Every week I receive missives from people who plan to buy a house in Ontario but can't figure out this confounding harmonized sales tax and the impact it will have on their costs.
Now senior economists at the Bank of Montreal have provided some clarity: Douglas Porter and Sal Guatieri say the tax could produce all kinds of negative side-effects, from holding back first-time buyers to taking a nick out of the provincial economy.
Just to recap, in its 2009 budget, the McGuinty government proposed a plan to combine the 8 per cent provincial sales tax with the 5 per cent goods and services tax starting July 1, 2010, creating at 13 per cent harmonized sales tax.
At the moment, newly-built houses in Ontario are levied with a GST but no PST. Under the new scheme, people who buy a house for less than $400,000 would receive a rebate to offset the tax, those who spend less than $500,000 would receive a partial rebate, and folks who buy a house costing more than $500,000 would be hit with the full freight.
Porter and Guatieri note that the difference between a house priced just under $400,000 (and therefore eligible for the rebate) and a house priced at $500,000 would be an extra $37,000. That makes an effective marginal tax rate of 37 per cent on the $100,000 increase in value.
“This is a huge impediment for home purchases in the half-million dollar range,” the economists note in a report.
Here are a few of the possible consequences they see:
Builders would likely shift towards building units under the $400,000 mark and might skimp on quality and size as a result. Consumers might have to pay separately for upgrades, landscaping and standard finishes.
At the other end of the scale, builders could focus on the very high-end, where taxes may be less of a deterrent to buyers. That means middle-income families could be struck harder.
More buyers are likely to veer towards resale houses. For a $500,000 house, the tax differential would amount to a hefty $65,000. This would in turn raise the price of resale homes, the economists reckon.
Fewer investors would want to buy condos in the price brackets hit by the tax so fewer units would be built, leading to upward pressure on rents.
The one benefit of the HST they see for builders is that it would reduce their costs by about 2 per cent, which is the amount they now pay for the embedded PST on building supplies. But they would also likely face falling demand for their houses.
The economists believe the HST generally has merit, but it's the treatment of new housing that gives them pause. Their advice to Premier McGuinty is to reduce the HST on new homes from the proposed 13 per cent to 7 per cent (equivalent to the current 5 per cent GST and the 2 per cent embedded PST currently levied on building materials).
They also suggest graduating the provincial portion of the tax on new homes priced above $400,000, so that the tax applies only to the portion of the price above $400,000.
As for the schedule for phasing all of this in, the BMO economists are wondering the same thing as everyone else: Will the HST apply only to homes purchased after July 1, 2010?
The budget didn't say, but Porter and Guatieri hope the government will grandfather both sold and unsold units that are currently being built and won't be occupied until after the HST comes into effect.
“This would ensure that current projects remain viable and retain financing, so they can be completed as planned, thus preserving commitments to workers, purchasers and lenders.”
To sum up, Porter and Guatieri say, home buyers would see a jump in tax burdens and growing families could face a shrinking supply of move-up, mid-priced homes. They estimate that 30,000 construction jobs could be lost and the resulting hit to Ontario's annual gross domestic product would be about 0.5 per cent.
“A significant loss of construction jobs and decline in residential construction would add pressure to an industry already under severe stress, and hit the economy just when it is emerging from a lengthy recession,” is the report's gloomy conclusion.
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