Understanding how the HST Affects New Home Pricing

The introduction of HST to Ontario on July 1st 2010 has both increased consumer angst and confusion, particularly with regard to its application to housing. For the present, the HST is only applied to new construction or major renovations and is not applicable to the resale of existing homes.

That said, how the HST is applied is also somewhat confusing, so its necessary to take a step backwards and understand how the GST and PST were applied to new construction prior to July 1st 2010.

Since the introduction of the GST on January 1991 Canadian new home buyers have been paying GST and benefiting from a partial rebate of those GST charges for homes priced under $450,000. The Federal Government applied the GST on a sliding scale basis such that a portion of the GST charged would be rebated provided the total value of the new home being constructed or renovation being undertaken was less than $450,000. For housing priced above $450,000 the full GST rate was applied and there were no rebates.

For the average new home buyer, the impact of the GST was transparent, as it was the builder who applied for the GST rebates, and new home prices reflected the fact that the builder was crediting those rebates to the buyers.

Prior to July 1st 2010, the Provincial Sales tax (PST) was only applied to the materials purchased for the construction of a new home and the labour and profit components of the new home price were exempt from the PST.

The 13% HST is a blending of the old Provincial Sales Tax (8% PST) and the Federal Goods & Services Tax (5% GST). The biggest difference for the consumer is how and where the Provincial component of this Tax is applied, which includes many goods and services (including hydro, heating, postage, even commercial condominium fees) which were not previously taxed under the PST regimen.

In the case of new housing though the province has sought to soften the impact of HST pricing by providing a Provincial rebate, of 75% of the Provincial portion of the HST Tax to a maximum of $24,000. However unlike the Federal component which is reduced to zero, once the value exceeds $450,000, the Provincial rebate maximum of $24,000 is maintained (for the present at least) independent of the final new home price be that $500,000 or $5,000,000.

Every new home built today in Ontario has some HST built into the price, however the final price to the consumer or list price of the new home is determined based upon the builder's base price (i.e. cost to build plus profit margin) plus total HST payable (base price x 13%) minus the applicable HST rebates.

Typically on homes priced up to $450,000 the actual amount of HST built into the new home price ranges from about 5% to a maximum of 7%.  Above $450,000, since the rebate of the Federal portion of the HST is reduced to zero and the Provincial portion is capped at $24,000, the additional cost to the home buyer is $8,000 per $100,000 in additional builder base price.

For first time buyer's purchasing a Condo or Townhouse priced at $280,000, the HST proportion of that price is about $14,000 or about $5,000 more than pre-HST. While, an up-market buyer purchasing a $750,000 home would incur approximately $73,500 in HST expense, or about $37,500 more than incurred under the GST regimen.

The increases in new home purchase prices, attributable to the introduction of the HST in Ontario, has had a negative effect on new home sales in Ontario, however over time as consumers become accustomed to this tax, new home construction and sales will return to historic levels.