On February 2, 2016, the New Brunswick government announced its 2016 Budget, doubling the real property transfer tax and increasing the Harmonized Sales Tax (HST). The tax hikes will have a big impact on NB real estate / property developers and owners. Here’s what property developers and owners need to know about the increases, and how to avoid getting nailed for the 2% difference in the HST rate.

REAL PROPERTY TRANSFER TAX

As of April 1, 2016, the Real Property Transfer tax payable on NB real estate transactions will double to $1,000 / $100,000 of the greater of the purchase price or the property’s assessed value. This change is simple – but hard-hitting. This tax is payable upon the registration of the Transfer of title, so the higher rate will apply to real estate transactions for which the Transfer is registered after Thursday, March 31, 2016. To avoid the additional cost, parties should consider this when selecting closing dates.

HARMONIZED SALES TAX 

As of July 1, 2016, the Harmonized Sales Tax (HST) in NB will increase from 13% to 15%. This change doesn’t change the type of transactions to which HST applies – but it is more complicated to figure out how it applies. Starting on February 2, property developers and owners need to keep careful track of each aspect of the transaction to know which rate will apply when, or risk getting nailed with of the 2% difference.

Applicable HST rate.  The applicable rate depends on whether the property is residential or non-residential. For the taxable sale of residential property:

• If the parties entered the Agreement of Purchase and Sale before February 2, 2016 (the date the HST increase was announced), the current 13% rate applies, whether both or either of ownership and possession transfer to the purchaser after July 1, 2016.
• If the parties entered the Agreement of Purchase and Sale after February 2, the current 13% rate will apply if either ownership or possession is transferred before July 1, 2016; the new 15% rate will apply if both ownership and possession is transferred after July 1, 2016.

For the taxable sale of a non-residential property, however, there is no similar “grandfathering”: the 13% rate will only apply if either ownership or possession transfers to the purchaser before July 1, 2016 regardless of the date they entered into the Agreement of Purchase and Sale. This is most relevant for purchasers that are “non-registrants” and therefore can’t claim input tax credits.  A good example is the sale of a vacant lot by a corporation to an individual who intends to later build on the lot; by closing such a transaction before July 1,  the purchaser would save the additional HST.

Deemed HST rate. It’s critical that property builders keep careful track of, and disclose the applicable tax rate – or risk getting nailed with the 2% difference between the current and new rate. For Agreements of Purchase and Sale into which a builder and a purchaser entered after February 2 and before July 1, 2016, it’s important the builder clearly indicate each of:

• The applicable HST rate.
• The total amount of the HST tax.
• Whether the tax is net of the HST New Housing Rebate.

Without this disclosure, the builder is deemed to have collected HST at the 15% rate, but the purchaser is deemed to have paid it at the 13% rate – and the builder won’t be able to claim the additional 2% from the purchaser. This is especially important for Agreements for which the purchase price doesn’t include the HST.

Progress Payments. For contracts involving progress payments, it will be important to quantify the amount of each payment attributable to property delivered and services performed before July 1, 2016 to know which HST rate applies:

• For progress payments due and payable before May 1, 2016, the 13% rate will apply regardless of when the property is delivered and the services supplied.
• For progress payments due and payable after May 1, the 13% rate will apply to the portion of the payment attributable to property delivered and services supplied before July 1, regardless of when the payment is made; the 15% rate will apply to property delivered and services supplied after July 1, 2016.

Holdbacks. The rule for HST rates on holdbacks generally follows the rule for the progress payments from which the holdback was maintained, regardless of the date it’s released: if the progress payment itself is taxed at 13%, then the holdback is also taxed at 13% regardless of when it’s released.

Deemed Supplies. Builders of apartment complexes may want to consider starting leases on June 30 instead of July 1, 2016 so the existing 13% rate applies to the self-supply. Subject to limited restrictions, grandfathering also doesn’t apply to deemed supplies under the Excise Tax Act:

• If the deemed supply occurs before July 1, 2016, the 13% rate applies.
• If the deemed supply occurs after July 1, 2016, the 15% rate applies.

For example, a deemed self-supply of an apartment complex occurs on the date the complex is substantially complete and possession or use of a unit is given to an individual as a place of residence.

Input Tax Credits. Grandfathering doesn’t affect a builder’s ability to claim input tax credits at the 15% rate for HST paid at that rate in respect of the supply.

Transition Rules. The Canada Revenue Agency (CRA) will release transition rules, but we expect they will be consistent with the guidelines it issued when NS increased its HST in 2010 and when PEI increased its HST in 2012.

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Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Real Estate Team to discuss this topic or any other legal issue.

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McInnes Cooper has prepared this document for information only; it is not intended to be legal advice.  You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.

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