What is HST?
Beginning July 1st, 2010, Canadian provincial governments will move to the new Harmonized Sales Tax (HST). This new “harmonized” tax will be a combination of the separate PST and GST (currently 8% and 5% respectively in Ontario).
Winners and Losers
Most business owners are pleased with the new HST, as it will increase the amount of tax rebates available to them. Consumers will bear the brunt of the impact in the move to HST which will result in a 1.5% increase to the effective tax rate on consumption in Ontario. Similarly, the expected impact for the real estate industry is overwhelmingly negative.
Real Estate Impact
The bottom line once the transition to HST occurs is that consumers will pay more taxes on more items and housing will become less affordable for both home buyers and renters.
As legal fees, home inspection fees, mortgage insurance premiums, and real estate commissions become subject to additional taxation under the new Harmonized Sales Tax regime, housing affordability will suffer. Ontario’s REALTORS® claim the McGuinty government’s plan to harmonize the sales tax will result in additional costs of over $2,000 for most real estate transactions. Current owners in urban areas will be impacted as well; condo fees are expected to increase 5-7% as management fees, concierge services and utilities will be taxed under HST.
Renters will be hit as landlords pass on the higher costs soon to be associated with electricity, gas, cable, maintenance, property management, and other services. The Federation of Rental-Housing Providers of Ontario (FRPO) estimates an increase of 2.5% to 3.0% in residential rents as a result of the HST.
Could HST Actually Help?
At first glance, it appears HST will only make it tougher to shake the current real estate slump, but could it actually help? One potential effect of this move to a harmonized tax is an artificial boom fueled by the incentive to get transactions done before July 1st, 2010. This incentive may be even stronger among new home sales (despite proposed rebates) where tax is paid on the purchase price. Combined with the usual spring uptick in sales figures, this artificial HST boom could be the catalyst that sets real estate up for its next positive run. Conversely, the additional costs of home ownership resulting from HST may keep a damper on demand and further delay recovery.
Despite the seemingly negative effects HST will have on real estate, we’ll have to wait to see the full impact of our latest tax-grab.
