TORONTO STAR
The introduction of the Harmonized Sales Tax could bring a whole new breed of housing products to the market, such as “white box” homes finished only as a shell for which buyers will hire separate contractors to do landscaping, interior finishing and the like.
And new home builders should expect a four-year slump in new home sales and the underground renovation economy to flourish due to the HST.
Those were the hard realities presented last week at a panel discussion arranged by the Ontario Home Builders’ Association (OHBA) for its members.
“Your greatest challenge isn’t long term, it’s the next four years, if you are still alive,” Paul Pettipas, chief executive officer of the Nova Scotia Home Builders Association said. The HST has been in effect in Nova Scotia since 1997. “You have fertile ground for an underground economy. A lot of skilled people are going to be out of work (former auto workers) and there’s going to be a whole new breed of handy people.”
The tax, which will blend the goods and services tax (GST) and the provincial sales tax (PST), comes into effect July 1, 2010 and will be charged on new home and condo sales and on renovation work.
A new home priced under $400,000 will receive a rebate of 75 per cent of the provincial portion of the tax, meaning that consumers will effectively pay a 2 per cent tax, about they same they pay currently.
The rebate is scaled back on homes priced at more than $400,000, however; for a $500,000 new home, a consumer will be paying the full 8 per cent, or $32,000 more in tax than the buyer of a $400,000 home.
About half the single family and semi detached homes sold in Ontario are priced more than $400,000.
Panelist Harry Herskowitz, real estate lawyer and Tarion chairman, speculated that the transition rules, yet to be announced, will likely exempt any agreements of sales entered into prior to July 1, 2010.
He offered several ideas on how builders could minimize the tax bite and “there will be an incentive for builders to keep below the $400,000 threshold.”
Such measures may include reducing the overall size of new homes or condos; simplifying, downgrading or eliminating costly architectural or design features, such as exterior landscaping.
Herskowitz said builders might also lower the price point by reducing or eliminating green features which are more costly than Ontario Building Code standards, even though that thwarts the province’s Green Energy Act and “is a collective detriment to everybody.” Or they could eliminate all extras and possibly sell the home as a “shell” or “white box” with the finishing work to be done by a separate, third party contractor.
This “white box” approach raises several issues, said Herskowitz: the finishing work may not be covered by Tarion; and builders must be careful that the finishing work be done by separate contract with a different date than the closing, ideally by an arm’s length third party supplier, so it’s not seen as a builder’s tactic to avoid paying a higher HST rate.
Or he said, perhaps some developers/builders will sell lots separately and the home building will be done in a separate contract.
The government is treating houses like luxuries,” observed Herskowitz. “In the City of Toronto, there will be $80,000 in taxes (including land transfer tax, HST, etc.) on the typical half million dollar house, which most of the time is owned by people with a $150,000 household income. It’s not a luxury, it’s a necessity. More and more buyers will be opting for resale so they don’t have to pay HST.”
“This has the potential to change the way we do everything,” noted moderator Brian Johnston.
“And the huge issue is the impact on renovators and incentifying the black market economy.”
“I can tell you in no uncertain terms consumers are going to pay more,” said Pettipas. “The people that will hurt the most are the renovators as they will have to make the decision whether to join the cash economy and go underground. Consumers don’t consider cash deals as wrong.”
With the HST, the 8 per cent tax will be added to labour costs, pushing renovation costs higher. Pettipas says in his province, about one-third of the reno work is done under the table, with homeowners doing one-third themselves and professionals doing the rest.
He told builders to brace for a bumpy transition.
“Yours is the worst of the worst with the ($400,000) threshold and the government will try to make it seem palatable up front, but it won’t last,” said Pettipas.
“Batten down the hatches, have some money salted away for the next few years, you’re going to need it. You’ve got to get through the next four years. After that, it will be irrelevant.”
What’s frustrating, said Johnston, president of the Monarch Corp. is that no plan has been announced for how the tax will be phased in.
“We thought we’d have a solution by now, we thought we’d have an answer to the transition; we don’t,” said Frank Giannone, president of the OHBA.
Giannone said the OHBA has been lobbying the provincial government for two changes for implementation: one, that buildings under construction before the HST comes into effect be exempt; and secondly, that the 2 per cent rate applies to the first $400,000 of any new home sale, even if the price is higher, then the cost beyond that be taxed at 8 per cent.
