The government intends to reduce what it calls speculative trading in the Canadian housing market. Its target is the resale of purchase contracts signed before the construction or occupation of the house or condo.
Currently, when a person makes a new home transfer sale, Harmonized Sales Tax may or may not apply, depending on the reason for the purchase of the home. For example, the HST does not apply if the purchaser originally intended to live in the house.
This creates an opportunity for speculators to be dishonest about their original intentions and uncertainty for everyone involved in an assignment sale as to whether the HST applies.
The existing rules also result in the uneven application of the HST to the final price of new homes.
To address these issues, Budget 2022 will make all disposal sales of newly constructed or substantially renovated residential units taxable for HST purposes, effective May 7, 2022.
The HST applies to the price from the builder to the first purchaser, and an additional 13% tax will be imposed on the total price paid by the second purchaser to the original purchaser.
In fact, each disposal sale concluded on or after May 7 will be subject to a tax of up to 26%.
The tax will be paid by the original purchaser of the builder who “rolled over” the agreement to an end user.
For the first buyer to break even, the home or condo must increase in value by 13% HST, 5% real estate commission, and any builder charges to consent to the transfer.
This means that for all sales of new or existing assignments completed on or after May 7, the first 18% of the new price will go to HST and real estate commission, even if the seller ends up in the red.
Will this kill the mission sales market?
John Pasalis is the Official Broker of Realosophy Realty Inc. and a frequent industry spokesperson. He emailed me and said, “If the federal government is able to control this and condominium investors have to start giving 13% of their capital gain back to the federal government as HST…that is not good for investors who intend to flip their condos.
Jose Manalo is a broker with Sutton Group Realty Systems in Mississauga. He spends much of his time on assignment sales.
I asked him about the impact of budget on mission sales. He replied, “Will this hold back resale prices in the future? I would say no! 13% HST plus 5% commission will simply be added to the investor’s sale price. Some investors will crawl a bit at first, but later it will be just a normal additional cost.
In my opinion, the disposal market may well come to a screeching halt in the short term, but once it adjusts to the new taxes, it may pick up after a while.