Goodbye HST, hello GST…again!

I was pleased to read that Kevin Falcon will be announcing HST/GST transition rules tomorrow. Below is an article published in a recent issue of BC Homes Magazine sharing some personal reflections on the introduction of the GST, and the need for a thoughtful phasing out of the HST.

Goodbye HST, hello GST…again!

By Michael Geller

When the voters of British Columbia recently rejected the HST in favour of the GST, I was reminded of some little known events from twenty years ago related to the introduction of the then much hated GST.

The Goods and Services Tax was introduced on January 1, 1991. I remember it well since I was President of the Urban Development Institute of Canada (UDI) in the period leading up to its inception. Canada’s homebuilding industry was very concerned about the impact of the pending GST on new development, since the tax was initially proposed at 9%. Once it became apparent that the federal government was determined to bring it in, the Board of UDI Canada proposed what I considered at the time to be a ridiculous idea. To ensure that GST would not deter purchasers of new homes, UDI Canada proposed that it apply not only to new homes, but all resale homes as well!

Moreover, if the GST applied to all housing, the rate could be reduced from 9% to 7%.

As President, I presented this idea to Don Blenkarn’s House of Commons Finance Committee. And when his committee’s findings were released, I was astounded to learn that Blenkarn, whose Mississauga riding was home to much new development, agreed with the UDI recommendations, and announced that the GST would therefore be reduced to 7%.

The Canadian Real Estate Association, representing realtors across Canada, was outraged. It publicly chastised UDI, and I privately agreed with every one of its concerns. Eventually, the government sided with the realtors, and GST applied only to new construction. However, a rebate program was put in place to minimize the impact on new homes. Somewhat coincidentally, the 7% figure remained, until subsequently reduced to 5%.

Eighteen years later, when the BC government announced the HST program, the local development community was again alarmed, since instead of a 5% tax, many new homes would be subject to a 12% tax. Although a rebate program would be put in place for some units, a new $1 million dollar home would be charged an additional $120,000. Not to mention the additional Property Purchase Tax.

For this reason, BC homebuilders watched the outcome of the HST referendum with great interest. While many, including myself, genuinely believed those economists who argued that the harmonized tax was good for the economy, we could not help but be pleased with the prospect of a 5%, rather than 12% tax.

Now that the tax is to be repealed, with a proposed date of March 31, 2013, what we do not know is what will happen to projects now under construction, or about to get under construction. Will HST apply, or will GST apply. Does it make a difference if units completed after March 2013 are pre-sold now? I am personally caught in this predicament since I am about to commence construction this fall on a small project in West Vancouver, with completion scheduled for Christmas 2012.

Unfortunately, neither UDI nor CHBA have received any answers from the Minister of Finance. So I posed these questions to Kelly Lohn, of Lohn Caulder, a highly respected firm of Chartered Accountants whose practice includes many real estate developers.

Not wanting to speculate on what the government will do, Kelly did wisely point out that when the government introduced the HST there was a somewhat complex ‘phasing in period’. He therefore thought it was reasonable to assume that there might be a similar phasing out period for the HST. Otherwise, Kelly agreed with me that there could be turmoil in the homebuilding industry if a $1 million dollar house or apartment attracted $120,000 tax one day and $50,000 tax the following day (subject to certain deductions).

As I write this article, representatives of UDI and the Canadian Homebuilders’ Association are trying to get some clarification from the Provincial Government as to what rules will apply, especially for new housing under construction and likely to be sold with or without pre-sales over the coming twelve to eighteen months. In my opinion, if there is not a carefully designed transition period, the reintroduction of the GST could be even more disruptive and harmful for both homebuilders and purchasers than the initial imposition twenty years ago.