How to Determine the Percentage of Completion for Purposes of the Provincial Transitional New Housing Rebates and the Transitional Tax Adjustment in Ontario and British Columbia

GST/HST Info Sheet GI-105
July 2010

This info sheet outlines the methods that are considered to be fair and reasonable by the Canada Revenue Agency (CRA) for purposes of determining the percentage of completion of the construction or substantial renovation of a residential complex situated in Ontario or British Columbia (B.C.) as of July 1, 2010. This percentage of completion must be determined to calculate the provincial transitional new housing rebate and the transitional tax adjustment and must be done in a fair and reasonable manner.

Definitions for GST purposes, e.g., builder, condominium complex, mobile home, residential complex, residential unit, residential condominium unit, single unit residential complex and substantial renovation, generally apply under the HST, as do the CRA's current policies on the application of the GST to housing. Guide RC4052, GST/HST Information for the Home Construction Industry and GST/HST Info Sheet GI-005, Sale of a Residence by a Builder Who is an Individual explore many of these important terms and concepts. Others are explained in GST/HST Memorandum 19.2, Residential Real Property or related policy statements.

Substantial renovation

Housing that has been substantially renovated is generally given the same treatment under the GST/HST as newly constructed housing. Extensive modifications must be made to the housing in order to meet the definition of a "substantial renovation" for GST/HST purposes. For a full explanation of the factors to consider in deciding if a substantial renovation has taken place, refer to GST/HST Technical Information Bulletin B-092, Substantial Renovations and the GST/HST New Housing Rebate.

Provincial transitional new housing rebate

Generally, a provincial transitional new housing rebate is available in respect of a newly constructed or substantially renovated residential complex, or an addition to a multiple unit residential complex where the construction or substantial renovation of the complex, or addition, is at least 10% complete as of July 1, 2010, and

• the sale of the complex is subject to the HST at 13% in Ontario or 12% in B.C.;
• the builder of the complex, or addition, is considered to have made a self-supply of the complex, or addition, on or after July 1, 2010; or
• the builder is considered to have collected the transitional tax adjustment in respect of the complex.

Generally, the intent of the provincial transitional new housing rebate is to ensure that a newly constructed or substantially renovated residential complex is not subject to both the HST (or the transitional tax adjustment in the case of a residential condominium unit or condominium complex) and the retail sales tax (RST) in Ontario or the provincial sales tax (PST) in B.C., by rebating an amount that is generally equal to the estimated RST or PST content of the complex, or addition. The provincial transitional new housing rebate is not available for mobile homes, floating homes and owner-built homes. It is also not available in situations where only the building part of a complex is sold to a person while the land in respect of the complex is leased to the person.

For purposes of the provincial transitional new housing rebate, the percentage of completion of a residential condominium unit situated in a condominium complex is the percentage of completion of the condominium complex as of July 1, 2010, unless the condominium unit is substantially renovated without substantially renovating the condominium complex in which the unit is situated. In this case, the percentage of completion is based on the substantial renovation of the unit only.

Refer to GST/HST Info Sheet GI-096, Harmonized Sales Tax: Provincial Transitional New Housing Rebates for Housing in Ontario and British Columbia, for a detailed explanation of the provincial transitional new housing rebate.

Transitional tax adjustment

The transitional tax adjustment is an amount a builder is considered to have collected in respect of a newly constructed or substantially renovated residential complex that is a single unit residential complex, a residential condominium unit or a condominium complex where the sale of the complex is grandparented. For more information on grandparented housing refer to GST/HST Info Sheet GI-083, Harmonized Sales Tax: Information for Builders of New Housing in Ontario, or GST/HST Info Sheet GI-084, Harmonized Sales Tax: Information for Builders of New Housing in British Columbia.

In respect of a single unit residential complex, the builder must account for the transitional tax adjustment where the construction or substantial renovation of the complex is less than substantially complete as of July 1, 2010. The amount of the transitional tax adjustment is based on the percentage of completion of the complex as of July 1, 2010.

In respect of a residential complex that is a residential condominium unit or condominium complex, if the sale of the unit or complex is grandparented, the builder must account for the transitional tax adjustment regardless of the degree of completion of the complex as of July 1, 2010.

The transitional tax adjustment is intended to approximate the amount of RST or PST that a builder would otherwise have paid on construction materials acquired after June 2010 had the RST/PST remained in place. Refer to GST/HST Info Sheet GI-095, Harmonized Sales Tax: Information on the Transitional Tax Adjustment for Builders of Housing in Ontario and British Columbia, for a detailed explanation of the transitional tax adjustment.

Determining the percentage of completion

The percentage of completion of a newly constructed or substantially renovated complex as of July 1, 2010 can only be determined if the construction or substantial renovation actually began before July 1, 2010. It is a question of fact as to whether the construction or substantial renovation began before July 1, 2010. In the case of a newly constructed residential complex, the construction begins when the excavation of the site within the activity of constructing the complex begins.

The determination of the percentage of completion of the construction or substantial renovation of a residential complex does not take into consideration the cost of the land upon which the complex is situated because land is generally not regarded as being constructed or renovated. Refer to the Appendix for additional information on property and services that are generally included or excluded from the determination of the percentage of completion.

For a condominium project where the housing is located in more than one building, the percentage of completion should generally be determined on a building by building basis.

Where a cost method is being used to determine the percentage of completion, common expenses of a project involving more than one building should be apportioned to the various buildings in proportion to each building's cost, as a percentage of the total cost of all buildings in the project, provided that the common areas to which such common expenses relate are in the residential complex part of the building, i.e., that part reasonably necessary for the use and enjoyment of the building as a place of residence for individuals.

The following six methods are generally considered to be fair and reasonable methods that can be used to determine the percentage of completion.

Method 1 - Capital and operating costs

Determine, as of July 1, 2010, the capital and operating costs incurred in the construction or substantial renovation of the residential complex as a proportion of the total expected capital and operating costs, as of July 1, 2010, to be incurred to construct or renovate the complex.

These costs include all costs necessary to put the complex in a position to fulfil its function as a place of residence, except for the cost of acquiring the land and certain related costs. The costs would include the costs of material and labour, as well as overhead costs reasonably attributable to the construction or renovation of the complex. The Appendix to this info sheet outlines the costs that should be included and those that should not be included in determining the percentage of completion. The determination of these costs should be designed to achieve a reasonable and proper matching of costs with the value added as of July 1, 2010.

Costs of materials that have been purchased as of July 1, 2010 but not yet used in the construction should not be included. Conversely, costs invoiced to the builder after July 1, 2010, but related to work performed or material delivered and used on or before July 1, 2010 should be included in determining the total capital and operating costs as of July 1, 2010.

The total expected capital and operating costs, as of July 1, 2010, to construct or substantially renovate the complex should include any cost savings or cost overruns that are known or expected as of July 1, 2010.

Method 2 - Interior floor space

Determine the percentage of completion based on the interior floor space of the residential complex for which the construction or substantial renovation was completed as of July 1, 2010, as a proportion of the total interior floor space as evidenced in the plans/designs for the complex as of July 1, 2010.

The interior floor space consists of all living areas within the interior of the complex, including common areas such as lobbies, corridors, staircases, elevator shafts, laundry rooms, recreation rooms, indoor swimming pools and similar spaces. Excluded from the interior floor space are storage rooms, attics and basements, unless they are finished by a builder of the complex to a standard comparable to the living areas of the complex. Commercial areas, parking garages, rooms or areas that contain heating or cooling equipment or equipment for the supply of water, gas or electricity to the complex, and similar areas are also excluded from the interior floor space.

The interior floor space is the aggregate of the building at grade level, plus the area of all other floors above or below grade level, designed and usable as living areas, all measured from the outside faces of the enclosing walls if the walls are not adjacent to any other residential complex or unit. If the enclosing wall is adjacent to another complex or unit (e.g., a condominium unit situated adjacent to another unit in the condominium complex), the interior floor space is measured from the middle of the enclosing wall.

The supporting documentation related to the interior floor space of the complex completed as of July 1, 2010 may include:

• the building contract;
• the drawings/plans for the construction or substantial renovation of the complex;
• engineering and/or architectural reports; and
• bank inspection reports used to support mortgage draws.

Method 3 - Total floor space

Determine the percentage of completion based on the floor space of the residential complex for which the construction or substantial renovation was completed as of July 1, 2010, as a proportion of the total floor space of the complex as evidenced in the plans and designs for the complex as of July 1, 2010.

The total floor space consists of the interior floor space and spaces that are excluded from the interior floor space but that form part of the residential complex.

The supporting documentation related to the floor space of the complex that was completed as of July 1, 2010 may include:

• the building contract;
• the drawings/plans for the construction or substantial renovation of the complex;
• engineering and/or architectural reports; and
• bank inspection reports used to support builder mortgage draws.

Method 4 - Fair market value

Determine the percentage of completion based on a certified appraised fair market value of the building (excluding the land), or part of the building, that was constructed or substantially renovated as of July 1, 2010, as a proportion of the appraised fair market value of the building as if it had been substantially completed as of July 1, 2010.

Method 5 - Progress billings

Determine the percentage of completion based on progress billings made in respect of the construction or substantial renovation of the residential complex, as of July 1, 2010, as a proportion of the expected total consideration payable to construct or renovate the complex as of July 1, 2010.

Where a contractor requires a person to make payments based on the progress of the work as stipulated under the contract for the construction or substantial renovation of the complex, the percentage of completion may be determined based on the progress billings made as of July 1, 2010. However, the progress billings made as of July 1, 2010 should not include any amounts that relate to work that was not yet performed, or property that was not delivered, or delivered and not used, as of July 1, 2010.

The expected total consideration payable to construct or substantially renovate the complex as of July 1, 2010, should include any adjustments to the consideration that are known or expected as of July 1, 2010.

Method 6 - Certified report

Determine the percentage of completion based on a report prepared by an engineer, architect or other professional who is qualified to certify the value or extent of work completed as of July 1, 2010.

Documentation

Documentation used to determine the percentage of completion should be maintained for a period of six years and included with a person's books and records as this determination is subject to audit.

Appendix - Costs to include or exclude in determining percentage of completion

This listing is meant to be illustrative and not exhaustive.

The cost of acquiring the land that forms part of a residential complex should not be included in determining the percentage of completion of the construction or substantial renovation of the residential complex.

The following costs may be included in determining the percentage of completion to the extent that the costs are necessary to put the residential complex in a position to fulfill its function as a place of residence:

• costs of plans and drawings that are integral to the construction process;
• costs of builder's permits and development cost charges (i.e., charges that a developer is required to pay for the infrastructure that the new development requires. Generally, these charges limit the amount that existing residents have to pay to subsidize the infrastructure required for new residents);
• cost of representations made to government authorities for the purpose of obtaining land development permits, building permits and licences;
• site investigation costs (amounts paid for investigating the suitability of a site, such as the costs of soil tests, zoning investigations, environmental studies, surveying and financial feasibility studies);
• costs of clearing and levelling the surface of the land (including the demolition of existing structures) upon which the complex will be built;
• blasting and excavation costs necessary to prepare for the construction or renovation of the complex;
• grading, fill, retaining walls, gabion slopes, earth removal, clearing and grubbing;
• architect's and engineering fees related to the construction of the complex;
• construction and inspection fees;
• builder's all-risk insurance;
• legal and accounting fees relating to the construction of the complex;
• clean-up costs;
• construction materials and construction services;
• component parts such as electric wiring, plumbing, sprinkler systems, air conditioning equipment, heating equipment, lighting fixtures, elevators, storm doors and windows, automatic stokers, sump pumps and fire alarm systems;
• footings, foundations and other base support below ground level;
• landscaping costs;
• costs of parking lots, garages, sewers, water mains, exterior lighting, sidewalks, utility connection costs, fences, swimming pools and other recreational facilities on the land to the extent that they form part of the residential complex;
• operating expenses associated with the construction or substantial renovation of a specific residential complex (or if the expense cannot be identified with a specific complex, then those costs that are allocated to the complex in a fair and reasonable manner).

As indicated above, the cost of acquiring the land should be excluded in determining the percentage of completion. Certain costs associated with the land should also be excluded in determining the percentage of completion. Such costs include the costs associated with the acquisition and maintenance of the land prior to construction, such as:

• legal and accounting expenses associated with the land acquisition and maintenance of the land prior to the construction of the complex;
• operating expenses associated with the land (or a reasonable apportionment of operating costs to the land) such as directors' fees, head office expenses (including rent, secretarial salaries, maintenance expenses and business taxes); and
• real estate taxes, including land transfer tax payable on the acquisition of the land.