Missing Middle Condos pt. 4.3 - HST & The Rebate

"In this world nothing can be said to be certain, except death and taxes."

In the (Ontario) Real Estate world, we sometimes forget Ben Franklin's turn of phrase; because resale residential properties are HST exempt (see Schedule V, Subsection 123(1) of the Excise Tax Act), one might be forgiven for forgetting to deal with HST on a new build. Forgiven by me, that is. Not by the CRA. So it bears repeating:

The sale of new housing is NOT exempt from HST. You need to collect and remit HST on a new Missing Middle Condominium Unit.

Your agreement of purchase and sale needs to take this into account. If you're familiar with new build purchases in Ontario, they're uniformly** priced inclusive of HST and net of the New Housing HST Rebate (which is actually two separate rebates, federal and provincial, but for our purposes, they function together), which returns up to $24,000 of HST to the buyer of a new home. The price being net of the Rebate is a function of the purchaser assigning their right to the Rebate to the builder, instead of collecting it themselves.

Why is this the practice? It allows the builder to present purchasers with the most accurate price to compare with other homes on the market, and immediate use of the HST Rebate; otherwise, the purchaser is fronting the rebate amount, and collecting it months later when Ottawa deigns to send out their cheque. The builder, meanwhile, can write the assignment off against their HST returns, and effectively claim the immediate benefit.

So if this is all very standard, what does a Missing Middle builder need to consider? More than you'd think. Let's dive in.

Qualifying for the Rebate

I won't get into the nitty-gritty details here (leaving that for the CRA), but at a high level, you have to understand what kind of purchaser qualifies for the new housing rebate:

1. Individual (so no corporations) must enter into an agreement to buy the property.
2. That individual must Intend to live, or have a family member live, at the property.
3. That individual must take title to the property.
4. That individual, or their family member, must actually reside at the property.

Failure to adhere to one of these terms means the purchaser doesn't qualify, and the rebate won't be credited. Because most of the terms are in the control of the purchaser, a builder has to be vigilant. By taking assignment of the rebate, the builder takes on some risk that if the purchaser doesn't qualify, CRA could come back to the builder, rather than the purchaser, for the rebate amount - especially if CRA suspects you were willfully ignorant. Because the builder will usually have deeper pockets, the builder is a much more attractive target.

During sales, reasonable efforts should be made to separate out investors from owner-occupiers. A full-on FBI investigation isn't necessary, but to the extent that future use of the property comes up, the answer needs to be recorded somewhere.

Implications for the Missing Middle

As a Missing Middle developer, you're working at a smaller scale, so losses don't amortize as easily, and the time value of money is all the more important. Disqualification of a single unit in a 500 unit tower is a drop in the bucket, that the builder may be able to afford to wait to recover from the purchaser. In a 4 unit condo, $24,000.00 is a lot larger percentage of your revenues, and you may need certainty about those funds.

In a larger project, there may be 6 month or longer occupancy period. If a purchaser moves into the condo in that time, you can be reasonably sure they're residing there, and credit the rebate with confidence. But because many Missing Middle projects won't have an occupancy period (you may not pre-sell, or even if you do, the time gap between unit completion and condo registration may be small), you'll have to find other ways to verify occupancy. Looking at where purchasers want future notices to go - their address for service on the transfer, with the condo corporation and for utilities - is one easy check you can do on closing.

Last Resorts

Even if you do your due diligence before closing, the purchaser could disqualify themselves by selling or renting out the property too early. If you do learn that the purchaser has disqualified themselves, it's not too late - there's a tool to protect yourself. The Vendor's Lien.

It used to be the case that a builder could register a lien on the purchaser's property after closing for any amount of the purchase price that was unpaid. This led to some abuse - builder's claiming excessive post-closing adjustments and pressuring purchasers to accept them or breach their mortgages - and the Director of Titles in 2021 decided to shut down the ability to register a Vendor's Lien entirely. After some cajoling, the DoT allowed for one exception - a lien for the HST Rebate amount.

The thinking is that unlike any other adjustment, which you'd have to go to court to adjudicate, a improper lien for the HST Rebate has a simple solution - the purchaser can go apply to CRA themselves.

The lien is a self-help remedy, and can be registered by your real estate lawyer on your behalf, so if you suspect a disqualification, act fast - if the purchaser is quickly reselling the unit, you may not have much time to register before the new deal closes and you lose the right to protect your recovery.

Next week - Adjustments!

**Uniformly, in my experience - let me know if you've spotted a new build without HST in the wild!

Legal disclaimer: This article and any replies in the comments are for general information purposes only and are not legal advice. If you are seeking legal advice for your project, please reach out at [email protected]