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Investing in new builds – know your HST burden

Buying an investment property can be a thrill like no other, but when it comes to buying new builds for the purpose of investing typically there’s this underlying confusion of who pays the HST, is there a rebate and, if so, how much of it do we get back? I know for me, my first time buying a new build as an investment property was very stressful and confusing since all of the previous investment properties I had purchased up until that point were re-sales. This whole HST owing and rebate thing threw me for a real zinger!

So lets look at some facts.

If you are purchasing the unit for yours or your family member’s use as a primary residence of the unit, the builder includes the HST amount, minus the rebate, in your final purchase price, so don’t worry about it.

However, if anyone other than yourself, or your family members, are going to be occupying the unit, you are responsible to pay the full 13% HST amount directly to the builder, along with the agreed upon purchase price, at time of closing. In most scenario’s, you will be eligible for at least some of the New Residential Rental Property (NRRP) HST rebate assuming the property qualifies, which in most cases it does.

In order to qualify for the NRRP rebate, the first occupants of the newly built home must be tenants for which you have a minimum one year lease signed.

The NRRP rebate is based solely upon the Fair Market Value (FMV) of each unit when the HST becomes payable (i.e. closing), not upon the purchase price you signed for several months, or even years prior to the unit’s completion. This is a very important point worth mentioning.

The Canada Revenue Agency describes FMV to generally be the value of the building, the applicable land, and all other structures (garage/shed) that are reasonably necessary for the use and enjoyment of the unit as a place of residence for individuals. It is the highest price that you can get in the real estate market between unrelated parties and should be comparable to the values of similar housing in the local real estate market. The FMV does not include any HST or Provincial Land Transfer Taxes applicable to the unit.

If you are unsure how to estimate your unit’s FMV, simply ask a trusted Realtor to help determine this for you.

Now, there are actually two parts to the rebate, a Provincial one and a Federal one. You must calculate them both to determine the full amount you will receive back.

Generally,

Provincial part = FMV x 0.08 x 0.75 (up to a maximum of $24,000)

Federal part = FMV x 0.05 x 0.36 (up to a maximum of $6,300)

Add these two numbers together and this is your total NRRP rebate amount.

However, the above equations only apply if the FMV of the unit at time of closing is under $350,000. Once the FMV exceeds $350,000, the Federal part of the HST rebate available starts to decline until the FMV reaches $450,000, at which point it disappears altogether. The good news is in Ontario you can still claim the higher 8% Provincial part of the rebate, even if the unit’s FMV is over $450,000 rendering you ineligible for the 5% Federal portion.

So let’s look at the three possible scenarios here:

Let’s also assume for these three examples that the unit’s purchase price (before HST) and the unit’s FMV are one and the same at time of closing, even though in reality the FMV could have risen (or fallen) in relation to the purchase price in the time between signing for the unit and it’s closing date.

FMV’s under $350,000

Lets say you are purchasing a newly built unit, for the purpose of investing, with an FMV of $300,000. You pay $300,000 plus 13% HST to the builder at time of closing, which would work out to $339,000. Now let’s put these numbers through the calculations above:

Provincial part = $300,000 x 0.08 x 0.75 = $18,000

Federal part = $300,000 x 0.05 x 0.36 = $5,400

Add these two together and you have $23,400 for your total NRRP rebate.

Take this $23,400 off of the $339,000 purchase price plus HST and you have $315,600 as your total cost after your rebate has been reclaimed.

FMV’s between $350,000 and $449,999

Lets say this next unit has an FMV of $400,000. You pay $400,000 plus 13% HST to the builder, totalling $452,000.

Provincial part = $400,000 x 0.08 x 0.75 = $24,000

($24,000 maximum is reached with FMV of $400,000)

Now this is where the Federal part of the rebate starts to decline. The new calculation is:

Federal part =  ($450,000 – FMV)/$100,000   x   (FMV x 0.05 x 0.36)

(The calculation of FMV x 0.05 x 0.36 = $7200, but we can only use the $6,300 maximum)

So Federal part = ($50,000/$100,000)   x   ($6,300) = $3,150

Add these two numbers together and you have $27,150 for your total NRRP rebate.

Take this $27,150 off of the $452,000 purchase price plus HST and you have $424,850.

FMV is $450,000 or more

We learned in the last example that anything over a $400,000 FMV gets us our maximum Provincial rebate of $24,000 already, so nothing new here.

Now for the Federal part of the rebate, anything over $450,000 FMV results in having no Federal rebate at all. Since the Federal rebate calculation between $350,000 and $449,999 FMV starts off with,

($450,000 – FMV)/$100,000

Any FMV of $450,000 or more results in either a zero or a negative number in the first part of the equation. Since the NRRP rebate application states we must count a negative number as a zero, any FMV’s at or above $450,000 for the Federal rebate will always result in the number being zero.

$0/$100,000   =   $0

The second part of the equation would then be,

$0 x (FMV x 0.05 x 0.36) = $0

This is how the Federal part of the NRRP rebate disappears after a $450,000 FMV.

So there you have it, the NRRP rebate calculations explained. I hope I’ve created more clarity than confusion and you are now able to purchase your new investment builds with more confidence than ever before.

Until next time, Happy Investing!

Kyle Woods

*Disclaimer: Although every attempt has been made to provide accurate information in this article, I am not representing myself to be a professional accountant or tax expert of any kind. Please consult with the appropriate trusted professionals before making any Real Estate decisions regarding the information above.

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