What is the HST Rebate and what are the differences when applied to the purchase of a principal residence or investment property?
The HST Rebate has been around now since mid-2010 when the CRA introduced the HST system in Ontario. The purpose of the rebate is to discount a portion of the HST on the purchase of newly constructed property by first-time home buyers or investors of real estate, provided that certain conditions are met.
The breakdown of the rebate is as follows: The HST, as most are aware, includes both the Goods and Services Tax (GST), accounting for 5%, and the Provincial Tax (PT), contributing the remaining 8%. The GST credit represents a refund of anywhere from 0-36% on the eligible GST amount attributed to the purchase. The definition of “eligible” GST will depend on whether the purchased property is to be a principal residence or investment property. We’ll assume principal residence for now and address how this differs from an investment property in the next section. The maximum 36% refund applies to any purchase up to and including $350,000. Beyond $350,000, the refund percentage is gradually reduced until $450,000 and above, where the refund goes to 0. The provincial portion of the rebate is 75% of the PT paid (for both residential and investment) but is capped at a purchase price of $400,000. What this means is that if you buy a property for more than $400,000, while you will still be eligible for a PT refund, it would be based on the $400,000 cap. Since the PT on $400,000 is $32,000, this means the maximum PT refund is capped at $24,000 (75% of $32,000). Let’s look at a couple of examples.
Purchase price of a principal residence is $350,000 + HST (GST: $17,500, PT: $28,000). The credit for such a purchase would be 36% of the $17,500 = $6,300 for the GST portion and 75% of the $28,000 = $21,000 for the PT portion, totalling $27,300.
Purchase price of principal residence is $470,000 + HST (GST: $23,500, PT: $37,600) Since the property value exceeds the $450,000 upper limit, the GST portion of the credit is reduced to 0 while the 75% PT credit is only applied to the $400,000 cap, which results in the rebate cap of $24,000 instead of $28,200, which would have been the rebate had the credit applied to the full $37,600 amount of the PT.
Now I will discuss some of the differences in the process between residential and investment property. Firstly, they require different forms that have to be filled out. In the case of a principal residence, especially condos, the builder usually handles the rebate and will already have included the HST rebate in the purchase price; be aware that you are signing this credit over to them to get a discounted price on the purchase. Keep in mind that for a principal residence, you or a relation to you must be the first occupant of the property. If someone else occupies the property, even before closing, you have forfeited your right to the HST rebate. In the case of investment properties, the full HST is paid up-front, and the purchaser bears the responsibility of applying for the rebate. Consequently, your purchase price will always be higher for an investment property. Make sure that the intended use of the residence is clear to the builder to prevent them from applying for the rebate as a principal residence, only for you to end up using it as an investment property instead. This could create problems in the future if the CRA audits you and discovers the wrong information was given.
Most crucially however, is the difference in the application of the GST rebate between the two types of properties. Recall earlier I had mentioned that the GST credit is applied to the eligible amount of GST. When applied to a residential property, the eligible amount of GST is simply the amount paid at purchase, however, this is not the case for an investment property. For the latter, the eligible amount of GST is based on the fair market value of the property at the time of transfer of ownership from the builder (closing, not occupancy), not the actual GST paid on the purchase. This often results in a smaller rebate for an investment property when compared to a property being purchased as a principal residence. If, for instance, a property was purchased 4-5 years prior and the fair market value has increased significantly by the time ownership was transferred, then the GST rebate portion could be substantially smaller.
Let’s look at how this would affect example 1 when applied to an investment property instead of principal residence:
Purchase price of investment property is $350,000 + HST (GST: $17,500, PT: $28,000). Fair market value at the time of ownership transfer is $500,000. The PT credit is unchanged: 75% of $28,000= $21,000. However, the GST component is no longer based on the $350,000 purchase price, but instead the $500,000 fair market value. Since the fair market value is greater than $450,000 upper bound, the GST credit is reduced to $0 instead of the $6,300 refund we calculated for a residential purchase.
It’s very tempting to flip your property with a hot Toronto Market, but should you? Investment property owners should be aware that in order for you to keep the HST rebate, the property must be leased for at least 1 year from occupancy.
Recently the government has been asking many investors who purchased properties and flipped them upon closing to pay the HST rebate back. This is a substantial repayment of taxes. Make sure you’re informed about the rules and understand the costs before you make any decision.
Also, if the property is your principal residence, there is no period of occupancy specified by the CRA required to allow you to keep your refund. That is, there is no minimum amount of time you, or a relation to you, must use it as a principal residence in order to keep the HST rebate. Each case is handled on a case-by-case basis by the CRA as required. If the residency period is fairly short, less than a year for instance, as long as you can justify the reasoning for such a short residency, it may be enough to satisfy the CRA. For example, a qualified reason might be that shortly after moving into the property, your parents fell ill, thus requiring you to live with them. Another possibility is that you moved to a different city for work purposes.
The best advice is to talk to your accountant when you buy or sell your property, to understand the tax implications both from HST rebates and any potential capital gains taxes when the property is sold.
Disclaimer: The information contained herein is not meant to be professional advice but for educational purposes only. You should consult with your accountant when handling such matters.