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The HST Transitional rules – What is the cost to the developer?

Since the recent announcement of the BC HST transitional rules on November 18, 2009 for residential housing there have been a lot of questions as to how these will apply.

In the following article Altus will touch on the potential impact to the developer of residential condominiums and rental apartment buildings, with the focus on the Transitional Tax Adjustment and the PST Transitional New Housing Rebate and their application with grandparented and non-grandparented sales.

Firstly we note there are a number of new terms being talked about. We note the definitions below focus on residential condominiums.

*Note

The following table outlines the percentage of the PST Transitional New Housing Rebate that the developer is entitled to based on the percentage completion of their project.

For the sake of clarity we have provided our understanding of a few examples for new residential condominiums applying the rules above. These scenarios are based on high level examples. The actual calculations should be done on a unit by unit basis, specific for each project.

Example #1

Project Stats

• Total number of units – 200
• Average size of the units – 700 square feet
• Average price per square foot of the units - $550
• Project completion – May 2010

Based on the above scenario there is a combined net rebate of $192,500 available to the developer for the units which entered into an agreement after November 18,2010 and closed after July 1, 2010.

Example #2

Project Stats

• Total number of units – 200
• Average size of the units – 700 square feet
• Average price per square foot of the units - $550
• Project Completion – December 2010
• Percentage complete as at July 1, 2010 – 75%

We note the above scenario assumes that the percentage complete will be certified for the building and not for each individual unit.

Based on the above scenario the maximum rebates available to the developer would be $423,500 calculated as follows:

PST TNHR ($866,250) + PST TNHR ($519,750) - TTA ($962,500) = $423,500

Together the Transitional Tax Adjustment and the PST Transitional New Housing Rebate, on average, are estimated to equate to the net taxes paid under the current PST regime.

We note the purchasers required to pay HST on their purchase would also be eligible for a rebate given they meet all the criteria. The value of the rebate will be a function of the unit value.

When a builder constructs or substantially renovates a building whose specific use will be residential rental, they are currently required to pay GST on the self-assessed value of each unit which is determined by the overall value of the building divided by the units share.

A rebate for the provincial portion of the HST payable on new rental housing will be provided for the same properties that were eligible for a GST rebate. The same GST rebate system will still be in place and apply to the federal portion of the HST.

The amount of the provincial portion of the HST payable on a new rental building would be equal to 2% on the first $525,000 of each unit and 7% on the amount above $525,000. The table below outlines an example of the provincial portion of the HST payable and the provincial portion of the HST rebate available on a new rental building.

In the above scenario Altus has used BC’s rebate calculation which equates to a max rebate of $26,250 based on a unit value of $525,000. You will note the additional cost to the developer with the implementation of the HST is $625,000 which equates to 2.1% of the total value. The province has estimated the embedded PST cost is 2% of the purchase price and given that PST will no longer be charged on materials supplied for the project and should therefore result in a savings during construction. You will note the net amount of the provincial portion of the HST payable is slightly more than 2% in the above example as some of the units are valued at more than $525,000.

As long as the average value of the units in the building is less than $525,000, the province has anticipated there will be zero impact on the total final cost. We note however that 1) this will be dependant on any savings achieved from the embedded PST being passed on to the Developer by the contractors and 2) in the event of a high end building the embedded PST cost savings will not offset the additional HST costs.