Posted by: Daryl & Wendy Ashby | July 8, 2010

Beware of the Taxman

Working out the finances for purchasing a resale home can be a complex business.

As of July 1 this year, there is another element to consider. The British Columbia government introduced the Harmonized Sales Tax (HST). The existing Provincial Sales Tax and federal Goods and Services Tax will be combined to create the HST. The provincial element of the tax will be 7% and the federal portion 5%, giving an HST of 12%.

Unlike on the purchase of a new home, HST will not be applied to the purchase price of a resale home but some costs associated with the deal will attract the new tax.

“I don’t really think a lot of people are realizing how much [the HST] increases [costs],” says Paula Roberts, a mortgage broker for Mortgage Intelligence. “It affects the commission; the legal fees; appraisals, if we need them; home inspections; renovations and everything like that.”

Ms. Roberts says the new tax may add about $1,000 to the costs associated with buying a resale home.

With so many factors influencing the decision to buy a home, it is hard to pinpoint exactly how great an impact the introduction of the HST will have on the housing market.

“It is probably going to be a trigger for many [househunters] to just get going a little faster than would have been the case,” says Robert Hogue, senior economist at RBC Economics. “We expected a bit more activity [this spring] and then a bit of a lull after [July 1st].” That seems to have come true.

However, Mr. Hogue says the prospect of higher interest rates expected this summer is also likely spurring potential home-buyers to get pre-qualified and locked into a good rate.

Ms. Roberts agrees: “We’ve noticed in the past few weeks, our pre-approval numbers are crazy. We’ve got a lot of people waiting to buy houses. I had a lot of June closing dates.”

While Ms. Roberts says clients are concerned about the impact of the HST, she counseled against rushing to purchase before the deadline just to avoid the tax (the closing date had to be before July 1 to avoid the tax hit).

“Quite honestly, if $1,000 is going to break them, they shouldn’t be buying a home anyway,” Ms. Roberts says. “In the whole picture, it’s not a huge, huge amount. I bet you in six months, it’s just accepted.”

Toronto-based Altus Group Economic Consulting has analyzed the potential impact of the HST on the new-home and renovation markets for, among others, the Building Industry & Land Development Association (BILD) and the Ontario Homebuilders Association.

“The amount of tax revenue that will be levied, net of any rebates, [will be] about $1.5-billion a year,” says Peter Norman, senior director, economic consulting, Altus Group. “The overall notion is that if you add about $1.5-billion in taxes to one particular sector, then demand in that particular sector is going to go down.”

Mr. Norman believes renovations rather than new-home sales will feel the brunt of this tax increase, and Stephen Dupuis, president and CEO of BILD, agrees.

“People are either fixing up their homes to sell, or, more likely, they’re renovating their new acquisition to suit their tastes. … The net tax impact is about 5.4% on renovations [after renovators factor their own tax credits into the price.]”

Renovators are concerned on two fronts that rising costs will cut demand for their services.

“Most speculation is that there will be a downturn in the renovation industry after [July 1] because of the extra amount it’s going to cost people to do it,” says David Males, president, Northern Edge Construction Services Ltd. “Also, we’re expecting more people to be doing cash deals as opposed to doing it with legitimate contractors.

Historically, that’s exactly what happened when the GST was introduced and we’re afraid that’s going to happen again.”

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