Housing Industry Opposes Canadian Sales Tax Harmonization

by Mike Godfrey, Tax-News.com, Washington

07 May 2009

Proposals to harmonize Ontario’s sales tax with the federal Goods and Services Tax (GST) system will result in a CAD800m (USD683m) tax rise on homebuyers and lead to thousands of job losses in the construction industry, according to a new study.

The report, by the Building Industry & Land Development Association, claims that new homebuyers in the Greater Toronto area will absorb CAD575m or nearly three quarters (72%) of the CAD800m tax increase while accounting for less than half (45%) of new home sales in Ontario.

"The way this tax so heavily penalizes hard working middle-class families in the Greater Toronto Area is as unfair as it is contradictory," said Stephen Dupuis, President and CEO of BILD. “Purchasers of new homes over CAD400,000 are solidly middle-class families that would not be subject to the high income surtax or even the highest tax bracket."

In March, Ontario Finance Minister Dwight Duncan announced a comprehensive package of tax reforms for fiscal 2009/10, including a new value-added tax that will integrate the province's existing sales tax with the federal government's GST.

The single value-added sales tax would be levied at a combined rate of 13%, the provincial portion being 8% – the same as Ontario’s general RST (retail sales tax) rate – and the federal portion being 5%. The system is set to become operative in July 1, 2010, and would be administered by the federal government.

According to the provincial government, purchasers of newly constructed homes under CAD400,000 would not be subject to an additional tax burden. Buyers of new homes valued between CAD400,000 and CAD500,000 could claim a proportional rebate which would be twice as generous as the GST housing rebate rate. But according to Dupuis, the province's CAD1,000 HST transition rebate “would not even come close” to offsetting the increased tax these house buyers will be paying on their new homes.

Frank Clayton of the Altus Group, who wrote the report for BILD has calculated that an individual buying a home for CAD500,000 will pay CAD32,000 more in tax than someone who purchases a new home for CAD400,000.

"This extraordinarily large increase in taxes will undermine the opportunity for middle-income Ontarians to purchase a new home, erode the competitiveness of new homes versus the large stock of existing homes, reduce the volume of new housing being built and cause buyers to move away from urban centres to obtain less expensive housing that escapes the burden of the new tax," Clayton wrote.

Clayton’s report suggests making the tax treatment of new housing neutral by applying a 2% rate against all new housing. Another option would be to apply a progressive tax on the value of new homes above CAD400,000.

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