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My Experience With the New Residential Rental Property Rebate (HST Rebate)

I wrote about the HST issue a couple months ago, calling it the “Elephant in the Room” with respect to the pre-construction condo market. I wanted to follow up this post with my own personal experience with dealing with the HST rebates (New Residential Rental Property Rebate-NRRP) when buying a new condo for investment. In short, it was a surprisingly quick and painless process to get back my rebate money once I figured out all the forms and the calculations.

The photo above is of One Park West, or 260 Sackville Street. The building was recently registered and I own a unit in the building which happens to be the Smallest Condo in Toronto. I recently closed on the unit and as an investor-owner had to pay an additional amount for HST on final closing. Here is my story for getting that money back from Revenue Canada:

In order to qualify for the rebate, I had to have a tenant in the property and a signed lease for a minimum 1 year (which I did). All in all it only took just 40 days from the time I sent in my application to the time I received my rebate monies back in full. Quite contrary to some of the reports I have heard of it taking as long as a year to get your money back. If you have your paperwork in order and you complete the forms properly this seems to be the result you get. I even was paid some interest on my rebate amount (presumably taking into the account the time I paid it until the time I was paid it back).

Some additional things that I learned when going through this process:

• Provincial tax (PST) is the biggest portion of the rebate by far
• Federal tax (GST) is the smaller one
• Provincial rebate is 100% until Fair Market Value (FMV) hits $450K, then is zero after that
• Federal rebate is 100% until FMV hits 350K, then reduces down to zero when you hit $450K
• Therefore if your FMV is less than $350K you should receive 100% of your HST monies back. If your FMV is between $350K-$450K you will receive most of it back. If your FMV is greater than $450K you will receive zero back.

The Problems I see with the New Residential Rental Property Rebate:

• If the FMV of your condo is $450K you will receive back more than $20K. If the FMV is $451K you will receive zero. What policy maker in Ottawa came up with this scheme??
• FMV is still a conundrum to me. Who determines it? How is it determined? What happens if the government doesn’t agree with your FMV number?
• FMV of  your unit does not take into account what you will actually ‘net’ on your unit if you sold it at FMV (it does not take into account selling costs).
• A better system might be to simply add an additional tax on investors who flip their unit after final closing as a percentage of their actual profit. Under the current system, you might both lose money on your sale (due to closing costs when buying and selling), and also have to pay tens of thousands extra in HST just for the ‘right’ to lose money on the transaction. Doesn’t make sense.
• Is the government in the business of discouraging people from investing in real estate unless that real estate is priced below an arbitrary figure of $450K??
• FMV is the crux of the calculations used to figure out if you qualify for the rebate. FMV is determined at the time that the HST is paid (at final closing in Ontario). The higher the FMV, the lower the rebate amount. Therefore I observed that it might be better for investors to actually pay the HST amount UP FRONT when buying a pre-construction condo, because this will result in a lower FMV and therefore a higher rebate amount!

Questions about the New Residential Rental Property Rebate (HST rebate)? Wondering if you qualify for the rebate or need help completing the application process with Revenue Canada? Contact me or leave a comment.

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Statement of Adjustments from Hell

When buying a new condo, you need to be aware of the costs involved. Buying a new condo is not the same as buying a resale condo, there are additional costs you will incur on closing day. The sales people at the condo sales centres will NEVER bring any of these items to your attention.

A reader of this blog (not my client) recently emailed me asking for my advice/help after they got the shock of a lifetime when seeing their statement of adjustments on their new condo that they were about to close on. The person in question bought a large unit at Festival Tower a couple years ago when they were offering their 5% deposit program. The price of the unit including some minor upgrades was ~$840K. Imagine how you would feel if your lawyer told you you had to come up with $74K for closing costs (not a cent of which would go towards equity in the unit). The costs that the buyer had to pay on closing included:

• HST of $39K
• Land Transfer taxes of $19K (after the first time buyer rebates were applied)
• Tarion enrollment fee $1250+HST
• Legal fees – for interim closing and for final closing $1300+HST
• Property taxes pre-paid by developer $750
• Development Charges $2900+HST
• Occupancy fee not already paid for $2500
• 3 months common element fees for reserve fund $1800
• Water and gas hook up fees $1000
• Nickel and dime admin fees $550
• Nickel and dime disbursement fees, mortgage registration etc. $1200

Now obviously the BIG expense here is the HST. He purchased the unit shortly after the HST came into effect but shortly before developers universally started to include the HST in the cost of the unit. (If you bought a new condo post June 2009, you better check and see in your contract if HST was included.) Development fees, Tarion enrollment fees, and water/gas hook up fees are all examples of costs that buyers incur when buying pre-construction instead of going resale. This buyer was NOT an investor so this is HST money that he will never get back (see my previous post on the HST debate/question).

The buyer told me he was not expecting these closing costs and had to scramble to get the $74K in funds together just to close on this property and not be in default of his contract. Ouch. How can this happen?

This story once again illustrates what I have been preaching for nearly 4 years on this blog:

1. Never buy a pre-construction condo without using a Realtor who is experienced and competent in handling pre-construction sales and working with developers. Ask them what they can do to minimize or eliminate hidden closing costs.
2. ALWAYS get your contract reviewed by a lawyer who is experienced in dealing with pre-construction condos and dealing with developers. Ask them what closing costs you will incur (according to what the contract says) on closing day. Go into your purchase with your eyes wide open.

Questions or comments? Do you have a story of how you were surprised when you saw your statement of adjustments? I’d love to hear about it. Contact me here.

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The Elephant in the Room: HST

NOTE: the following blog post is not to be considered legal or tax advice. I am not a lawyer or an accountant. I’m writing this strictly for informational purposes only. Always consult a lawyer when purchasing pre-construction real estate.

ANOTHER NOTE: If you find this article confusing, good. That’s the number one point I’m trying to make: the HST on new condos is very confusing and it needs to be fixed.

This is a subject that very few people in the pre-construction condo industry are talking about, but one that could actually have major repercussions on our industry over the next few years. HST and how it affects new condo purchasers, specifically those purchasers who are investors (i.e. up to 80% of the market right now), is a terribly unclear issue. When the Mcguinty government introduced the HST in July 2010, it was said that it would not really affect the real estate market. While this may be true in an overall sense, for investors of new condos, there can be serious implications to your bottom line.

The issue is essentially this: there is an HST rebate built into the price of every new condo sold in Toronto. The assumption is that the buyer of any given new condo is an end-user (they are buying it for themselves to use, not to flip for profit, or to rent out to a tenant), therefore they qualify for this rebate which the builder collects on their behalf. In reality we know that the pre-construction condo market is dominated right now by investor-buyers NOT end-user buyers. Investors do not qualify for this rebate, so the builders must charge them to account for this rebate, effectively increasing the price of their units significantly at final closing. Now, there is a process in place whereby investors can apply to get this extra money back from the government after the fact, but as you can imagine any application process involving extracting money from the government is long, painful, and tedious.

The key questions that are so difficult to get concrete answers on are:

• Who qualifies for the HST rebate in the first place?
• How much is the HST rebate? How is it calculated? How much do I have to pay extra if I am an investor?
• How do I apply to get my money back if I am an investor? When can I apply? What conditions must I meet? When will I get my money back? Do I get all my money back or only a portion of it?

If you talk to 3 different real estate lawyers, I gaurantee you will get 3 different answers as to how the HST rebate works and how it affects investors. This is a serious issue as thousands of investors are buying condos in Toronto every month, and I think many will get a shock in 2-4 years when they meet their lawyers for final closing and they are asked to write a cheque for thousands of dollars to cover the HST.

Why are there seemingly no clear answers on how the HST works for investors? Part of it can be explained by the fact that the HST has only been in effect for a year, and very few (if any) NEWLY purchased condos have actually completed and closed in the last year. In other words, very few lawyers have actually completed a final closing for a client who purchased a new condo during the HST era which began July 1, 2010.

Toronto real estate lawyer Stephen Shubb has done his best to explain how the HST works (and I think he did a pretty good job) on his website: HomeLegalCost.com. Essentially his explanation boils down to this: if the purchase price is less than $450K, you will get the full rebate back after the fact as long as you rent it out for at least 1 year after final closing. So you will be in the same position as the end-user is, but you have to pay up front and wait to get your money back. If your purchase price is over $450K (which many units are of course in Toronto), buyer beware! You may have significant additional costs at final closing that you might not be getting back.

Call me crazy, but I actually believe that someone up there at Queen’s Park might be reading this blog (especially with an election coming). With that in mind, I am calling on the Ontario government to do the following:

• Come up with a clear statement and communication to the public about how the HST will affect buyers of new condominiums in Ontario.
• Come up with a clear statement and explanation for the real estate law industry (lawyers) so they can explain it to their clients
• Increase the limits on who qualifies for the full HST rebate. $450K is a ridiculous upper limit in a city where the average single family home costs about double that
• Get rid of the application process for getting back the HST rebate for investors. If the rebate is in fact the same as for end users, why complicate the entire process, create unnecessary bureaucracy at a great cost to the public, just to get the same result in the end?

Questions or comments? Totally confused? Please contact me.

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June 30th – The Busiest Closing Day Ever?

Today is June 30th, 2010 which means that tomorrow is July 1st, 2010 – the day the earth will stand still as the dreaded HST era begins in Ontario.Today is quite possibly the busiest closing day in the history of Toronto.

The last week of June is traditionally the busiest of the year for closings as this marks the official start to summer as well as the end of the school year. People want to be in their new homes for the summer months and parents don’t want to move until their kids are finished school. Over the past several months, a huge percentage of the resale transactions that have taken place have been set to close this week, and in particular this day – June 30th.

There is still a great deal of misinformation about the HST. I had a client ask me just this week who purchased a resale home that is closing in September if they would have to pay HST in addition to the sale price! Can you imagine-adding a surprise 13% to the purchase price of a home! Of course HST does not apply to the sale price of a resale home whatsoever, I reassured my client but it goes to show that the general public does not know how this HST will be affecting them. I suppose like anything, you have to live with it for a while before you can tell what it feels like.

We’ve been hearing about it for months, that there would be a rush to get in before the HST, and it has definitely played out this way. I suspect many lawyers will be taking next week off as just about no one will be doing any closings this week.Now the question is, what happens next? Will the market drop off in July? Probably not. Buyers will keep buying and sellers will keep selling. Questions or comments? Contact me.

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HST Rush Is On

The long predicted rush to beat the HST seems to be in full effect. Developers who have nearly finished buildings are rushing to get their remaining inventory over $400K sold and closed (building registered) before June 30th. For example, Empire Communities has School House Lofts in the Annex – a boutique collection of high-end condominium residences, all priced over $629K, and they are trying to get these units sold and the building registered by June 30th. If they do not, they will either have to absorb a MASSIVE hit from the inclusion of the 8% extra HST, or they will have to raise prices on all units significantly.

On the resale side, buyers and sellers alike are trying to get their closings in before June 30th even though the impact will not be nearly as great as on the new build side. Let’s just say that all the real estate lawyers in the city will be VERY busy the last week of June and completely bored the first week of July!

Here’s what the actual impact of the HST will look like for both buyers and sellers of a typical $400K transaction

For Sellers, closing before July 1st will save you 8% on your real estate fees (assuming fees at 5%, that’s $1600). Legal fees on a typical sale will be about $1000 (HST would be $80 extra here).

For Buyers, closing before July 1st will save you 8% on your legal fees (assuming fees at $1500, that’s $120).

Other miscellaneous expenses to think about that will cost more come July 1st include home inspections and moving expenses.

Tip For Buyers: If you are buying a condo, check the status certificate to ensure that the budget includes an accounting for the HST and the impact it will have on the services the condo uses regularly. If the condo board has not planned for the increase, this is not a good sign!

Tip For Buyers and Sellers: Secure your lawyer early to handle your closing as many will be ‘booked up’ for the last week of June and may refuse you service.

Questions or comments? Feel free to contact me.

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New Details on The HST

The provincial government is proposing to harmonize the GST with the PST. This new tax will be known as the HST. This would underlying principle is to increase efficiencies by having just a single tax, however, some goods (like housing) that have never been subject to the PST, suddenly would be.

This has many people inside and outside the Real Estate industry very concerned. The cost of a new condo or home in the GTA could jump overnight by tens of thousands if this new tax was implemented with no concessions. (Resale properties are not subject to the GST or PST).

The province just announced some new proposed changes to be made to how the HST is implemented as it pertains to new housing. Continue reading for the full press release from TREB.

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Assignment Advantages For Buyers

Continuing the Toronto Condo Assignment series, let’s take a look at the key advantages for buyers of assignment listings.

• Lower purchase price. Buying an assignment is sort of like having a time machine and being able to go back in time to purchase a condo today, at yesterday’s prices. Sellers know they have to price their units for less than what the developer would sell a similar unit at today. Savings can be in the tens of thousands compared to buying through the developer, and in some cases the price paid is even lower than what is available on the resale market.
• Lower taxes. If you buy an assignment contract that was originally signed prior to the new Toronto Land Transfer tax kicked in (January 1, 2008), you can save yourself a few thousand dollars in closing costs by not having to pay them even though the closing date is after Jan 1, 2008. Also, with the McGuinty government recently announcing a new Harmonized Sales Tax (HST), buying an ‘old’ contract is a great way to avoid the tax man!
• New condo without the wait. Usually when  you buy pre-sale you are looking at a very long wait to move into your new condo. When you buy an assignment, you don’t have the usual 3-4 year lag time, often occupancy is only months away.
• Tarion Warranty. Since you are buying a new condo, you do qualify for Tarion‘s 7-year warranty that comes with all new homes and condos in Ontario.
• Inherit VIP incentives. Many sellers of assignments are investors who purchased during the initial ‘VIP’ stage of the sales process, when prices were lowest and often many upgrades were thrown in by the developer for free that if  you bought today from the developer directly you would have to pay extra for.
• Negotiate from a position of strength. Many sellers are selling because they cannot wait until occupancy or final closing -they need to get their money out now. Negotiating with someone in this position can be advantageous. 

Questions? Leave a comment or contact me.

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