Updating the Benefits of the GST New Housing Rebate

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1 Housing Affordability and Choice for Canadians: Building on Success Updating the Benefits of the Introduction: When the Goods and Services Tax (GST) was introduced in 1991, the federal government recognized that it would unfairly increase federal sales taxes on new housing, thus undermining housing affordability. The was designed to address this problem, allowing the government, in its own words, to meet its commitment to ensure that the new [GST] system does not pose a barrier to the affordability of housing in Canada. At that time, the government estimated that over 90% of new houses in Canada were priced at less than $350,000. This was the basis for establishing the threshold for the full rebate at $350,000 or less, with a partial rebate available for homes selling for up to $450,000. Homes priced above this level were not eligible for any GST rebate. Since 1991, in spite of house prices rising by over 60%, the federal government has never adjusted the thresholds for the New Housing Rebate upwards. As a result, many new home buyers (the vast majority of buyers in many large urban centres) do not receive the GST New Housing Rebate. They pay the full 5% GST on the price of their new homes. In recent years, housing affordability benefited from the reduction in the general rate of the GST from 7% to 5%. As a result of this reduction, the actual rate of GST on new homes eligible for the full was reduced from 4.48% to 3.2%. This is closer to the percentage of federal sales taxes on a new home that applied prior to the introduction of the GST in This was a major step in supporting housing affordability for those who qualify for the rebate. However, the ever-increasing proportion of new home buyers who do not qualify for the rebate are paying much more in federal sales taxes than was the case prior to the introduction of the GST. Since the rebate thresholds have been frozen since 1991, new home buyers are paying more GST than would be the case had the rebate thresholds been adjusted to reflect higher housing prices over the past two decades. This has had a negative impact on housing affordability. Page 1 of 5

2 Background The reduces the actual rate of GST payable on eligible new homes from 5% to 3.2%. 1 Purchasers of new homes priced below $350,000 receive the full rebate i.e. the actual rate of GST on their new homes is 3.2%. Purchasers of homes priced between $350,000 and $450,000 receive a progressively reduced rebate and the actual rate of GST rises accordingly. Homes priced at $450,000 or more receive zero rebate i.e. the actual rate of GST for these homes is 5%. For new homes priced between $350,000 and $450,000, the GST payable is calculated as follows: House Price $350,000 $400,000 $450,000 5% GST $17,500 $20,000 $22,500 $6,300 $3,150 $0 Actual GST Payable $11,200 $16,850 $22,500 Actual GST as % of House Price 3.2% 4.21% 5.0% Federal Commitment When the GST was introduced in 1991, the federal government made a commitment to adjust the thresholds to reflect changes in housing prices, and thus to protect housing affordability over time: The government will review these thresholds at least every two years and adjust them as necessary to ensure that they adequately reflect changes in economic conditions and housing markets. 2 During the 1990s, immediately after the introduction of the GST, housing prices were relatively stable in most parts of Canada, so there was little need to adjust the thresholds to reflect changes in housing prices. As a result, the thresholds were not adjusted. Since the mid-1990s, housing prices have increased significantly; however, the thresholds have remained frozen at their 1991 levels. Rising Housing Prices Over the period since the GST was introduced, Statistics Canada s New House Price Index has increased by over 60%. As a result, freezing the thresholds has meant that an increasing number of households no longer receive a full or even a partial rebate. 1 The is 36% of the GST payable on eligible new homes, up to a maximum rebate of $6,300 the rebate for a $350,000 home (36% of 5% of $350,000 = $6,300). For new homes priced between $350,000 and $450,000, the rebate is progressively reduced. For new homes priced at $450,000 or more, the rebate is $0. 2 Technical Paper on the GST, 1989, page 19. Page 2 of 5

3 For example: In Vancouver, over 75% of the purchasers of new houses in Vancouver qualified for the full rebate when the GST was introduced in In contrast, almost none (0.1%) of the purchasers of new single-family homes completed in 2012 qualified for the full GST housing rebate. In Victoria, over 95% of the purchasers of new homes qualified for the full rebate in Only 7% of the purchasers of new single-family homes qualified for the full GST rebate in In Toronto, over 67% of the purchasers of new houses qualified for the full rebate in Only 8% of the purchasers of new houses completed in 2012 qualified for the full GST rebate. In Calgary, almost all (99.6%) of the purchasers of new houses qualified for the full rebate in Only 18% of the purchasers of new houses completed in 2012 qualified for the full GST rebate. The picture is similar across Canada. In 2012, only one-third (33%) of new houses in major centres across Canada qualified for the full GST new housing rebate; 45% of new houses received no rebate (i.e. they were priced at $450,000 or more). According to the federal government at the time the GST was introduced: The rebate will substantially offset the impact of the tax on the vast majority of new houses purchased in Canada. Indeed, over 90 per cent of the purchasers of owneroccupied new houses will be eligible for the maximum rebate. An additional 5 per cent of new homes will receive some rebate of the tax. In total, therefore, the housing rebate program will affect over 95 per cent of new house purchases. As a result, the GST will not pose a barrier to the affordability of new housing in Canada. 3 (emphasis added) In 1991, according to CMHC data, over 90% of new houses completed in major centres across Canada qualified for the full GST housing rebate this mirrors the expectation of the federal government at the time the GST was introduced. However, since then, as housing prices have increased, fewer and fewer home buyers have qualified for the GST rebate. Contrary to the federal government s statement when the GST was introduced, the GST is increasingly posing a barrier to the affordability of new housing in Canada. In future, as house prices continue to rise, new home buyers will pay increasingly more GST and housing affordability will deteriorate further. Home buyers in urban centres are particularly disadvantaged. Additionally, it is important to note that not only purchasers of new homes are disadvantaged by the frozen thresholds. Since new and resale homes are competitive products, the high (GSTincluded) prices of new housing are reflected in higher prices in the resale market as well. 3 Technical Paper on the GST, 1989, page 21. Page 3 of 5

4 Share of New Single-Family Completions* Qualifying for Full Vancouver 0.1% 75.2% Victoria 7.2% 95.3% Toronto 8.1% 67.4% Ottawa Hamilton Regina Calgary Kitchener Edmonton 11.9% 12.9% 18.4% 18.4% 23.8% 25.9% 93.9% 87.9% 100.0% 99.6% 95.7% 97.6% Oshawa Niagara-St Catharines Winnipeg Saskatoon Halifax Sudbury Montreal London 35.7% 37.5% 39.9% 43.3% 47.9% 50.9% 54.7% 60.5% 96.4% 96.8% 99.0% 99.6% 99.9% 99.3% 98.7% 91.9% * Newly completed single- and semi-detached dwellings priced less than $350,000 Source: Based on data from CMHC Page 4 of 5

5 Adjusting the Thresholds For many years, the CHBA has been recommending that the federal government adjust the Thresholds in line with its commitment at the time that the GST was introduced. This commitment would have been met had the federal government indexed the thresholds to the increase in housing prices since the GST was introduced. The increase in the Statistics Canada New House Price Index between 1991 and 2012 was 64% if the rebate thresholds had been adjusted to reflect this increase in housing prices, the thresholds would increase from their current $350,000-$450,000 to $575,000-$740,000. As the thresholds for the new housing rebate have now been frozen for over 20 years, the CHBA recommends that the federal government adopt the rebate model for new housing that has been adopted by the government of Ontario under sales tax harmonization. This model provides a provincial tax rebate (75%) up to a maximum value ($24,000). With this model, all new home purchasers pay less tax on the portion of their home price under $400,000, and the full tax on any amount above this threshold. This would achieve the federal government`s goal at the time the GST was introduced: that the GST would not pose a barrier to the affordability of housing in Canada. Federal Revenue Impact Based on a rebate threshold of $400,000, it is estimated that the reduction in GST revenue to the federal government from adoption of the Ontario rebate model would be slightly less than $500 million in The purpose of the federal government s commitment to adjust the GST thresholds was to protect housing affordability over time. With almost all new houses in many major centres now ineligible for the GST rebate, action by the federal government to fulfill this commitment is now urgent. What Should Be Done? The CHBA recommends that the federal government raise the price thresholds for the GST rebate, or adopt the rebate model for the new housing rebate threshold that has been adopted by the government of Ontario under sales tax harmonization, where a rebate is available to all new home purchasers up to a maximum limit. Page 5 of 5