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Federal government announces GST rate reduction from 6% to 5%; Toronto land transfer tax


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Canadian Indirect Tax News, November 2007 (07-02)

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General comments
In its Economic Statement released on October 30, 2007, the federal government proposed, following the July 1, 2006, reduction from 7% to 6%, to again reduce the goods and services tax (GST) rate, this time from 6% to 5%, effective January 1, 2008. The 1 percentage point reduction will also be applied to the harmonized sales tax in New Brunswick, Nova Scotia and Newfoundland and Labrador, bringing the rate to 13%.

When implemented, this will be the second rate reduction in a span of 18 months and will produce issues strikingly similar to those encountered when the rate was last reduced. For example, the effective date of this new rate reduction also falls on a public holiday, meaning businesses will need to ensure key personnel are available to implement systems changes at a time when staff availability is traditionally low. Again, businesses will likely need to incur significant costs to ensure their systems and pricing are amended appropriately.

Aside from the transitional issues that may affect certain persons, the GST rate reduction will, of course, affect all business, the public sector, governments and individuals, alike.

The Economic Statement gives some alternate examples of the kinds of savings generated by a reduction in the GST rate; however, aside from major purchases (new homes, new cars, etc.), the actual savings are likely to be fairly minimal, amounting to just a few hundred dollars per year for the average family. For example, $200 in GST savings would result from the purchase of taxable goods and services of $20,000. 

Finally, it is proposed that part of the cost of reducing the GST rate will be offset by increasing the rate of federal tobacco excise levies.

The public sector
The current level of public sector rebates will be maintained following the rate change. For example, charities will continue to be able to claim rebates of 50% of GST paid and hospitals will keep their 83% rebate rate. Despite the fact that the original basis of these rebate rates was determined from the change from the old federal sales tax to a GST rate of 7%, there appears to be no planned reduction in these rates for the time being.

Commensurate with the reduction in the main rate, the net tax remittance rates for public sector bodies using streamlined accounting (e.g., the special quick method) will also be reduced.

Transitional rules
General
GST at 5% applies if:

Tax is paid and becomes payable after December 31, 2007

GST at 6% applies if:

Tax is paid or becomes payable before January 1, 2008

The existing legislation provides the general rules for when tax becomes payable and should be relied upon to determine that date. Generally, the date of payment of tax follows the date of payment for the consideration payable for the supply. For example, for GST purposes, each lease payment is considered to be a separate supply and, as such, GST at 6% will apply to lease payments due before January 1, 2008 and at 5% for lease payment due after December 31, 2007.

Sales of new residential complexes
GST applies at 5% if:

Ownership and possession are transferred after December 31, 2007.

GST applies at 6% if:

Ownership or possession is transferred before January 1, 2008; or,

Ownership and possession are transferred after December 31, 2007, but the sale is made pursuant to a written agreement entered into before October 31, 2007, and after May 2, 2006.

GST applies at 7% if:

Ownership and possession are transferred after December 31, 2007, but the sale is made pursuant to a written agreement entered into before May 3, 2006. 

Purchasers of new residential housing, for which ownership and possession are transferred after December 31, 2007, but who pay a rate of GST higher than 5%, may apply for a transitional rebate.

Deemed supplies
Generally, GST at 5% applies to supplies when tax is deemed to have been paid after December 31, 2007.

Imports
GST at 5% applies to the value of goods imported or released from Customs' control in Canada after December 31, 2007, and to the value of imported taxable services provided the consideration is paid and becomes due after December 31, 2007.

Financial institutions
Financial institutions that are required to self-assess GST on certain cross-border transactions using a special set of proposed rules released on January 26, 2007, and whose fiscal year straddles January 1, 2008, must apportion the value of these cross-border transactions using the number of days in the fiscal year before January 1, 2008, (6% rate applies) and the number of days after December 31, 2007, (5% rate applies).

Taxable benefits
The prescribed rates used for remitting GST on taxable benefits will be amended for registrants whose fiscal year straddles January 1, 2008.

Anti-avoidance
The Economic Statement indicates that rules to ensure that the integrity of the GST system is maintained will be introduced. Presumably, these rules will mirror the anti-avoidance rules announced with the last rate cut.

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Toronto land transfer tax 

The Toronto City Council has approved the imposition of the controversial city land transfer tax (LTT), effective February 1, 2008. The LTT is subject to certain transitional “grandfathering” provisions summarized below.

The new city tax will mirror the existing provincial land transfer tax; however, the city’s proposed tax rates are lower in some circumstances. The city is also proposing to provide a one-time tax rebate of up to $3,725 for first-time home buyers (see below for further description).

The city has not provided details as to the administration of the new tax but it appears that it will tie into the administration of the provincial land transfer tax. This raises a number of potential concerns and many unanswered questions. Will the city tax provide the exemptions under the current provincial tax? Will the city tax apply in the same manner as the provincial tax to complex related-party and syndicated real estate transactions? Does the city intend that the tax will apply on each of the multiple stages and levels of land development?

Furthermore, the existing Ontario Land Transfer Tax Act is a relatively old statute that does not expressly address many modern commercial real estate transactions. These tend to be dealt with administratively by the province, though much of the province’s administrative policy is unpublished.

In light of these uncertainties, and especially because this is the city’s first exercise of its expanded taxing powers, we encourage stakeholders to come forward to provide input and make their concerns known before the enacting by-law is submitted to Toronto City Council. We understand that the by-law will be before the City Council at its meeting on November 19 and 20, 2007, and will likely be enacted at its December 12 and 13, 2007, meeting. We have been informed by a city official that no prior release of the draft by-law is planned.

Please contact your usual Deloitte advisor, if you wish to discuss your views and/or concerns about the city’s proposed LTT.

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Proposed rates under the City of Toronto LTT
The proposed LTT will apply as follows:

  • 0.5% of the value of the consideration on sales up to and including $55,000 (Parallels the provincial rate.)
  • 1% of the value of the consideration on sales exceeding $55,000 up to and including $400,000 (The provincial rate rises to 1.5% after $250,000, a total potential saving of $750 compared to the provincial rate.)
  • 2.0% of the value of the consideration of land containing one and/or two single family residences exceeding $400,000 (Parallels the provincial rate increase.)
  • 1.5% of the value of the consideration on commercial properties including multi-residential units exceeding $400,000 up to $40 million
  • 1% of the value of the consideration which exceeds $40 million (The 0.5% reduction in rate over $40 million is a reduction from the provincial rate – a concession to purchasers of large commercial properties.)
  • First-time purchasers of new or existing homes will receive a one-time LTT reduction of up to $3,725, which represents the tax on a purchase price of $400,000.

Transitional rules
Purchasers who have signed a purchase and sale agreement on or before December 31, 2007, will receive a full rebate of the LTT regardless of the closing date.

Purchasers who sign a purchase and sale agreement after December 31, 2007, with a closing before February 1, 2008, will not be required to pay the LTT.

Purchasers who sign a purchase and sale agreement after December 31, 2007, with a closing on or after February 1, 2008, will pay the LTT in full.

City consultation – Proposed rebates on certain commercial developments
At its October 23, 2007, meeting, Council called for:

“consultation with industry stakeholders, on a rebate program or lower rate structure for large non-residential property (commercial) class developments that will further the City’s economic development priorities, such as the retention of employment lands and brown field conversions”.

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