BC.
This article provides an overview of how the PST applies to real property related transactions, including construction. It will also provide an overview of the various transitional rules.
PST and Real Property Related Transactions
Sales and leases of real property will not be subject to PST. However, some fixtures are deemed to be taxable tangible personal property if they fall within the definition of affixed machinery. Transactions involving such fixtures may be subject to PST despite the fact that fixtures are considered real property at common law.
Construction services will not be subject to PST. However, construction materials are subject to PST. The default rule is that a contractor must pay PST on construction materials the contractor purchases. Yet, a contractor can pass the PST on to the purchaser of the improvement to real property if certain conditions are met.
A contractor will be exempt from paying PST on construction materials if the following conditions are met. First, the contractor purchases in or imports into BC construction materials for the purpose of fulfilling a contract to supply affixed machinery or an improvement to real property (e.g., build a house). Second, the construction materials must be used so that they cease to be personal property at common law. Basically, the construction materials must become part of a building or some other fixture. Third, there is an agreement between the contractor and the purchaser that specifically states the purchaser is liable for the PST on the construction materials, and the contract sets out the purchase price of the construction materials the purchaser will have to pay PST upon. Fourth, there must be written evidence of the agreement under which the purchaser assumes responsibility to pay for the PST on the construction materials.
The transition rules determine whether the 12% HST or 5% goods and services tax ("GST”) is applicable to the sale of real property in BC.
Sales of Real Property
For newly built or substantially renovated residential property ("New Housing”) other than certain condominiums, 5% GST applies if both ownership and possession of the property transfer to the purchaser on or after April 1, 2013. If either ownership or possession transfer to the purchaser on or before March 31, 2013, 12% HST applies.
There are special rules for new residential condominium units where possession is transferred to the purchaser before the condominium has been registered as a condominium. In those circumstances, 5% GST applies if ownership transferred on or after April 1, 2013 and the day that is 60 days after the condominium was registered as a condominium is on or after April 1, 2013. If ownership transferred on or before March 31, 2013 or the day that is 60 days after the day the condominium is registered as a condominium is on or before March 31, 2013, 12% HST applies.
Leases Commercial Property
A lease payment on commercial property will be subject to 5% GST if the day the rent is due and the day the rent is paid is on or after April 1, 2013. If the day the rent is due or the day the rent is paid is on or before March 31, 2013, 12% GST applies.
Transition Tax and Transition Rebate
This section will provide an overview of the transition tax and transition rebate. It does not cover situations involving "double straddling transactions” which, in simplified terms, refer to transactions that straddle both the July 1, 2010 implementation of the HST and the April 1, 2013 reintroduction of the PST. Special complex rules apply for determining the transition tax and transition rebate in respect of double straddling transactions.
The transition tax is a 2% tax on the purchase price of New Housing or an interest in New Housing sold by the builder. The transition tax is generally payable by the purchaser. The transition tax is meant to ensure tax is paid on the value of New Housing attributable to construction materials subject to HST that was refundable by way of input tax credits. Since PST will not apply to the sale of New Housing, construction materials purchased under the HST and used to construct New Housing sold on or after April 1, 2013 could escape provincial taxation if it was not for the transition tax.
The transition tax can only apply once to a residential property or an interest in a residential property. There is no transition tax on commercial properties.
The transition tax will apply when all of the following conditions are met. First, GST (not HST) must be payable on the purchase. Second, tax must be payable before April 1, 2015. Third, construction or substantial renovation of the New Housing is at least 10% completed before April 1, 2013.
Since the transition tax is imposed at a flat rate of 2%, it can lead to more tax being paid than necessary to compensate for the fact that some construction materials were subject to refundable HST. The transition rebate is meant to refund the portion of the transition tax that is excessive.
The transition rebate is available to the builder of the New Housing. The transition rebate is available when the following conditions are met. First, the sale of the New Housing must be subject to the transition tax and generally the transition tax must have been reported and paid by the builder. Second, PST has been paid on all or substantially all of the materials incorporated into the construction after March 31, 2013. Third, the person claiming the transition rebate can provide satisfactory evidence that the aforementioned PST was paid. Fourth, no person has obtained or is entitled to obtain a rebate, refund or remission of the aforementioned PST, unless the rebate, refund or remission is provided for in the PST Act or related regulations. Fifth, a transition rebate application is filed within the required time period.
In very simplified terms, the transition rebate is calculated by determining the amount of construction completed during the HST, which enables one to determine the appropriate rebate rate, which ranges from 0% to 1.5%. The rebate rate is then multiplied by the total consideration paid on the New Housing to determine the dollar amount of the transition rebate.
This article first appeared in lexology.com.